Are Tax Cuts Useless?

A lot of conservatives and libertarians were complaining that the ‘Obamacare repeal’ passed by the House last week did not do enough to fully eradicate the monstrosity in root and branch. One overlooked aspect of the GOP bill, however, is that it contained very substantial tax cuts. Americans for Tax Reform provides a compendium of the cuts, which ATR says amount to over $1 trillion, presumably over ten years. Here is just a partial list of some of the biggest cuts:

-Abolishes the Obamacare Individual Mandate Tax which hits 8 million Americans each year.

-Abolishes the Obamacare Employer Mandate Tax. Together with repeal of the Individual Mandate Tax repeal this is a $270 billion tax cut.

-Abolishes Obamacare’s Flexible Spending Account tax on 30 million Americans. This is a $20 billion tax cut.

-Abolishes Obamacare’s Chronic Care Tax on 10 million Americans with high out of pocket medical expenses. This is a $126 billion tax cut.

-Abolishes Obamacare’s 10% excise tax on small businesses with indoor tanning services. This is a $600 million tax cut.

-Abolishes the Obamacare health insurance tax. This is a $145 billion tax cut.

-Abolishes the Obamacare 3.8% surtax on investment income. This is a $172 billion tax cut.

Gotta love that last one–a tax cut exclusively for rich people. In contrast, on the spending side, the GOP left Obamacare’s massive system of subsidies largely intact. And in the latest budget deal, they couldn’t even defund the Corporation for Public Broadcasting. But they’re all about tax cuts for the rich. Never change, GOP.

Of course, it’s always politically easier to cut taxes than to cut spending. So, should we be thankful that at least we got tax cuts? Or are the tax cuts useless without accompanying spending cuts?

The science of tax cuts vs. spending cuts is not settled. There are two conflicting schools of thought. One school of thought says that spending cuts are more important than tax cuts because it is spending in the long run that drives taxes, and not the other way around. From this perspective, tax cuts without spending cuts can only be temporary, because in the long run, taxes will have to rise to match the level of spending. This theory implies that the GOP’s tax cuts are useless, because taxes in the future will have to rise by necessity in order to pay for the ongoing Obamacare spending. It is indeed indisputable that, eventually, all spending has to be paid for with taxes.

Nonetheless, the causal relationship between spending and taxes may work in reverse–taxes might drive spending. Lower taxes might effectively restrain the size of government simply because the government will have less money to spend. This is the so-called Starve the Beast theory of tax cuts.

In reality, the causality between taxes and spending probably runs in both directions; to a considerable degree, taxes and spending both influence each other. But if so, then tax cuts can have at last some influence on spending. At least to some degree, it is possible to starve the beast, or at least force the beast to count calories. The late, great Milton Friedman implicitly endorsed Starve the Beast when he famously declared that he was “in favor of cutting any tax, at any time, for any excuse.” That rule would obviously validate all of the House GOP’s tax cuts.

Personally, I’ve often thought that the strongest evidence that taxes can drive spending is the fact that Democrats generally hate all tax cuts, and always try to raise taxes whenever they think they can get away with it. That’s how all these Obamacare taxes got enacted in the first place. “At what level would tax rates be too high?” is a question to which Democrats never have an answer. That’s because Democrats must suspect, at least intuitively, that limits on taxes can restrain spending, and Democrats have no desire to restrain spending.

In the long run, perhaps the greatest weapon against big government is tax resistance, and tax resistance should therefore always be encouraged. The main thing–perhaps the only thing–that prevents boundless growth of government is the simple fact that people do not like to pay taxes.

If the Republican Congress does not have the guts to cut spending, then cutting taxes–any taxes–is still better than nothing.

Spread the word.Share on TumblrShare on StumbleUponShare on FacebookTweet about this on TwitterEmail this to someone