Government does need to be shrunk. That doesn’t mean I oppose tax increases. If you bothered actually reading what I wrote instead of skimming it for soundbites you can attack, you might have a slightly more sophisticated view of my opinions.
For example, I have repeatedly said that supply-side economics is valuable in the sense of removing barriers to business and job creation, it’s a separate issue from whether tax cuts will increase revenue irrespective of the current tax situation. I have said that it’s my belief that at current tax rates, a tax cut will NOT increase revenue.
I’ve also said that the laffer curve and supply-side tax cuts are more complex than just saying, “Cut taxes and revenue will go up.” There’s a long, variable time component involved. If a tax cut increases economic growth, then eventually tax revenues will return to and then exceed the baseline value. The question is how long it will take, and how much revenue will be lost in the meantime, and whether you can afford to do that.
The Bush tax cuts dropped revenue by more than 3% of GDP. However, revenues recovered within a few years back to just 1% of GDP lower than their original value. Unfortunately, spending was not cut but was increased, leading to deficits that created a permanent debt-servicing cost. I was in favor of the Bush tax cuts under the assumption that his promise to cut spending would also occur. If you go back and look, you’ll see I jumped off the bandwagon when they didn’t.
For instance, look at this table. In 2001, individual taxes were 9.7% of GDP. By 2004 they had declined to 6.9% of GDP, probably mostly due to the Bush tax cuts. But just before the crash in 2008 they had climbed back up to 8.4% of GDP. Had there not been a crash, it’s entirely possible that individual taxes as a percentage of GDP would be near or higher than their pre-cut values. And if tax cuts cause additional GDP growth, this could very well result in more goverment revenue. Unfortunately, there are many confounding variables and trying to attribute cause and effect to phenomenon that take years to show up is very difficult.
There’s another very interesting finding in that table, however: Individual taxes as a percentage of GDP have been remarkably stable in the modern era, despite numerous changes to tax rates, both up and down. The same is true of corporate taxes and overall tax receipts. In fact, if you plot tax receipts against economic growth, you’ll find that there is a greater correlation between tax revenue as a percentage of GDP and GDP change than there is between tax receipts and the tax rate.
One implication of this is that the best way to increase government revenue is to maximize economic growth. If you attempt to raise taxes to raise revenue, you may just wind up decreasing growth and reducing government revenue.
HOWEVER… There is one big exception, and it’s one I’ve mentioned many times on this board. A key finding of the Romer/Romer paper was that tax increases that are used to pay down the deficit do NOT reduce growth. They also found that large deficits are growth inhibitors. Therefore, it’s perfectly consistent to advocate for tax increases as a pro-growth tactic, so long as those tax increases are actually used to pay down the deficit.
There are a lot of conservatives/libertarians who believe this, but the other problem we have is that we’ve been burned by government promises. The ‘gang of six’ deal that was cut during the Reagan administration is a good example: The deal was a compromise - raise taxes, and we’ll also cut spending. The tax increases were immediate, but the spending cuts were delayed for several years into the future. Of course, they never happened. Because once you raise taxes and get a temporary revenue boost, the political will to cut spending evaporates. So all you get for your tax increase is bigger government and ultimately an even bigger debt.
So cutting to the chase: I would support tax increases in the U.S., but only if they are co-located with spending cuts. In other words, the cuts have to come before, or at the same time as the tax increase. And future spending increases have to be curtailed so that the tax increase/spending cut regime doesn’t just go for a few years until the deficit comes down slightly, which then triggers a boom in government spending.
Historically, taxes have hovered around 18-20% of GDP. I think a reasonable policy would be to peg government spending to a number around there, then start a round of spending cuts and tax increases that aim to bring taxes back to say 19% of GDP and spending down to 20% of GDP. Then I’d peg spending growth to GDP growth - 1%, so that as the economy grows the government slowly drops to maybe 19% of GDP, and the extra tax revenue would be used to pay down the debt.
Once the debt is paid down, taxes could then be cut back to match government spending, and government spending could be raised a bit to peg GDP growth, maintaining a balanced budget. As the debt is paid down, debt servicing costs would be lowered, and the savings could be split 50/50 between new government services and tax cuts. The ultimate goal is a government spending around 18% of GDP, taxes around 18% of GDP. Because the government would no longer have hundreds of billions in debt servicing costs, this would allow actual government services to still grow at a rate slightly higher than inflation.
That’s my position. There are no supply-side tax cuts, no fuzzy math. Just sound financial management, based around the principle of respecting the historical data and recognizing that ultimately growth helps people more than bigger government does, so a smaller government, higher growth model is better than one with bigger government and lower growth.
On the other hand, liberals don’t want to shrink government, even though it’s consuming about 5% of GDP more than the government has ever been able to collect with taxes. They think they can just pile on higher taxes and everything will be fine. They also want more regulations and more restrictions on businesses. They think that they can get away with this because government spending will create a magic multiplier that will make it all work out. That’s the real fuzzy math, and it’s an assertion that has no historical basis in fact.