Magazine

Getting Real About Taxes


Here's an audacious proposal: Let's have an honest debate about taxes. Right now, Congress is battling over a tax cut of $550 billion or $350 billion. It's fighting over cutting marginal income tax rates vs. ending double taxation of stock dividends. It's arguing about whether it is better to stimulate the economy short-term or long-term. The plain truth is that those engaged in the debate don't know whether they are right or not. We had strong growth and falling interest rates in the '80s under Ronald Reagan, when he cut taxes sharply and ran up big budget deficits. We also had strong growth and falling rates in the '90s under Bill Clinton, when he raised taxes and rang up big budget surpluses. There are enough economic theories and empirical examples around to prove both sides right and wrong. In truth, the fight over taxes is not about economics. It is really just a proxy for a much larger question: Do you favor Big Government or Little Government? The argument is about choices.

And it isn't easy to make them. Some 85% of the federal budget goes to Social Security, Medicare, Defense and Homeland Security, and interest on the debt. The rest includes subsidies to farmers, money for education, NASA, and pork -- projects that move rivers, cars, and people, pumping money and jobs into local congressional districts. You can choose to have more or fewer of all of them, or pick your favorites and cut from the rest. If you want a tax cut, you have to choose what spending to cut.

But won't tax cuts spur so much growth that spending can stay high without big budget deficits? In a word, no. Dynamic scoring was supposed to show us that cutting taxes could generate enough growth to mostly pay for itself -- but the recent Congressional Budget Office analysis showed it didn't. We don't really expect honesty from Washington pols on taxes, especially when most of the discussion is really posturing for the next Presidential election. But it sure would be nice if voters understood that if they want tax cuts, they had better decide what government largesse they are willing to give up.


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