Raise Taxes To Cut Government?

As the debate rages over letting some of the Bush tax cuts expire, Republicans have raised their starve-the-beast theory from its coffin. They insist that government (the "beast") can be shrunk by cutting taxes: The less money government has, the less government there can be.

Time has not been kind to this theory. The beast never did better than when tax-cutting Republicans were in charge.

The fiscal grown-ups who used to run the Republican Party didn't cotton to reducing taxes before spending in normal times. But Ronald Reagan offered the far more pleasurable doctrine of just cutting taxes.

"Well, if you've got a kid that's extravagant, you can lecture him all you want to about his extravagance," Reagan said in his 1980 campaign. "Or you can cut his allowance and achieve the same end much quicker."

No one turned the starving-beast theory into baloney faster than Reagan, who followed his tax cuts with a spending binge fueled by massive borrowing. What he did, in effect, was cut the extravagant kid's allowance and then hand him 10 credit cards.

The national debt doubled under Reagan. It doubled again under George W. Bush, who followed the same reckless path. (At least Reagan subsequently raised taxes in the face of soaring deficits.)

Frustrated fiscal conservatives -- a group that includes Democrats, Republicans and, above all, independents -- are assessing another tool for imposing budgetary discipline: the "Fiscal Illusion" effect. Totally contrary to starve-the-beast, it promotes raising taxes as the better way to contain government.

University of Mississippi economist Andrew T. Young describes how it works in the Cato Journal: "A tax increase may make taxpayers hostile toward government spending as they are forced to directly reckon with its costs. Likewise, tax decreases may lessen the perceived cost of government spending, increasing the quantity demanded."

James Buchanan, a Nobel Prize-winning economist, helped develop the "Fiscal Illusion" hypothesis. It's obvious, he said, that "borrowing allows spending to be made that will yield immediate political payoffs without the incurring of any immediate political cost."

 Paying for tax cuts and expanded government with debt has been the Republican free lunch. Since raising taxes is zero fun, the party's swingers see no reason to change their approach.

Bruce Bartlett, an economic historian and former Republican adviser, has called this position "completely indefensible." As he recently told The Economist magazine:

"In their view, deficits cannot arise from tax cuts. No matter how much taxes are cut, no matter how low revenues go as a share of GDP, tax cuts are never a cause of deficits. They result only and exclusively from spending -- and never from spending put in place by Republicans, such as Medicare Part D, TARP, two unfunded wars, bridges to nowhere, etc."

You can see why Bartlett is no longer a welcome presence on Fox News.

Of course, the bills don't go away. Future generations of taxpayers will be paying for both their grandparents' government and their own. Which makes even the idea of referring to the Bush tax cuts as "tax cuts" so aggravating.

Are Democrats equally to blame? No. Deficit spending is warranted during an economic crisis. (By the way, their new health-care initiative was fully paid for.) What worries fiscal conservatives most about Democrats is that they might lack the guts to do what must be done, which is raise taxes.

Some "conservative" Democrats are afraid of their own shadows, while others on the left resent having to clean up after Republican orgies. They should all recognize: Honest budgeting is something to be proud of.

Once the economy comes back to life, any responsible plan to address America's deep deficits will include tax hikes. Let the brave step forward.
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Views expressed in this column are those of the author, not those of Rasmussen Reports.       

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