James Pethokoukis

Politics and policy from inside Washington

The false choice of higher taxes and less spending

May 11, 2010

Over at NRO, Kevin Williamson tries to figure out how to reduce the US budget deficit:

I am not, in general, in favor of tax increases, but I think that Chait is correct that conservatives would do better to support a budget plan that combines real spending cuts with tax increases than to support a budget that does nothing to reduce spending but leaves taxes where they are or reduces them. The point being, from my point of view: Reducing government spending is paramount, and it is a much more important agenda item than tax cuts that will only defer the financial reckoning that our spending inevitably entails.

Closing the gap from revenues that equal 15 percent of GDP and spending that equals 25 percent of GDP still looks pretty hard to me. To repeat yesterday’s thought-experiment, say we construct a point-by-point trade-off, equalizing spending and revenue at 20 percent of GDP. I don’t see Republicans supporting a 33 percent tax increase or Democrats supporting a 20 percent spending cut. Lots of readers have made clever suggestions about how we get there, but none of them seem convincing to me. The trade-offs would have to be pretty significant, like collecting that 20 percent of GDP via a flat tax and enacting deep entitlement reform.
Me: First of all, let’s keep in mind that all the scary long-term deficit forecasts assume long-term US growth will be about a third slower than its historical average. ┬áSmart tax policy, along with other pro-growth initiatives, could keep the US economy humming along. ┬áSecond, the higher-tax/less-spending austerity policy formulation has a poor track record. It brings weak growth and grumpy voters. More likely countries try to grow or inflate their way out of trouble.
Comments

Historical average is meaningless, sorry. One can’t assume the past will repeat itself in these matters. America was industrialized only up to the Mississippi as little as 100 years ago, and the growth that ensued up to the Korean War was based on building up the west and the industry to support that build up. After that followed a lull in economic growth as there was no more easy organic growth. It wasn’t until Nixon relieved the USD from the gold standard and then the policies of Reaganomics that growth approached the numbers from the days of yore – and those numbers were skewed by the growth of debt! In my opinion a fully developed economy like America should really only expect 1% growth + population growth (in America’s case a total of 2%.) For most of the rest of developed nations, that means 0-1%. Forcing up those numbers into 2-4% range in effect really only creates bubbles because the support isn’t there for those growth valuations. And so we’ve seen in the last 15 years… well, really since ’86-87, but I’ll limit to the dot-com build up to be fair

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