Deficit Thinking or Thinking Deficit

Ever since the midterm elections the debate about the national debt has been heating up again, to degrees not seen since the mid-1980’s arguments about the same topic. This blog isn’t supposed to be political, but taxes, and especially business-related taxes, do relate to our primary topic, and there was an article this week in the Wall Street Journal that points out one of those traditional blind spots in which neither side of the political spectrum appears to have much of a grasp on reality: deficit spending and increased taxation…

The linked article follows up on a classic study in economics from the 1980s, which showed considerable support for the contention that every dollar of new taxes leads to more than one dollar of spending by Congress. In fact, the Vedder and Gallaway article found that for each new tax dollar, our Federal government generated $1.17 of new spending (17% more than the tax increase). The updated study is considerably more sophisticated, taking into account a much longer time period, and controlling for a range of different variables, but the alternative models suggest a tax-to-spend relationship of between $1.05 and $1.81, depending on where, when, and how the data is arranged. Nor does this pattern appear to be changing – in the years from 2008 to 2010 the present Congress has approved over $ 1 trillion, which violates all of the existing budget rules…

Now, as a political moderate, I’m not going to claim that the bailout wasn’t needed, or that we can just start slashing social programming without horrible long-term repercussions, or that our military spending is out of line with post-Cold War conditions, or any of the other standard formulae that people like to spout instead of actually wading through millions of pages of dust-dry government documents; I’m just pointing out that regardless of what you think of deficit spending (whether you’re for it or against it), our government has NEVER been able to reduce the deficit by raising taxes. It’s always possible that conditions will be different somehow this time around, but after 65 years and 13 Presidential administrations, no one has ever succeeded in doing so. Which makes the present call for things like a 6.5% national sales tax nothing more than political grandstanding…

From a business standpoint, there’s no reason to expect any member of Congress to show any fiscal responsibility, simply because there is no benefit for any of them to do so. On the contrary, the way most of our representatives continue to get elected is to bring economic advantages (e.g., jobs, entitlements, benefits and pork) to their home districts and/or states. Any member of Congress who could somehow manage to bring funds to their constituents while making somebody else pay for all of them would be elected for life, and in fact many of our longer-serving politicians have spend decades in office doing just that, or at least creating the illusion of doing so. By all indications, the problem with the current system isn’t that we aren’t being taxed enough, or even that we’re being taxed too much, but rather that our taxes are being spent on the wrong things…

Several authors have noted that deficit spending by our national government is, in effect, taking the benefits and making someone else pay for them – in this case, someone else being whoever the tax-paying public is twenty to fifty years from now. Personally, I believe that our government can dig itself out of the hole it’s currently in, by investment in industries and enterprises that will raise our tax base under existing tax law (and coincidentally create jobs, raise our standard of living, improve our trade balance, and fix our broken economy), and that might even be true. The two things that history teaches us about this issue are that whatever else tax-and-spend policies might be able to do, they won’t be able to reduce the Federal deficit – and that people never listen to history, of course…