Paying for Tax Cuts?
Whose money is it?
“How will we pay for the tax cut?”
I laugh when I hear that question because it’s so obviously illogical. If the government were to cut taxes, say, by lowering rates or outright repeal, people would simply be free to hold on to money they otherwise would have sent to the IRS under threat of punishment. Allowing them to keep that money requires no expenditure. If the tax cut is dramatic enough, it might save money by permitting a shrinking of the government’s tax-collection machine. In the most basic sense, a tax cut costs nothing.
What people who ask that question really mean is: How will the revenue forgone be made up? Why do they care? Because they don’t want the government to have to cut spending.
Tax cuts don’t cost money; government programs do.
The demand that tax cuts be paid for rests on the claim that government distribution of other people’s resources – euphemistically called “spending” – is sacrosanct. If you dare to propose that less money be sucked into the government’s coffers through one form of taxation, you’d darn well have a plan to make up that lost money because cutting spending is out of the question. That means raising other taxes to offset the cuts.
For those interested in freedom – which must include the freedom to keep the fruits of one’s own labor – that is hardly a satisfactory solution. Do I really care if I surrender my money through an income tax or a sales tax? It’s the demand that I surrender it at all that irritates me.
The question might be intended to point out that revenue shortfalls would have to be made up by borrowing unless other taxes were raised. Borrowing, however, is another form of taxation. Advocates of freedom should always bring the conversation back to spending. Give no aid or comfort to those seeking to raise revenue.
All Income to the State
This is important because when we talk the language of paying for tax cuts we adopt an outlook to which statists implicitly (and sometimes explicitly) subscribe, namely, the view that all income belongs to the State and that any measure that lets us keep some is just another form of spending. Tax credits and tax deductions are called “tax expenditures.” As C-SPAN explains, “Tax expenditures are losses to the U.S. treasury from granting certain deductions, exemptions, or credits to specific categories of taxpayers…. Tax expenditures are an alternative to direct government spending on policy programs.”
Or, to choose a less neutral source, the Center for American Progress says, “The government uses tax expenditures to accomplish the same goals as direct spending, but it transfers money by lowering taxes for an individual or company instead of giving them the money. Tax expenditures are, quite simply, spending programs implemented through the tax code.”
“Transfers money by lowering taxes.” You can’t make this stuff up.
From the conservative camp, we have Martin Feldstein writing in the Wall Street Journal: “These tax rules [intended to encourage certain activity] — because they result in the loss of revenue that would otherwise be collected by the government — are equivalent to direct government expenditures. That’s why tax and budget experts refer to them as ‘tax expenditures.’”
But government’s letting people keep their money is not really equivalent to its spending the money. If it were, the federal budget wouldn’t be $3 trillion-plus. It would be the whole GDP.
True, tax expenditures usually refer to deductions or credits for specific activities. But it’s a short step to believing that even general tax cuts to “stimulate the economy” are a form of government spending too. I imagine some people already believe that.
Of course, government regularly uses the tax code to encourage certain economic activity, such as buying a house or getting medical coverage through one’s employer. By implication it discourages alternative activity. And it’s true that tax credits and deductions can accomplish what a spending program might accomplish. Nevertheless, although manipulation of our lives through the tax code is objectionable, we shouldn’t conflate keeping one’s own money with government spending. That way confusion lies.
Advocates of liberty and autonomy naturally want government’s hands out of their pockets. No one should have to bow and scrape to keep a little more of what he or she rightfully earns. Tax gimmicks are sometimes tempting policies, such as a tax credit for hiring during a recession. But they help to reinforce the pernicious idea that our incomes are a tool of government economic policy.
Better to put our efforts into repealing and reducing taxes and spending wherever we can.
Comment by DownsizeDC on 3 September 2010:
It’s funny how those who wonder how tax cuts can be “paid for” never ask how businesses can pay for the cost of complying with government regulations. Nor do they account for these compliance costs when they compute the overall cost of government.
Comment by Tim on 3 September 2010:
Through the income tax the federal government makes a claim on one hundred percent of our earnings. When the tax rate is 40 percent, the Feds are merely permitting us to keep 60 percent. Whether they decide to increase the tax bite to fifty percent or reduce it to thirty percent is a matter of prudence, not principle. Indeed, the principle of the income tax is that we are enslaved to the State.
Mr Richman is correct. A genuine tax cut must involve a reduction in government expenditure. When the government cuts tax rates but increases spending, there is no real tax cut. This sleight of hand is usually done through inflation where the government expands the money supply via the banking system and arranges for the sale of more treasury bills. The inflation tax is paid for in depreciated dollars, wider malinvestment, and increasing government debt which is then serviced by future taxation and more inflation.
Comment by Chris George on 3 September 2010:
When the average person receives a pay cut, do they say “how will I pay for this?”
Pingback by The True Cost of Tax Cuts | GovSpend.com on 3 September 2010:
[...] Which are you in favor of? Here’s an article which highlights the pros and cons of boths HERE Posted in US Government Waste « Could the Loss of Lisa Murkowski Signal More Wins for the [...]
Comment by Capt. A. on 3 September 2010:
Sheldon,
You already know my sentiments on “legalized plunder,” as I’ve commented on this issue numerous times before. My hackneyed overtures toward a real solution seems to haunt those individuals that seethe at “the demand to surrender…”
The Masai Indian takes pride in the fact that standing back several feet, shooting a sharp tipped arrow into the jugular vein of the “owned” cattle and draining the necessary amount of blood to satisfy the needs and wants of the collective is acceptable. Now, from the cattle’s point of view…! That point of view is watching the Masai warrior pull back on the bow … voilà! What’s the difference between cattle and tax slaves? (Answer: nothing!) Think not? Think again.
This turpitude fills volumes back into ancient history. Nothing new here. Be that as it may, as I’ve noted before, the collective does not care whether you eat chicken or steak, drive a Chevy, Ford or whatever… The collective merely coerces the productive, up to even killing the cattle (tax slave). You will give your “blood” whether you like it or not! Right Sheldon? The will of the voting collective shall be done. Period. Redistribution of wealth (especially from the top 1%—5% of American tax slaves) is about to get “veery ugly!”
The ONLY way to earn and maintain wealth from the greedy hands of the State is to resign if necessary (renounce citizenship) and seek haven, a playing field conducive to the entrepreneur, the value-producer, and the innovator … and that’s fact. The collective is the problem. The individual that only votes with his or her feet, “leaving the jurisdiction and if necessary placing the passport into the circular file system,” is the answer. Life is simply too short to change the collective. History and truth belong on my side on this issue. Period.
The danger to America is not Barack Obama, but a citizenry capable of entrusting a man like him with the Presidency. It will be far easier to limit and undo the follies of an Obama presidency than to restore the necessary common sense and good judgment to a depraved electorate willing to have such a man for their president. The problem is much deeper and far more serious than Mr. Obama, who is a mere symptom of what ails America. Blaming the prince of the fools should not blind anyone to the vast confederacy of fools that made him their prince. The Republic can survive a Barack Obama … who is, after all, merely a fool. It is less likely to survive a multitude of fools such as those who made him their president. – Jeez, I wonder who wrote that! I smile.
Regards,
Capt. A.
Principaute de Monaco
GMT +2:00 CET
Comment by Tom Blanton on 3 September 2010:
Hey Captain, in case you haven’t noticed, legalized plunder didn’t begin with Obama – it’s been going on for a long time. Likewise, the multitude of fools have been electing jackasses for generations.
I wouldn’t be too worried about the top 5%, either. They are part of the elite and they have done well under state capitalism. They will continue to do well. They can even afford to bolt this country if they wish. I’d worry more about the bottom 95%. If there is a total collapse and they figure out how badly they’ve been screwed, there is no telling what kind of monsters they will elect.
Comment by FooManChoo on 3 September 2010:
Chris George on 3 September 2010:
When the average person receives a pay cut, do they say “how will I pay for this?”
===
Does that same person then conclude that they will simply demand their neighbor give them more money and that they will use force to take it if necessary?
Comment by Steven Hankin on 4 September 2010:
I wish to add that “tax expenditures” (putting aside Sheldon’s main point that the focus must always be on reducing actual government expenditures) are actually worse than actual government expenditures. At least, actual government expenditures by the federal government must be approved by Congress. In the case of charitable deductions (i.e., one type of tax expenditure), it is the equivalent of allowing a donor taxpayer the ability to force the federal government to give half again as much of that taxpayer’s charitable contribution to the taxpayer’s charity. For example, take a taxpayer who is in a 33.33 percent marginal income tax bracket. If that taxpayer makes a charitable donation of $100 to XYZ charity, then as a result of be able to deduct this charitable contribution this taxpayer will have reduced his income tax liability by $33. This is equivalent to the taxpayer making a $67 non-deductible, charitable donation to that XYZ charity, and to which the federal government is then required to donate $33 to that charity. In other words, the rest of us taxpayers, via this government expenditure, have effectively been forced to make a $33 contribution to XYZ charity without Congress having to approve that expenditure.
Comment by Todd S. on 4 September 2010:
Steven Hankin, you would make O’Brien proud. Your mastery of doublethink is unsurpassed.
Comment by Steven Hankin on 4 September 2010:
Todd S. Who is O’Brien? And, why do you consider my comment to be “doublethink?” My analysis actually provides the reason for why a charitable deduction is viewed as a tax expenditure.
Comment by Steven Hankin on 4 September 2010:
Todd S. can I assume that your reference to O’Brien is a reference to the character in the novel “1984″ by George Orwell? My analysis is not doublethink, but merely an explanation of what a tax expenditure is. Note. that a tax expenditure is not only not budgeted, but the amount of a tax expenditure is not subject to any limit.
Comment by prolefeed on 4 September 2010:
Steven H. — your comment is “doublethink” because you are engaging in the statist perspective ripped in by the article — that reducing the amount of money stolen by the government “is the equivalent of allowing a donor taxpayer the ability to force the federal government to give half again as much of that taxpayer’s charitable contribution to the taxpayer’s charity.” If you personally give some of your after-tax money to a charity, the federal government is not is not in any sense giving any money to that charity. If the tax rules allow that giving to reduce the amount of money that the government will steal from you in the future, that is still not an expenditure by the government.
You either do not understand what the article plainly and clearly said, or you fundamentally disagree with the premise of the article because, at least on this issue, you are a statist.
Comment by TSkyLA on 5 September 2010:
Only the owner of the money can spend it or keep it. The others can only rob the owner or offer a voluntary exchange in goods and services for the owner’s money. If you think people are robbing the government, you may be a STATIST. If you think the government is robbing the people, you may be NOT a STATIST!
Comment by I*Have*Been*Robbed! on 5 September 2010:
The owner of the money acquired it by a voluntary exchange of goods and services or inheritance. Has the government inherited your money?
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[...] Goal Is Freedom — so what’s this talk of “paying for tax cuts?” Whose money is it to begin with? Sheldon Richman provides us with some useful [...]
Pingback by How Much Does a Tax Cut “Cost”? - Civitas Review Online on 15 September 2010:
[...] Sheldon Richman wrote recently, its not tax cuts that cost money, its government programs that cost money: “How will we pay for [...]
Comment by B. HACKETT on 9 December 2010:
FACT, BCKED BY HISTORY, WHEN THE TAX RATES DROP GOV. REVENUE INCREASES.
AS LONG AS SPENDING STAYS THE SAME OR DECREASES NATIONAL DEBT DECREASES OF REMAINS LEVEL.
PROBLEM IS IDIOCRATS OF BOTH PARTIES SEE THE REVENUE AND GO SON A SPENDING SPREE.
Pingback by Tax “Cut” Recap « on 10 December 2010:
[...] Politicians are out saying that these tax cuts will cost the government money–but Sheldon Richman has it right: “Tax cuts do not cost money; government programs do.” [...]
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Comment by Richard Holmes on 15 December 2011:
Socialism (and social welfare states) generate “transactions of decline”. (See Jane Jacobs, “ Cities and the Wealth of Nations”). The argument advanced by Jacobs is that once societies become strong and wealthy, they enter into too many political. economic and social policies that amount to “transactions of decline”. This leads to them becoming too poor to sustain the empire they build. Military spending has been the most common of these “transactions of decline”. Welfare and regional support policies are the second most common of such transactions—produced by the race to create the perfect social welfare state. By trying to provide the unproductive members of a society with the same benefits enjoyed by productive members, successful societies push themselves into decline. They adopt these policies because socialists (including social welfare statists) assume they should be concerned only about the redistribution of wealth (not with its creation). This results from envy of the rewards earned by others. Their false conclusion is that wealth should be equally shared. They pay no attention to the need to match rewards to the service provided to others (as others determine those services). These social-egalitarian manoeuvres create mounting debt and place an overwhelming burden on the productive sector of society. Financing of this excessive government debt is necessarily done by inflationary policies which are “tools of wealth destruction”. The problem is made worse in countries such as Canada with a strong separatist movement. Attempts by government to bribe separatists leads to further government spending in a bidding war that is an “economic time bomb”.
Recommended Reading: Jane Jacobs, “Cities and the Wealth of Nations“, Wm D. Gairdner, “The Trouble with Canada –Still“.