Steven Lagerfeld: We've Made a Bad Bet on Taxes

The WQ's Steven Lagerfeld opened my eyes to the risky, two-way bet of tax cuts:

In another way, today's red vistas of debt recall the era of tax cutting under Ronald Reagan. The Reagan Revolution was in part a gamble: Cut taxes, and an alarmed public will demand budget cuts in order to avoid red ink. Now we may be witnessing a kind of reverse Reaganism: Increase the size of government and gamble that an alarmed public will eventually authorize the taxes to pay for it. [From Wilson Quarterly, Summer 2009, Vol. 33, No. 3, page 4]

Mr. Lagerfeld is absolutely correct--by refusing to cut government spending, we failed to uphold our end of the tax bargain. It seems that voters will always demand the same level of services or increased services; as a result, cutting taxes--which reduces revenue available for government services--might actually be a slow suicide pact. Californians just don't seem to have the stomach to cut spending, even when the money isn't there to provide the same level of services. Perhaps some kind of counterproductive but ingrained psychology is involved--after all, once you've tasted gourmet food on a regular basis, it's almost impossible to go back to the frozen microwave dinner--even if you have less money to spend and should be cutting back.

If Mr. Lagerfeld and I are both correct--that the bet on lower taxes failed, and once spending is increased, it's almost impossible to cut services--then cutting taxes should not be the main focus of any government policy. Instead, we ought to be focusing on the following areas: first, having a consistent tax policy to attract business and minimize inflation; second, requiring all new government programs to terminate at the end of the following fiscal year if sufficient revenue to fund the program does not exist; and third, to pass a balanced budget amendment to each state's constitution.

Comments

[whidbey:]

You seem to know the problem, spending, but still warm up to the notion that an economy can grow into its spending habits and force itself by law to balance budgets at state levels. This is hopeless logic and will not work because no one wants it to happen. The secret of bonding against future tax revenues has all the states cheating on forecasted interest rates and tax receipts.

The public's propensity to consume is infinite however, its willingness to pay more taxes is zero, ergo we must run up borrowing to balance cash budgets, which, we have indeed, done. This is also what the US government will continue to do since it lacks the political will to balance its cash budget each fiscal period.

Suppose, however, that Congress called for a structurally balanced budget. The current over-hang on social programs is about 54 Trillion dollars and just the interest payments on that debt is a massive structural deficit far beyond the taxing power of Congress, the public willingness to pay or do with less, or the economy to produce the marginal revenue. The null Skulls in the Obama administration hope to cut the costs of health care, energy(not clear how), and increase productivity via education so as to balance the cash budget annually in 3 years. It is hopeless and they are idealist at best.

This is a financial bind exceeded only by Japan. See FT 4Aug, page 5 for the story. On Aug 30 Japan will elect its last government before the melt down starts on its debt and economy. Watch what happens, it will be very instructive, but it will show you that we too are past the tipping point and your band aids will do no good for anyone. Too late!

Aug 06 01:14 PM

[Roger Knights:]

The only way out is to ban gov't. workers' unions and cut their pay and pensions by 25%--or whatever it takes.

Aug 06 06:07 PM