A New Tax Revolution
April 15, 2007
By Ernest S. Christian and Gary Robbins
Lest the 21st century become the post-American century, we
the people must rein in big government in Washington. This
means drastically reducing its access to money, curtailing
its functions and authority, and electing political leaders
with the skills and values necessary to achieve a smaller,
smarter and much less interfering government.
Step One for the voters is to put a skilled turnaround expert
in charge, preferably one with a proven record of success
(think Mitt Romney at the Olympics or Rudy Giuliani in New
York City or both). Step One for him, even before starting
to hack out the deadwood, is to end the financial fakery upon
which Big Government Inc. is built. Now, when the government
spends another $1, it lists the cost as only $1 in tax and
assures us the benefit to us is greater than $1. The truth
Recent works by Gregory Mankiw and Martin Feldstein at Harvard
demonstrate the cost to the economy of an additional $1 of
tax for the government to spend can be as high as $5 and is
almost always at least $2. First, there is the $1 in tax paid,
and then there is another $1 or more in lost income and jobs
the economy would have produced but for the tax. The further
ugly truth is that the deadweight economic loss falls mainly
on low- and middle-income wage earners.
Most government activities and expenditures have a degree
of utility greater than zero -- some substantially so -- but
if each one of the $3 trillion in the federal budget were
treated as the last dollar spent (and the true costs of paying
for it were publicly acknowledged as at least $2), it is certain
that much federal spending would be eliminated by popular
demand. On the discretionary side of the budget, when $1 of
government spending costs $2 or more, and when government
typically spends $3 to do a $1 job, the price tag for pork
and other low-value projects becomes ridiculous.
Entitlement spending includes vast amounts of high-cost,
low-value subsidies for the middle class and wealthy. This
portion of the budget is already on track to force tax increases
of such unprecedented magnitude that -- on a 2-for-1 basis
-- the associated damage to the economy and living standards
will be catastrophic. Big government must be downsized before
it downsizes America permanently.
Picture a president who comes into office with a detailed
plan for downsizing big government, and a coterie of experts
capable of helping him carry it out. Also picture a president
who assigns each Cabinet officer and agency head two tasks:
(1) Eliminate every function and cost not essential to performing
the government's basic responsibilities.
(2) Perform those essential functions with less money.
Further picture an informed electorate that is, through
interactive tools and calculators on the Internet, fully engaged
in deciding how best to cut spending.
Voters will understand that spending cuts mean tax cuts
and that tax cuts lead to economic growth and higher incomes.
Extrapolating again from the works of Mr. Mankiw and Mr. Feldstein,
a good rule of thumb is that a $1 tax cut will induce at least
an additional $1 of income growth and sometimes $2.
Because the extra income produced by tax cuts is itself
taxed, big boosts to economic growth can be achieved in exchange
for relatively small long-term reductions in government spending
capacity. Mr. Mankiw's work shows that because a $1 tax cut
on dividends induces $2 of extra income and 50 cents of tax
revenue, the net long-term reduction in government's spending
capacity is only 50 cents. Similarly, an across-the-board
tax cut of $1 -- which induces an extra $1 of income growth
and 25 cents of tax revenue -- could be paid for by only a
75-cent long-term spending cut.
The high ratio of benefit-to-cost when taxes are cut (as
compared to the high ratio of cost-to-benefit when taxes are
increased) will be especially important during the transition
when lower-value portions of the federal sector spending are
being replaced by higher-value private sector growth. America
will be stronger, freer and more prosperous as a result.
Ernie Christian and Gary Robbins were Treasury tax officials
in the Ford and Reagan administrations and are adjunct fellows
at the Heritage Foundation.