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Raising Taxes Is Not Reducing Government Spending

Economics / Economic Theory Nov 24, 2010 - 11:52 AM GMT

By: George_Reisman

Economics

Best Financial Markets Analysis ArticleSunday's New York Times carries an article titled "The Blur Between Spending and Taxes." The author is Harvard Professor N. Gregory Mankiw.[1] The essential theme of the article is that the government is spending when it decides to forgo tax revenue that it otherwise could have collected. Indeed, tax revenues forgone in the enactment of tax deductions, such as for interest payments on home mortgages or charitable contributions, and tax credits, such as for first-time homebuyers or adoptions, are now commonly described as "Tax Expenditures." The thought is that the government is spending money in deciding not to take it in taxes and to allow the taxpayers to keep it.


The underlying assumption of those who hold this view is that the government already owns the funds in question whether it has collected them in taxes or not. The government is the alleged owner of funds that belong to the taxpayer and which it abstains from taking. It allegedly spends these funds in allowing the taxpayers to keep them.

The fundamental question is, who is the owner of the funds paid in taxes? Is it the citizens, who have earned the funds and who turn them over to the government under the threat of being fined or imprisoned, or even killed if they physically resist the government, or is it the government?

To the supporters of the principle of individual rights and limited government — the principle on the basis of which the United States was founded — the obvious answer is that the people own the tax revenues and, in paying them, financially support the government. To the supporters of an omnipotent government ruling over a citizenry of rightless serfs, the government is the owner both of the people's possessions, which, allegedly, are theirs in name only, and, indeed, of the people themselves. It is on the basis of this belief that it follows that the government financially supports the people in not taxing away their wealth.

The defenders of individual rights need to remind the government that it does not pay or enrich anyone by allowing him to keep what is already his.

This truth has major implications for the subject of tax reform, which the Times' article was written to address. Tax reform needs to consist exclusively of reductions in government spending and in taxes. It should not be based on massive tax increases resulting from the elimination of existing tax deductions and credits. It is actual government spending that must be reduced, not what people have up to now been able to avoid having to pay in support of that spending.

The notion of tax expenditures provides the pretext for massive tax increases in the name of reducing government spending. This notion must be cast aside, so that the target of tax reform will be reductions in actual government spending, which then must be followed by reductions in taxes. This is what must be done on a truly massive scale. To the extent that it is accomplished, the income tax can be progressively reduced, until it is ultimately eliminated altogether. At that point, all questions of income tax deductions and credits will have disappeared.

As matters stand, the notion that the absence of taxation constitutes government spending is setting the stage for the total perversion of genuine tax reform. It is being used in an effort to impose as much as a trillion dollars a year in new taxes disguised as a trillion dollars a year of reduced government spending. In the words of the Times' article,

Erskine B. Bowles and Alan K. Simpson, the chairmen of President Obama's deficit reduction commission, have taken a hard look at these tax expenditures — and they don't like what they see. In their draft proposal, released earlier this month, they proposed doing away with tax expenditures, which together cost the Treasury over $1 trillion a year.

This is the sum and substance of the concept of tax reform held not only by the Obama administration but also by cowardly Republicans and conservatives. Simpson was a Republican United States Senator from Wyoming for eighteen years. Mankiw, the author of the Times' article, was chairman of President Bush's Council of Economic Advisors from 2003 to 2005.

In sum, the danger exists that Left and Right are about to unite to accomplish a colossal political fraud in the form of enormous tax increases sold to an unsuspecting public as reductions in government spending. The American people need to stand up and refuse to accept any form of the absurdity that in not taxing them, the government is spending their money and that the path to lower spending and taxes is raising their taxes. The basis of tax reform must be reduced government spending, not higher taxes.

George Reisman, Ph.D., is Pepperdine University Professor Emeritus of Economics and the author of Capitalism: A Treatise on Economics (Ottawa, Illinois: Jameson Books, 1996). His web site is www.capitalism.net. His blog is at www.georgereisman.com/blog/. Send him mail. (A PDF replica of the complete book Capitalism: A Treatise on Economics can be downloaded to the reader's hard drive simply by clicking on the book’s title, immediately preceding, and then saving the file when it appears on the screen. ) See George Reisman's article archives.

This talk was given at Economic Downturn: Cause and Cure (Mises Circle, Sponsored by Louis E. Carabini) Newport Beach, California, November 14, 2009. Comment on the blog.


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