Tyler Cowen Wrong Again About Taxes


Posted by Ryan Ellis on Wednesday, October 5th, 2011, 11:42 AM PERMALINK

The New York Times only publishes articles from conservatives when the latter is foolishly carrying water for the Left.  This was true again this week, with the useful idiot role played this time by GMU professor Tyler Cowen, who we've publicly called out before for supporting a VAT.

You will want to read his article first.  My responses are below:

Would a grand bargain with $10 in promised spending cuts for $1 in tax hikes be a good deal for conservatives?  No.  We have been through this before.  In 1982, President Reagan was promised $3 in spending cuts for every $1 in tax hikes.  In 1990, President George H.W. Bush was promised $2 in spending cuts for every $1 in tax hikes.  In each case, all the tax hikes went through, since that's a matter of a single, affirmative tax law change.  The spending cuts never materialized.  It doesn't matter how unbalanced the promised ratio is.  The first number in the ratio always has been and always will be a mirage.

Are spending cuts now tax cuts in the future?  No.  First, the spending cuts are merely grand bargain promises, and those have never actually come to fruition.  Second, cutting spending now does not mean that taxes will be lower in the future.  Congress could very easily raise spending in the future, for example.  Spending and taxes are two independent choices made by politicians.  They are related to each other, but there is not the causality that Cowen is asserting.

Does promising never to raise taxes mean that taxes must rise in the future because spending will keep going up?  Absolutely not.  First, there is no law of nature that spending must rise faster than the rate of nominal GDP growth.  Spending declined as a percent of GDP in the 1990s for just this reason.  Second, higher taxes means more money for the government to spend, putting upward pressure on spending.  Third, much of what is deficit-financed today can be indefinitely rolled forward in debt servicing perpetually.  The link simply isn't there in the best scenario, and Cowen is 180 degrees wrong in the worst scenario.

Is it unlikely that spending cuts alone can balance the budget?  I don't know where Tyler Cowen has been for the past couple of years, but this is simply not true.  Dan Mitchell from Cato has pointed out again and again that simply capping government spending growth at 2 percent annually balances the budget within 10 years--even if all scheduled tax hikes are avoided.

According to CBO, tax revenues will exceed 18 percent of GDP (about the historical average) by the end of this decade, even if all tax hikes are avoided.  Spending is projected to be well above its historical average of 21 percent each and every year, and get worse after this decade is over.  We don't have an under-taxing problem--we have an overspending problem.  Spending simply needs to grow more slowly than nominal GDP, which shouldn't be that difficult.  It was achieved in the 1990s, and it could easily be done today.

Cutting discretionary spending isn't enough.  This is a straw man set up by Cowen.  First of all, discretionary spending is quite high right now as a percentage of GDP.  CBO projects that discretionary spending will equal 9 percent of GDP in 2011.  Since 1990, discretionary spending has averaged 7.5 percent of GDP.  That 1.5 percent of GDP isn't enough to balance the budget, but it would get us about 20 percent of the way there.  It's not nothing.  In nominal terms, that's about $225 billion in annual overspending on the discretionary side.

Turning to entitlements, Cowen needs to take a look at the composition of the political branches.  The House passed a budget with meaningful entitlement reform.  It would have block-granted Medicaid and the rest of the remaining welfare programs to the states at a significant savings to taxpayers.  It would have begun the process of transforming Medicare from an open-ended defined benefit into a defined contribution for the purchase of market-sensitive health insurance.

The Senate hasn't even passed a budget in almost 1000 days, and everyone in Washington knows Harry Reid is simply renting the Majority Leader's office from Mitch McConnell until January 2013.  The President has doubled down on base turnout, and wants no part of entitlement reform except to demagogue it.  Why, again, would we not wait to do this until we have a fully GOP Congress and (increasingly-likely) a GOP President?

At that time, the political branches can focus in unity on what is obviously the policy goal--bringing the bloated level of federal spending down to the historic level of federal tax revenues (while avoiding future tax hikes).  Right now, only 1 out of the 3 political levers of government have this as their goal.

What do you think?  Should conservatives agree to massive tax hikes in order to repeat the 1982 and 1990 budget deals?

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