The Real Budget Problem

[Geee]

National Review:


If you listen to the discussion of the deficit in the mainstream media or the talking points from leading Democrats on the Hill (but I repeat myself), the refrain is that tax increases must be part of any deficit fix.

There is a superficial moderation to that appeal, a sort of splitting the difference between Republicans who want to cut spending and Democrats who want to pay for popular programs. And, frankly, some tax breaks and loopholes should be eliminated — ethanol subsidies, for example — not as revenue raisers, but because they are such bad economic policies.

But raising taxes to reduce the deficit would be bad policy for several reasons:
There’s not really a revenue problem. Democrats correctly point out that federal tax revenues are now just 16.5 percent of GDP, well below the post–World War II average of roughly 18 percent. This would have meant a bigger budget deficit than usual even if spending hadn’t exploded in recent years. But much of that decline is due to the economic slowdown, not to the Bush tax cuts or other policy changes. In fact, the Congressional Budget Office predicts that as economic growth returns, federal tax revenues will grow by an average of 7.3 percent annually over the next ten years. By the end of the decade, taxes will have pushed back through the 18 percent level, and be headed toward 20 percent — all without any changes in tax policy.

There is a spending problem. Focusing on taxes implies that the problem is how to pay for spending — taxes or debt — not the spending itself. But, as Milton Friedman constantly pointed out, the real cost of government is the size of government. According to the CBO, the federal government is on track to consume 42 percent of GDP by 2050. (State and local governments will consume another 10 to 15 percent of GDP.) Would we really be better off if we raised taxes enough to pay for all that spending?