The ongoing debate over tax cuts has been framed, as it always is, in stark terms: Either we stimulate the economy by cutting taxes — leading to a rise in deficits and debts — or we raise taxes to pay the ever-higher cost of government. In general, Republicans have tended to favor the former, arguing that tax cuts, paradoxically, will lead to economic expansion and higher tax receipts over time. Democrats deny this, arguing that tax cuts will increase the debt and deficit, and leave America unable to defray the costs of government.
There is, however, an excluded option that neither side is willing to acknowledge: the possibility of cutting the size and cost of government. The debate over whether to raise or lower taxes is a false dilemma: It is the size of government, and not the level of taxation, that is the real rub.
The notion that tax cuts can lead to greater tax revenues has been popularized in recent decades by economist Arthur Laffer, whose “Laffer curve” suggests that somewhere between zero and 100 percent taxation rates (two extremes that are both assumed to yield zero revenue), there is an optimal rate that will lead to more revenue than either a lower or a higher rate. Economists disagree widely on what that rate may be, but the notion that there exists an optimal tax rate — which is significantly lower than current rates — is what is driving the GOP push for tax cuts right now.
But note well the underlying premise: Trump and the GOP want to cut taxes so that the government can maximize tax revenues. The entire notion of economic stimulus via tax cuts is motivated by the belief that it will actually lead to more revenues and facilitate more government spending.
That is precisely what happened back in the ’80s, when the Reagan administration, heavily influenced by Laffer and his acolytes, pushed for deep tax cuts. The economy did indeed take off, at least in part because of lower taxes (although they weren’t the only stimulus; monetary policies at the Federal Reserve under Chairman Paul Volcker and his successor, Alan Greenspan, also helped to fuel the long bull market of the ’80s and ’90s). And with the soaring economy, tax revenues soared as well.
But somehow, despite nearly two decades of unremitting economic growth, the government grew and grew. Deficits and debts exploded, prompting Reagan’s successor, President George H. W. Bush, to raise taxes. No sooner was he ousted from the White House for breaking his infamous “read my lips” promise not to raise taxes, than President Clinton raised taxes again.
The lesson to be extracted from the last three decades of taxing and spending is that while tax cuts do indeed stimulate the economy, they are no remedy for the larger problem, which is out-of-control government spending. Indeed, successful economic stimuli such as tax cuts tend to encourage higher levels of government spending, especially when the entire motive for such stimuli is to increase tax revenues. Nowhere in Washington does the notion that government itself needs to undergo drastic cuts have any traction.