Good Reasons for Taxes

Diane Lim Rogers
Diane Lim Rogers Chief Economist, The Concord Coalition

April 16, 2006

WITH TAX-FILING upon us, many people, ordinary citizens and politicians alike, complain of how high Americans’ tax burdens are. President Bush recently used his radio address to say that, as Americans are finishing up their tax returns, they should be reminded of the need to make the 2001-03 tax cuts permanent.

Left unsaid, though, is that even with our imperfect tax system, the revenues provided by taxes strengthen, not weaken, our nation’s economy. They fund essential public goods and services, they contribute positively to national saving, and many of the things that they fund — from highways and schools to biomedical research and national parks — indirectly create private wealth as well. As Justice Oliver Wendell Holmes put it in 1927, ”Taxes are what we pay for a civilized society.”

Policy makers who argue that taxes are too high are typically not just in favor of low taxes; they are also in favor of smaller government. They ignore the fact that the recent tax cuts have not shrunk government spending. The recent tax cuts instead have increased the budget deficit, reduced national saving, and made it more likely that our children and grandchildren will face a weaker economy and lower standard of living than would otherwise be possible.

Since President Bush took office, the 10-year budget outlook has deteriorated from a $5.6 trillion surplus to a nearly $3 trillion deficit, according to the official ”baseline” estimates of the Congressional Budget Office. That $8 trillion turnaround actually understates the fiscal damage associated with current policies, because the CBO baseline assumes that the 2001 tax cuts expire at the end of 2010 and the 2003 dividend and capital gains tax cuts expire at the end of 2008.

Those who have supported the tax cuts typically deny that the tax cuts have had anything to do with this deteriorating budget outlook. In fact, many have argued that revenues would have been lower without the tax cuts, i.e., that the tax cuts more than pay for themselves.

But the facts show that the tax cuts already enacted will cost more than $3 trillion just through 2016. Thus, contrary to the view that the tax cuts were neutral or even beneficial, the tax cuts have been a huge factor in the deterioration of the 10-year outlook and our currently high and rising deficits.

Making the 2001-03 tax cuts permanent, as the president is calling for, would bring the total cost through 2016 to $6 trillion, including interest. Yet the president says this is the way to ”stay on track to meet our goal of cutting the budget deficit in half by 2009.”

Unfortunately, the goal of cutting in half the huge deficit created during this administration is a bit like a retailer marking up prices just before a sale. President Bush took office facing trillions of dollars in surpluses and said that his administration would reduce the federal debt by nearly $1 trillion in his first four years. Instead, the debt ceiling has been raised four times, by a total of more than $3 trillion.

Finally, the argument that tax cuts grow the economy, while tax increases shrink it, is incomplete and incorrect. Economists generally agree that true tax reform, where marginal tax rates are reduced while the tax base is broadened and the revenue collected stays the same, is good for economic growth. But tax cuts that diminish revenue are harmful to economic growth if they increase deficits and reduce national saving.

So as we work on our tax returns, what should we be pondering about the deeper meaning surrounding this painful and tedious task?

Rather than making fiscally unsustainable tax cuts permanent, let us remember that taxes are collected for a reason: to provide vital public services such as a strong defense, homeland security, healthcare, retirement and income security, education and training, and disaster relief.

And let us be wise when we hear politicians pitching more tax cuts, understanding that every dollar of additional tax cuts that we receive now only adds more than a dollar to the future tax bills of our children and grandchildren. Our current tax burden is historically low, not high: Federal taxes were less than 17 percent of gross domestic product in 2003-04, the lowest since the 1950s. A civilized society shouldn’t go on a spending spree with an unwillingness to pay sufficiently for it, only to stick the bill to future generations with no political voice.