Don't Forget about Spending Cuts

Now that the excitement of having seen some of the thinking with regard to tax reform of the “big six” has faded, I have to ask: After nine months in power, this is all you’ve done? 

Don’t get me wrong, I like a lot of what I have seen on the corporate income tax side (rate deduction from 35 to 20 percent and a move to a territorial system, among other things). It should grow the economy and in the long term help wage earners too. I even like some of the proposals on the individual side, especially the attempt to simplify the tax code and make compliance easier and cheaper. 

But that’s not revolutionary. Most of what’s in those nine pages has been a standard conservative/free-market demand for the last twenty years or more. I assume that Paul Ryan and Kevin Brady could have typed and copy-edited this plan in a few hours. Seriously, unless I am forgetting something, what’s new in this? If anything, there is a bunch of stuff usually found in the traditional free-market tax plan that is omitted here, including information about the treatment of capital gains taxes. 

In addition, the lack of details makes this plan pretty useless when it comes to knowing what the final impact on taxpayers will be. As others have noted, without knowing the size of the expansion of the child tax credit above its current $1000 level, or the income levels at which the three tax brackets begin and end compared to current law, we can’t know what it means for the middle class. 

We certainly don’t know how this plan, if implemented, will affect our long-term deficit and debt outlook. (Or we do know, and it will have a negative effect if not paired with serious spending cuts.) 

In my opinion, the rule should be that if you implement pro-growth tax reforms (like the ones on the corporate side of the code), the deficit won’t be too much (emphasis on too much) of a concern in the long run. Chris Edwards had a good piece about that a few days ago. However, everything else pretty much requires offsets. 

The plan does state that some unspecified tax breaks will go away. However, it also states that the biggest ones won’t be touched (the mortgage-interest or charitable-contribution deductions are highlighted as being untouched). I assume the biggest tax deduction of them all, the exclusion for employer-sponsored health insurance, isn’t on the table either. The only ones we know are on the chopping block are the state and local deductions. I love the idea, but I don’t think we should be counting on these $700 billion savings over ten years quite yet. 

Which reminds me that since yesterday, I don’t know how many times I have heard pundits, TV commentators, and even senators demand that the child tax credit should be doubled, that the middle class deserves a tax cut, that lower income people shouldn’t pay more taxes than they do currently, and that the highest-income earners shouldn’t be subjected to that potential extra tax bracket. These conversations all take place without any mention of matching these demands with spending cuts. Does everyone actually believe that economic growth will take care of it? 

I want smaller taxes as much as the next guy, but I also care about the size of government. In fact, I am willing to name on the spot many programs that should be reformed and cut. On the other hand, I am not super excited about tax cuts for individuals, even the ones that will benefit me, if if we continue to grow the size of government like we are now because I know all we will get in the short-term illusion of a smaller government and lower taxes. 

As Milton Friedman said: 

“Keep your eye on one thing and one thing only: how much government is spending, because that’s the true tax . . .  If you’re not paying for it in the form of explicit taxes, you’re paying for it indirectly in the form of inflation or in the form of borrowing. The thing you should keep your eye on is what government spends, and the real problem is to hold down government spending as a fraction of our income, and if you do that, you can stop worrying about the debt.”

In other words, if you cut taxes like envisioned in this plan but continue to spend like drunken sailors, which is happening now with Congress refusing or failing to reform entitlement programs, you will end up with more taxes tomorrow, paid for by your children and grandchildren.