Morality of (further) tax cuts
Will Wilkinson has a good post up at his blog, an excerpt from a piece he wrote for the Philadelphia Enquirer, regarding the moral aspect of tax cuts.
For many libertarians and conservatives, cutting taxes is about more than efficiency; it’s about morality. We have a moral claim to the fruits of our labor. Every cent the government takes from us beyond what is strictly necessary to secure our basic rights is a token of injustice….However, if further tax cuts would accelerate deficit spending, justice would be threatened. Under present conditions, further tax cuts would largely be tax shifts, moving the burden of government spending to future generations. And there is nothing notably moral about raising taxes on the future to subsidize the present.
Now, he’s clearly on the right track in the first part and he partially qualified the point with “if further tax cuts would accelerate deficit spending.” However, I take exception to the idea that a tax cut today (specifically) is immoral simply because it may require a deficit to finance. First, there’s the obvious point that we’re not at the peak of the Laffer curve yet, so the assumption that a tax cut would mean a higher deficit is debatable. But even beyond that, I’d contend that a tax cut has only to produce enough economic growth to raise revenue sufficiently to pay the interest plus any amount above zero in order to reduce the tax burden for future years. Of course, the more additional revenue above that point it produces the better the long term effect, but the gap is going to compound.
My bottom line point is that he’s completely on the right track in raising the issue that taxation has a moral component, but divorcing it from any economic thinking beyond the simplest short term numbers might lead to a false conclusion.
I have a very pretty graph in my head to illustrate this, but I haven’t a clue how to get it on here effectively. Need a graphing/spreadsheet plug-in for WordPress. I may fiddle with a spreadsheet and illustrate the point later.
The blue is total interest paid and the purple is total revenue increase. The gap gets larger each year. Even a small increase in the economic growth assumptions would make this gap grow more and faster.
I used a fairly conservative set of assumptions and I figured this per $100 dollar a year tax cut for sake of example. Assumptions: Additional economic growth equal to 50% of the tax cut, â€œnormalâ€? economic growth of 3.2% (the US historical rate since 1970), interest on US Treasuries averaging 8%, average tax rate of 20%.
Of course, additional tax cuts are going to reduce the average tax rate so there is a floor to how low you can go and have this be effective. The right tax cuts on the other hand would likely exceed contributing 50% to economic growth, perhaps substantially, under current conditions. Current interest on US Treasuries is well below 8% and has averaged below 8% for several years, but a policy of borrowing would likely raise that.
The average economic growth number I used included the anti-growth policy, malaise days of Nixon/Ford/Carter. Combining tax cuts with other pro-growth policies such as increased trade, increased immigration, sound money, deregulation and privatization, could increase economic growth even more (making the graph look even better). Since we’re discussing morality, it’s worth noting that those would also jibe with the philosophy that holds government should interfere least. The total package works even better than just a part of it.