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Gorging the Beast

Tax cuts didn’t starve big government.

Nov 26, 2012, Vol. 18, No. 11 • By ANDREW FERGUSON
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Reagan, Friedman, and other early advocates of STB had counted on something that never materialized. They had assumed that as the debt piled up to finance annual budget deficits caused by free-flowing benefits, public outrage would force politicians to restrain spending without raising taxes. Yet we’ve had the deficits and the borrowing, in amounts that would have left Friedman and Reagan agog; what’s been missing is the outrage.

As compelling as Niskanen’s critique is, he was less persuasive in explaining the flip side of his findings. Why do tax increases lead to decreased spending? “Demand by current voters for federal spending,” he explained, “declines with the amount of this spending that is financed by current taxes.” When you make them pay for government benefits out of their own pockets, in other words, voters will want fewer of them. The journalist Jonathan Rauch put Niskanen’s point more pithily: “Voters will not shrink Big Government until they feel the pinch of its true cost.”

For that reason, the great libertarian pot-stirrer said that spending would never decrease—that government would never get smaller—until federal revenues increased from 15.8 percent of GDP, where they are today, to higher than 19 percent of GDP: an amount totaling in the hundreds of billions of dollars.

This part of Niskanen’s argument follows economic logic too—raise the price of something and people will want less of it—but it’s still conjectural. He had no way to measure whether demand for federal benefits was rising or falling among voters at any point in time. Most likely, it’s always doing both, depending on the voter and the benefit. Niskanen’s explanation assumes that there is a unitary demand for government services, and a unitary population of taxpayers who bear the cost.

Yet not all voters are taxpayers, at least not to the same degree. A progressive tax code like ours is meant to redistribute wealth, so that people with less of it get more of it, in the form of government benefits. Under such a system, an increase in taxes— say, on the upper 2 percent of tax- payers—won’t reduce demand for government services, because the demand isn’t coming from the peo- ple who will “feel the pinch.”

Of course, the cost of government comes not only through positive benefits, the checks that government writes. The government also confers benefits by forgoing revenue through tax exemptions for mortgage interest, charitable contributions, and thousands of other activities. The mortgage interest exemption, for example, allows homeowners to pay fewer taxes than their fellow citizens who make the same annual income that they do. Repealing this exemption would also force homeowners at last to bear the “true cost” of government.

And yet in the current discussions our government officials aren’t calling for eliminating the deduction for the vast majority of homeowners—only those with high incomes and expensive homes. America’s homeowners won’t feel the pinch of this kind of tax increase either. So why should they want to demand fewer benefits and shrink Big Government?

The only system that would sustain Niskanen’s logic—raise taxes to reduce demand for government benefits—is one in which everyone pays the same percentage of their income in taxes. When taxes were increased to pay for government, everyone would feel the pinch. Such a system is called the flat tax. Good luck with that.

So we’re right back where we started.

Reagan never showed a sign that his “starve the beast” strategy was failing, had failed. “Raising taxes won’t balance the budget,” he said in his 1982 State of the Union address, as revenues fell and spending rose. “It will encourage more government spending. . . .”

We know now Reagan was wrong. But that doesn’t mean Niskanen was right. There may be reasons to raise taxes—if you give me a couple years I might come up with some—but the failure of “starve the beast” isn’t one of them.

Andrew Ferguson is a senior editor at THE WEEKLY STANDARD. 

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