The (imaginary) Libertarian Conservative Tax Split
Brian Beutler smartly discusses how the libertarian justification for tax cuts, – ie the ones Megan McArdle and more sensible conservative economics types support - aren’t very politically popular, but I feel he gives the libertarian case for tax cuts, or more broadly, the libertarian support for GOP fiscal policy in the last 25 years a bit too much credit for having any consequences for the reduction of government:
Ezra and Matt and I could argue with Megan all day about whether or not tackling “deadweight loss” and promoting brief spending increases is worth the cost of shriveling government revenue–or about whether the associated tax cuts even have the effect of lowering government spending in the first place–and we’ll get nowhere.
It turns out that the Grandmaster of Libertarian Fiscal Policy, William Niskanen, Chairman of the Cato Institute, has basically debunked the idea that GOP tax cuts have any meaningful effect on the size of government. Here’s JonathanRauch’ssummary of the research:
Niskanen recently analyzed data from 1981 to 2005 and found his hunch strongly confirmed. When he performed a statistical regression that controlled for unemployment (which independently influences spending and taxes), he found, he says, “no sign that deficits have ever acted as a constraint on spending.” To the contrary: judging by the last twenty-five years (plenty of time for a fair test), a tax cut of 1 percent of the GDP increases the rate of spending growth by about 0.15 percent of the GDP a year. A comparable tax hike reduces spending growth by the same amount.
Again looking at 1981 to 2005, Niskanen then asked at what level taxes neither increase nor decrease spending. The answer: about 19 percent of the GDP. In other words, taxation above that level shrinks government, and taxation below it makes government grow. Thanks to the Bush tax cuts, revenues have been well below 19 percent since 2002 (17.8 percent last year). Perhaps not surprisingly, government spending has risen under Bush. [emphasis added - mz].
Even without this empirical confirmation that the “starve the beast” strategy is a total crock, it’s odd that libertarians, spending hawks or small government types would even get behind the supply side program. The central claim of the extreme supply side wing is that tax revenues (and thus spending) go up as you lower them. This is, of course, crazy — but those who have the opposite justification for supporting tax cuts (that they make government smaller) — should have always been a bit more wary of aligning themselves with people who were not only crazy, but crazy and publicly opposed to their preferences on size of government issues. It’s clear that supply siders are tax cuts uber alles types, and really have no stake in the spending/small government game. This alliance is rather baffling, unless you assume that GOP tax policy has only had one goal in the last 25-30 years, to get as much money funneled to the rich as possible and conservatives are thus willing to use any number of conflicting arguments to pursue tax cuts. Then it all makes sense.
