Tax Day Exposes the Delusions of "Deficit Hawks" and Happy Talkers
With tax day comes the inevitable back and forth about tax rates that are either too high or too low depending on one's view of the world. These discussions are in a sense the tax problem. Implicit in debate about the proper tax rate is that the federal government isn’t collecting enough revenue. What a laugh.
Self-styled “deficit hawks” generally argue that the federal government isn’t collecting enough. That’s why their commentary about tax cuts invariably hits on how “irresponsible” they are, and how “we’re saddling our grandchildren” with massive debt in the future. Happy talkers point to the revenue effects of tax cuts. They have charts that show surging federal revenues in response to lower tax rates. With the cost of work lower, people work more. History supports their revenue argument, but so what? Not explained by happy talkers is why rising federal revenues are a good thing. Furthermore, in talking up the revenue implications of their policies, they too are making the false case that Treasury doesn't collect enough of our money.
Importantly, both sides forget that there’s little difference between government spending in deficit or surplus. When in surplus, it just means that the federal government is getting all the money it wants from us for free. When the federal budget is in deficit, it means the federal government is paying not nearly enough for the right to waste the wealth we produce. The economy is burdened either way given the basic truth that government spending amounts to Paul Ryan and Nancy Pelosi controlling the allocation of resources instead of Jeff Bezos and Peter Thiel. Government spending is the ultimate tax. But I digress.
Returning to the so-called “deficit hawks,” their focus on boosting federal revenues to retire the debt loudly signals their confusion about the nature of debt. That’s the case because federal debt is a certain sign that the federal government is collecting way too much in the way of revenue.
To understand why the above is true, readers need only consider what Treasury bonds are: they’re claims on present and future monies that will be collected by the U.S. Treasury. If taxes were so low that future Treasury income were set to plummet, so would deficits. The paradoxical truth is that deficits are high precisely because federal revenues are too high. In their elevation of rising tax revenues as the solution to the alleged deficit problem, so-called “deficit hawks” are calling for the very tax revenues that will enable more and more federal borrowing. Investors are always willing to buy income streams that are viewed as a sure thing.
Which brings us to the happy talkers. They want lower tax rates. Reduced rates on their own are a good thing. In a reasonable world, tax rates would be much lower. So low that federal revenues would decline. Happy talkers don't want lower federal revenues. They say that the deficit can be fixed through lower, but not too much lower tax rates. With reduced penalties placed on work, people work more in concert with rising federal revenues that will – you guessed it – pay off the debt.
To be clear, there’s agreement with the happy talkers about the good of light taxation. The disagreement comes with the tax rates sought. Figure that the 2017 tax bill did very little to reduce tax rates on those most capable of boosting the economy (the rich), and that’s why its long-term effects are overstated. The rich, precisely because they are rich, have the most disposable income to invest. Rate cuts for them accrue to investment. Rate cuts for average earners don’t. Investment is the driver of growth, so aggressively slash tax rates for the rich. Yet that too is a digression.
The happy talkers want slightly lower tax rates that will enhance output, and with higher output, higher federal revenues to essentially buy off a Congress that loves to spend. Ok, but those rising revenues once again mean that Pelosi and Ryan will have even more money to waste. Their waste is the ultimate tax. Happy talkers seek the good of lower tax rates, and then neuter the good of lower penalties levied on work with trillions worth of capital mis-allocation care of Congress.
It’s the capital mis-allocation that both sides ignore. In their worship of budgets in balance, so-called “deficit hawks” ignore that the true burden on our grandchildren is government spending itself. This is true whether the spending is funded through taxes or borrowing. Capital mis-allocation is the worst of all burdens foisted on future generations simply because it means they’ll inherit a much less evolved world. Such is the shame of annually handing Congress control of trillions, instead of leaving it in the private economy where it would fund real progress.
As for happy talkers, they’re the proverbial bad actor endlessly stepping on the lines of their talented co-stars. While their desire to reduce rates of taxation is laudable, they gloss over just how much the spending they ignore blunts the impact of the lower rates. In short, if you want to see the true genius of tax cuts, slash them in concert with spending cuts. It would be beautiful.
Of course, such a policy mix isn’t even being discussed. Instead, “deficit hawks” and happy talkers talk past each other while ignoring the mathematical truth that says plummeting federal revenues would help each side to achieve its goals.
Here’s hoping both sides come to understand that the real barrier to progress is federal revenues that are way too high. Logically. How could an economy benefit from the political class having more money to spend? It’s a question that needs to be posed to hawks, happy talkers and politicians alike, but that too few are presently asking.
