Since the late 1970s, a powerful antitax movement has advocated a reduction in the portion of national income that goes to fund government. What has it accomplished?
Tax cuts, then and now
To answer that question, I found that I had to distinguish between two very different periods of tax-cutting. The first began with the Reagan tax cuts of 1981, and the second with the Bush tax cuts of 2001.
Most tax-cutters wanted to both reduce tax rates and shrink the size of government by cutting spending. (A few argued that reducing the federal budget would not be necessary, because the tax cuts would pay for themselves.) What is interesting about the period from 1981 to 2000 is that the antitax forces succeeded a little more in cutting spending than in lowering taxes. Government outlays went down from 20.7 percent of GDP in 1980 to 17.5 percent in 2000, while government revenue went up from 18.1 percent to 19.8 percent. As a result, the budget went from a deficit of 2.6 percent of GDP to a surplus of 2.3 percent. Why? Because when faced with the high deficits resulting from the Reagan tax cuts, political leaders got serious about balancing the budget. They accomplished this both by raising taxes and cutting spending.
The fiscal trends in the second period, 2001 to 2023, were the opposite: The Bush and Trump tax cuts really did bring federal revenue down, while federal spending went up. That’s because the country cut taxes in both good times and bad, while also spending to address the national emergencies of the War on Terror, the Global Financial Crisis, and the Covid pandemic. The budget went from a 2.3 percent surplus in 2000 to a 6.2 percent deficit in 2023.
For much of the nation’s history, taxes were increased to fund wars and new entitlement spending, such as for Social Security and Medicare. In the twenty-first century, however, commitments not to raise taxes meant that massive spending to fund the wars following the terrorist attacks on September 11, 2001, to add prescription drug coverage to Medicare, to keep the economy afloat during the global financial crisis, and to respond to the Covid pandemic all went unfunded.
Low taxes and the economy
The effect of low taxes and federal deficits on the economy is a difficult and controversial topic. A tax cut is not a controlled experiment, since the economy is changing in other ways all the time. Some ideas do stand the test of time. The old Keynesian idea that tax cuts and deficit spending can stimulate the economy during recessions remains alive and well, thanks to the experience of the Great Recession of 2007-2009 and the Covid recession of 2020. The idea that low taxes accelerate growth any time finds less support, since the economy grew faster in the high-tax postwar era and in the 1990s than in the recent period of lower taxes. Graetz says that “the most robust economic growth since 1978 occurred during years following Bill Clinton’s 1993 tax increases. Tax reductions at the top have spurred neither great increases in domestic investment nor bursts of increased productivity.”
Lower taxes have been a contributing factor to economic inequality. The main beneficiaries of tax cuts have been the wealthy, who are disproportionately impacted by cuts in income taxes, estate taxes, capital gains taxes, and corporate taxes (as shareholders). They also have ways of living off their existing wealth while paying hardly any taxes at all.
Rich Americans borrow cheaply against their stock and bond portfolios to fund their lifestyles without paying any income taxes. Increases in the values of assets are not taxed as income until the assets are sold, and the tax law forgives any income tax on a lifetime of gains if assets are held until death.
Low taxes and government
Low taxes and high deficits may hamper the government’s ability to respond to new crises, such as climate change, global political threats like Russian or Chinese expansionism, demographic changes increasing the costs of Social Security and Medicare, economic dislocations caused by new technologies, and new demands for human capital development. The national debt is now so large that the country spends about as much on interest payments as it does on national defense.
This year’s presidential election is, among other things, a choice between two different fiscal approaches. President Biden wants to raise taxes on individuals with incomes over $400,000, raise the corporate rate from 21 percent to 28 percent, and create a wealth tax on people with over $100 million in assets. Former President Trump wants to make permanent his 2017 tax cuts favoring the wealthy.
I began with John Marshall’s observation, “The power to tax involves the power to destroy” and Graetz’s addendum, “So, it turns out, does the power not to tax.” I agree with Graetz’s suggestion that low taxes may now be a bigger threat to national greatness than high taxes.
Beneath the Surface 