Free Liberal

Coordinating towards higher values

Liberty vs. Tax Cuts

by , Senior Editor , Free Liberal

Tax cuts equal more liberty. Right?

Wrong! I am currently working on a project to drastically simplify the tax code, cut the civilian civil service in half, and allow more people to spend their money as they see fit. Yet my project, if successful, would show up on the books as more taxes and more government spending.

We have an accounting problem. I am working to replace our complicated system of welfare programs, social insurance programs and tax deductions with a simple nearly flat tax system and unconditional free money for all citizens. Where I replace welfare programs with free money, the books might show a small increase in net government: none for those completely on welfare, but some increase in benefits for the working poor. But where I replace tax deductions with the universal stipend, the books show a huge tax increase and a huge increase in government largess. Yet for a typical taxpayer, the result is close to a wash. The only real difference is that taxpayers don’t have to jump through lots of hoops to get their tax rebate— an increase in liberty that shows up as bigger government.

And this is not the only paradox in government accounting. Suppose we were to shut down Social Security next week. Would this be a boon for liberty? No! It would be an enormous retroactive tax increase for retirees and those nearing retirement. It would be a retroactive tax increase on people in a very poor position to pay.

How about defaulting on the national debt? Yes, this would reduce government spending, and it would tie the hands of government for future surges in spending, including in times of war and emergency. But it would also necessitate immediate tax increases since the deficit is higher than our interest payments. More importantly, defaulting on the national debt would be an enormous retroactive tax increase— on everyone who holds government debt. And lest ye think this is just desserts for those who enabled big government, keep in mind that if you have a bank account or mutual fund shares, odds are good that you too hold some government debt indirectly. And even if you don’t, unless your portfolio consists of guns, gold, land and dehydrated food, your portfolio is likely to get clobbered by the indirect effects of a default.

How about the soft default: devaluing the debt through inflation? Is it better to raise taxes on the rich back to Reagan or even Clinton levels or to experience Carter era inflation? Last I checked, a rather large contingent of libertarians favor zero inflation, a gold standard even.

A Better Metric

To better answer these questions let us remind ourselves what government does to us when money passes through Washington. The effects are two:

  1. The government transfers money from one group to another.
  2. The government dictates how the money is to be spent.

The two effects are largely separable. We can have large wealth transfers with little in the way of government mandates or “actual” government spending (such as with my free money for all project), or we can have massive government interference with little wealth transfer (such as with socialized medicine). We can reasonably debate how much the government should do of either. In fact, this is what we should be debating, vs. the total amount of taxation or spending.

Take the income tax. It doesn’t take all that much to get into the 25% tax bracket. $34,001 does the trick for a single taxpayer. (And this is on top of FICA and Medicare taxes.) But you can pull your marginal tax rate down by having a large mortgage, putting your money into approved retirement accounts, and/or living in a state with a high state income tax. All of these tax deductions are in effect disguised mandates. Economically, they are equivalent to fines for not taking the government-encouraged actions. The only real difference is that for a fine the burden of proof is on the government to prove you are guilty; for a tax deduction the burden of proof is on you, the taxpayer, to prove “innocence.” Yet I have met many a libertarian who defends every tax deduction, and decries cleaning up the tax code.

Now take the welfare system. There, the mandates are greater, and most of the benefits are in kind, thereby reducing individual choice. While these headaches do discourage getting on welfare in the first place, they also discourage getting off welfare and back into the workforce. Replacing all welfare for the able-bodied with unconditional dough would be an immediate net increase in wealth transfer to the working poor, but it would be an enormous increase in liberty for the poor. (It might even be a net decrease in wealth transfer to the poor overall in the longer run, as more would graduate from total dependency and/or criminality to being working poor.)

A Realistic Response to the Debt Crisis

Let us put aside my utopian project for now and look at today’s ballooning federal debt. The 2011 deficit looks to be on the order of $1.4 trillion dollars. Meanwhile, Rand Paul is calling for a mere $500 billion dollars in immediate budget cuts. That leaves us on the order of $800 billion in the red even if the most libertarian member of the Senate gets everything he asks for. And the Baby Boomers are starting to retire.

We need tax increases, even with real spending cuts. Even libertarians should be calling for tax increases. That is, unless you believe default or hyperinflation is preferable to the taxes we had under Clinton, or even Reagan. Even the Heritage Foundation admits that federal revenues as a fraction of GDP are at near record postwar lows. So don’t fall for the negative wishful thinking line that we cannot increase federal revenue. Like it or not, it’s too late for budget cuts alone. The money has already been spent.


Dr. Carl Milsted, Jr. is a Senior Editor of Free Liberal and is a member of its founding committee. He is the author of Holistic Politics and the Enhanced Precision Political Quiz, an online version of the popular Nolan quiz.