Friday, July 2, 2004

Daniel Shaviro (NYU) presented The Bush Tax Cuts as Steps Toward Bigger Government at the Critical Tax Conference at Rutgers-Newark. Here is part of the Conclusion:

Republican tax-cutting, to the extent that it has involved a principled, long-term policy view, seems to have been aimed at shrinking the size of government. The idea apparently is to force eventual spending discipline, even (or perhaps especially) with respect to Social Security and Medicare, by turning reduced tax revenues into a political fact on the ground that is hard to reverse. In fact, however, the idea that the tax cuts would make the government smaller rests on spending illusion, or confusion between the actual size of government, in terms of its effects on economic activity and wealth redistribution, and the observed gross dollar flows that are denominated “taxes” and “spending.”

Given the no-free-lunch principle and the huge preexisting fiscal gap, the tax cuts are likely to be paid for, in the main, through some combination of future tax increases and cuts to Social Security and Medicare. To the extent that today’s tax cuts lead to future tax increases, the combined effect of the offsetting tax changes is likely to make the government bigger both allocatively and distributionally. To the extent that Social Security and Medicare spending bear the brunt, the government still gets larger in the sense of increasing redistribution from younger to older generations, although Medicare cuts might decrease the size of government allocatively.