Government taxation is not government spending

Suppose the federal budget is balanced at $1 trillion. Now suppose Congress reduces taxes by $200 billion without reducing spending. One result is a $200 billion deficit. Another result is that voters pay for only 80 percent of what government actually costs. This of this as a 20 percent discount on government. As everyone knows, when you put something on sale, people buy more of it. Logically, then, tax cuts might increase the demand for government instead of reducing the supply of it. Stoking the beast, Jonathan Rauch, 'Atlantic Monthly', June 2006

Rauch goes on to cite research showing that there is no sign that deficits have ever constrained government spending. To the contrary; the evidence shows that a tax cut of 1 per cent of GDP increases the rate of spending growth by about .15 per cent of GDP per annum. The same research shows that taxation above 19 per cent tends to shrink government and taxation below it makes government grow.

Thanks to the Bush tax cuts, revenues have been well below 19 percent since 2002…. Perhaps not surprisingly, government spending has risen under Bush.

There are several policy implications arising from this. The critical one is that reducing government income does not necessarily reduce government spending. The two are not synonymous. This sounds obvious, but it’s the sort of fact that is rarely made accessible to the electorate. It means that reducing taxation does not mean small government – it can mean quite the opposite. This means that we, the public, should (ideally) vote for meaningful outcomes; not slogans. If a political party is advocating small government as an end in itself, then it should come right out and say so. If, on the other hand, it really wants tax cuts, regardless of whether (as in the US) they increase government spending, then it should admit that that is its objective.

Politicians currently get away with this sort of shell game, because we, the voters, are not used to distinguishing between policy ends and means. Small government, except to ideologues, is not an end itself. It may be a means to various ends, but in my view it would be more efficient to target those ends explicitly, rather than the alleged means of achieving them. We should demand and respond to greater transparency from the politicians as to their true intents. We should, indeed, be voting for explicit outcomes that are meaningful to citizens; rather than vague promises and slippery slogans. Such outcomes would be at the very core of a Social Policy Bond regime. People would know exactly what they were voting for. A revolutionary concept, no doubt, but one that would hold politicians accountable and bring greater public participation into the policymaking process – at the expense of the spin doctors and ideologues.