Will Tax Cuts Shrink Government?

by Lee McCracken

In an effort to do something—anything—about our ailing economy (remember when recovery was supposedly just around the corner?), President Bush has finally unveiled his “economic stimulus” plan consisting primarily of nearly $700 billion in tax cuts. I’ll leave it to the economists to debate whether this plan will work as advertised. What interests me is the effect, if any, that the Bush plan will have on the size and scope of the federal government.  

Writing in the Wall Street Journal, Milton Friedman, the grand old man of Chicago school free-market economics, argues that the Bush tax cut will in fact have the salutary effect of moving us toward a smaller government. “History suggests,” he writes, “that Washington spends whatever it receives in taxes plus as much more as it can get away with.”  

He continues:  

“Under those circumstances, how can we ever cut government down to size? I believe there is one and only one way: the way parents control spendthrift children, cutting their allowance. For government, that means cutting taxes. Resulting deficits will be an effective—I would go so far as to say, the only effective—restraint on the spending propensities of the executive branch and the legislature. The public reaction will make the restraint effective.”  

Friedman argues that deep tax cuts will create a deficit that is too large to be “politically tolerable” and that this will force politicians to rein in spending to bring the deficit back down to a level the American public can live with. Thus tax cuts can act as a check on the government’s propensity to expand.  

One interesting thing to note about Friedman’s argument is that it seems to flatly contradict one of the usual “supply-side” justification for tax cuts—that they will actually increase tax revenue and help eliminate budget shortfalls. And yet later in the piece Friedman praises the Bush tax plan as a supply-side triumph!  

Apart from this, though, there are other more serious problems with Friedman’s strategy for reducing government. First, it seems that, at best, this plan would only prevent further government expansion but would not actually reduce the size of the government. Since government is constantly growing, a tax cut would have to be enormous to do more than slow the rate of growth. For instance, the current 2003 Federal Budget projects a deficit of approximately $80 billion, and yet Federal spending is scheduled to increase by nearly $100 billion over last year (source: Office of Budget and Management). This begs the question: how large would the deficit have to be to keep Federal spending flat, much less shrink the budget?*  

Secondly, Friedman seems to underestimate the self-interest of the politicians and those who benefit from government largesse. They essentially constitute a separate class—or “court party”--who have a direct stake in maintaining their ability to live at the expense of others, rig markets in their favor, and use the power of the State to enforce their social vision. We can expect them to fight tooth and nail against any threat to their power. To do otherwise would be, from their point of view, positively irrational.

As the “public choice” school of economics has pointed out, those who benefit most from the favors that the government doles out have the greatest incentive to protect their privileges. If a congressman threatens to eliminate Acme Widgets’ $3 million subsidy, Acme has a major incentive to prevent that from happening. Meanwhile, Joe Taxpayer, who’s only footing a fraction of the bill, has next to no incentive for seeking an end to it. To think that the recipients of government subsidy are going to stand by while their power and influence is liquidated seems naïve at best. Even assuming that the majority of Americans want a smaller government as Friedman claims, the majority of Americans don’t write big checks to election campaigns. And most politicians are not looking to put themselves out of a job. Can we really expect the political class and its clients to willingly participate in the erosion of their own power?

There’s nothing wrong with tax cuts. Anything that allows people to keep more of their own money is a good thing in my book. But tax cuts are no substitute for the drastic rethinking about the role of government in a free society that will have to take place if we really want to shrink the State. The Declaration of Independence restricted the legitimate functions of government to securing the rights to life, liberty, and the pursuit of happiness. This was a philosophical and cultural breakthrough of the first order. Unfortunately, many Americans have over time accepted that it’s also the government’s job to stimulate the economy, monitor the reading habits of potential subversives, inculcate children with the “right” social attitudes, and maintain a worldwide garrison state in the name of “benevolent global hegemony.”

With all due respect to Professor Friedman, whose work I greatly admire, his perspective seems to be limited by a kind of utilitarian calculus. His major complaint seems to be that “we do not get our money’s worth for the roughly 40% of our income that is spent by government.” This may be why he sees the rollback of government as fundamentally a technical problem: how can we engineer some kind of budget constraint that will reduce the size and intrusiveness of government?

But it’s going to take something more radical than budgetary gimmicks to restore the American Republic . Pushing back the State is fundamentally a moral and cultural task. Statism is a kind of failure of the moral imagination. Fixing this will involve, among other things, resisting the blandishments of the State and not just waiting for our overlords in Washington to cut taxes a percentage or two. The bloated Federal Leviathan needs to be exposed for the monstrosity it is. Only when people recognize the modern State as a parasite that weakens individuals, hobbles enterprise, undermines communities, and spreads destruction abroad will they be convinced of the need to drastically reduce its scope.