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November 22 2010

Death and Spending

Hadley Heath

Several weeks ago I wrote a piece called "Raising Taxes is Not the Solution to the Budget Problem."  In this oped, I argued that higher taxes don't always lead to higher revenues for the government.  In fact, higher taxes hurt the economy, and our tax system needs a healthy economy to generate the revenues it needs.

In today's Wall Street Journal, Stephen Moore and Richard Vedder argue my point that raising taxes is a bad idea, but they make this point for a different reason.  They argue that raising taxes will not solve the budget problem because politicians in Washington will spend the new revenues as fast as they come in - faster, in fact. 

If you've ever had a history teacher tell you, "Those who do not learn from the past are doomed to repeat it," you'll appreciate the studious analysis of Moore and Vedder:

In the late 1980s, one of us, Richard Vedder, and Lowell Gallaway of Ohio University co-authored a often-cited research paper for the congressional Joint Economic Committee (known as the $1.58 study) that found that every new dollar of new taxes led to more than one dollar of new spending by Congress. Subsequent revisions of the study over the next decade found similar results.

We've updated the research. Using standard statistical analyses that introduce variables to control for business-cycle fluctuations, wars and inflation, we found that over the entire post World War II era through 2009 each dollar of new tax revenue was associated with $1.17 of new spending. Politicians spend the money as fast as it comes in-and a little bit more.

We also looked at different time periods (e.g., 1947-2009 vs. 1959-2009), different financial data (fiscal year federal budget data, as well as calendar year National Income and Product Account data from the Bureau of Economic Analysis), different lag structures (e.g., relating taxes one year to spending change the following year to allow for the time it takes bureaucracies to spend money), different control variables, etc. The alternative models produce different estimates of the tax-spend relationship-between $1.05 and $1.81. But no matter how we configured the data and no matter what variables we examined, higher tax collections never resulted in less spending.

The authors of this piece also remind us that President Reagan waited his entire presidency for the $3 of spending cuts that Congress promised for every one dollar of new taxes he agreed to in 1982, and that those cuts never came.  Often, there's a compromise to raise taxes if spending cuts are promised, but according to Moore and Vedder, history shows that this is a "sucker play."

The two also examine the late 1990's, when taxes were actually cut, along with spending.  And voila! The budget was balanced, and the economy "roared."

Here's how Moore and Vedder close their argument:

The grand bargain so many in Washington yearn for-tax increases coupled with spending cuts-is a fool's errand. Our research confirms what the late economist Milton Friedman said of Congress many years ago: "Politicians will always spend every penny of tax raised and whatever else they can get away with."

Independent Women’s Forum’s mission is to improve the lives of Americans by increasing the number of women who value free markets and personal liberty. Sister organization of Independent Women’s Voice.
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