Tonight at 5:30pm, the American Enterprise Debate series returns as Grover Norquist debates Ross Douthat on the effectiveness of the Taxpayer Protection Pledge. The debate can be seen live on AEI’s website, on C-SPAN3, or live here at AEI. To help lay out the contours of the discussion, we asked some young bloggers from around DC to weigh in on the question.
Grover-bashing has become something of a cottage industry in Washington since the Super Committee failed to reach a comprehensive deficit reduction plan. It seems that Republicans and Democrats alike are keen to use Norquist as a scapegoat for the decisions they made or failed to make regarding the budget.
So, is the pledge effective? You decide.
From Andrew McIndoe at the Bill of Rights Institute:
The Taxpayer Protection Pledge is one of the most impactful policy initiatives and political strategies currently advancing economic prosperity.
It is clear that our nation’s deficit is exclusively a result of Washington’s spending problem. Congress continually makes promises to the American people that are simply unaffordable. Living well beyond its proper functions, the U.S. government invariably lives beyond the means of the American people.
Revenues have remained largely where they have always been while spending has dramatically increased. As noted by the Office of Management and Budget, spending levels have historically equaled 19-20 percent of GDP but have risen to nearly 25 percent of GDP in recent years.
The American people know from experience that if more of their money is sent to Washington to “fix the deficit,” it will be spent on short-term political projects rather than being used to reduce the long-term debt. A pledge not to raise taxes forces politicians to face the real problem: spending.
Politically, the Pledge has ensured that politicians’ feet are held to the fire when they start to consider tax hikes as a way to fund their spending addiction. Critics of the Pledge argue that this does nothing more than create political stalemates. Such an outcome, while frustrating, is not necessarily ruinous. A political impasse is preferable to compromises on core principles that betray American voters in backroom deals.
The vast majority of center right voters believe that Washington has sold them out on issue after issue. Americans—who are overwhelmingly conservative—have historically low faith in their Congress because of its multi-decade spending binge. The last line of defense for proponents of limited government is that taxes have not been raised. Many want those on the right to muddy the waters on the last bright line left with the American people.
Over the last 25 years, the Pledge has truly protected taxpayers (and their hard earned money) from the overreach of politicians like no one else could have.
From Joseph Henchman at the Tax Foundation:
“Starve the Beast” Not Effective at Federal Level
Before the first decade of the twentieth century, many smart people believed that “starve the beast” could work at restraining federal spending growth. After cutting taxes, or at least not raising them, as Milton Friedman explained, “[r]esulting deficits will be an effective restraint on the spending propensities of the executive branch and the legislature.” The much harder job of rolling up sleeves and cutting spending by terminating ineffective programs and confronting entrenched interests could thus be avoided.
After a decade of experience, we know now that “starve the beast” does not work at the federal level. Instead of creating pressure to reduce expenditures to a smaller revenue total, spending exploded. After the 2001-03 tax cuts, federal spending under the George W. Bush Administration grew 55 percent (29 percent after adjusting for inflation). Defense spending grew 6.8 percent a year even after adjusting for inflation, other discretionary spending grew 5.4 percent a year (again, after adjusting for inflation), and the federal debt rose to 66 percent of GDP.
Why? The best theory I’ve heard is “fiscal illusion”: that tax cuts without spending cuts just reduces the apparent cost of government to the taxpayer. Instead of paying $1 in taxes to get $1 in services, the taxpayer is apparently paying only 70 cents to get $1 in services. Taxpayers thus demand more services. (Some argue that something similar is happening with nearly half of Americans paying no federal income tax, in that they will demand more in services but paid for by other people.) While tax increases lead to increased government spending, so apparently do tax cuts. The only thing that leads to spending cuts is cutting spending.
How You Tax is Just as Important as How Much You Tax
Some advocates of limited government believe that any reduction in government revenue is effective to this end because it puts money in consumers’ hands. However, if the ultimate policy goal is to reduce government involvement in individual and market decisions, tax credits are a poor choice. These credits are often complex, administratively burdensome, use government policy to distort behavior, create damaging uncertainty, and are the result of political micromanaging. Even as a tax credit modestly drops government revenue, it increases government meddling in the economy and resultant harmful outcomes.
One recent example is the ethanol tax credit, which has heavily distorted domestic gasoline prices and foreign food prices (causing hunger overseas, as found by 17 studies) and warped economic decisions by just about everyone who uses energy, for the benefit of a small group of politically-connected insiders. Stopping this unconscionable policy and its harmful outcomes should supersede in importance the relatively small amount of additional revenue the government would gain from ending the tax subsidy. Serious analysis of this and other tax incentives should look not just at the revenue but also other economic costs.
Tax Foundation analysis is guided by the principles of economically sound tax policy: simplicity, transparency, neutrality, stability, and growth-promotion. These principles originally derive from Adam Smith’s “maxims” about taxes from The Wealth of Nations. While we look at revenue impacts, we also look at other costs to taxpayers, such as administrative and compliance costs (Americans now spend 7 billion hours per year complying with the federal tax code), and reduced economic activity caused by a badly designed tax system. We analyze not just whether a tax change would increase or reduce revenue, but also whether it moves us towards a simpler, more sensible tax system.
Conclusion
I don’t like paying taxes but if there are to be taxes, they should be as simple and sensible as possible. Tax policy should be used to raise revenue, not micromanage a complex economy by trying to pick winners and losers in the market. Everyone should kick in a bit, to avoid fiscal illusion. “Starve the beast” has not worked at the federal level, so we should recognize that there is no way out of the hard work of pursuing genuine tax reform.
From Curtis Dubay at the Heritage Foundation:
The Pledge works to keep Congress focused on the cause of our debt problem: Overspending driven by entitlement programs like Social Security and Medicare.
Members of Congress will always take the path of least resistance, and tax hikes—although not an actual solution—are often an easier political route to address the debt than reforming entitlements.
Tax hikes should never be considered to fix the debt for three reasons:
- Low tax collections are not the problem. Tax receipts are relatively low today because of the recession and anemic recovery. Once the economy recovers—and assuming that current tax policies remain in place (including all the Bush tax cuts)—receipts will quickly rise to their historical average and grow thereafter.
- Tax hikes don’t address the cause of the exploding debt. If Congress raises taxes to fix the problem and does nothing to slow the rapid growth in entitlement spending, it will have to continue raising taxes year after year to keep pace. The constantly growing tax burden will slow economic growth and leave succeeding generations a diminished future.
- Spending cuts never materialize in “balanced” deals. Any deal that offers spending cuts for tax hikes is fundamentally unbalanced. As Presidents Reagan and Bush I found out, the tax hikes in such deals become permanent law immediately, but succeeding Congresses are under no obligation to abide by the spending levels set by previous Congresses and quickly undo earlier cuts.
Congress needs to cut spending and reform entitlements. Not hike taxes.
From Rizqi Rachmat at the Mercatus Center:
The Taxpayer Protection Pledge seeks to restrict the size and scope of government by limiting tax revenues; however, the focus on taxes may distract our attention away from the central issue driving our debt spiral—excessive government spending. The weight of our compounding debt burden on future generations, then, will ultimately be determined by our ability to successfully address this spending.
The pledge is concomitant with the idea of starving the beast, popularized by Republicans in the 1980s, which assumes that once taxes have been cut, constituencies will demand lower levels of spending in response to deficits. The pledge’s ability to limit spending depends upon a government which views its level of revenue as a binding constraint on its level of spending—history tells us that this is not the modus operandi of the political system in which we operate. The federal government did not shrink much, if at all, under Reagan, and it expanded under George W. Bush. Tax cuts alone can’t bind spending.
While the pledge will not solve our debt problem, it maintains an important function in the debt discussion—it reminds us of the ideals of a free society. It reminds us that voters should be empowered and knowledgeable. It reminds us that politicians should be held accountable for the decisions that they make. It reminds us that we should be moving along the margins of increased freedom and prosperity.
The Taxpayer Protection Pledge places too much emphasis on taxation, so limiting the discussion around balanced-budget amendments, broad-based tax reform, and entitlement reform—some of the many tangible policy solutions that would move us closer to the ideals of a free society.
And, finally, one more contrarian:
The Taxpayer Protection Pledge fails in both principle and practice by creating a perverse structure within Congress’ operations in the following ways:
- Limits the ability of statesmen to govern. By taking policy options off the table, it limits the ability of statesmen to provide for the evolving demands of their constituencies. Moreover, politicians are now asked (or, in some instances, required) to sign a litany of pledges to win elections—effectively destroying their ability to govern when in office.
- Increases the real cost of government. When politicians are allowed to introduce new programs but are forbidden to introduce ways to fund the programs, the government overspends. Such overspending reallocates real money away from the private sector into government coffers, creating a promise of deficits, debt, and stagnation.
- Creates idiotic complexities. Legislators are encouraged to create an increasingly complex tax system in the name of keeping low marginal rates. The explosion of tax expenditures and deductions since 1986 has lowered Federal revenues while raising the real cost of tax compliance and fostering opportunities for tax evasion. While low taxes are positive, it’s idiotic that some mega-corporations pay no income taxes or wasteful programs such as agricultural subsidies cannot be cut—because the Pledge views changes to this system as tax increases.
- Makes the tax code unfair. Income taxes might be fundamentally unfair, but simple progressivity is more fair than the current nightmare we call the tax code. The abundant loopholes available to the super-rich add to the dearth of socioeconomic mobility in the United States and cause real tax rates to be much higher on the middle class than their architects (ie, the Reagan administration) intended.
- Causes taxes to rise. Because signatories could not make small concessions because of the Pledge, we are set for two massive tax hikes—the expiration of the payroll tax cut and the expiration of the Bush-era tax cuts. Compromise on smaller areas may have allowed these programs to be extended. When Norquist helped defeat George H.W. Bush because he broke his tax pledge, the resultant victory was rather hollow; eight years of Clinton resulted in an explosion of entitlement programs and a rise in tax rates.
- Creates political gridlock. Sometimes, gridlock can be positive, but this “do-nothing” Congress has earned its label, as fever-pitched hyper-partisanship has resulted in new lows of Congressional incompetence.
The Pledge, while nice in theory, isn’t effective at achieving what it set out to do: make the tax code simpler, fairer, and lower.
What do you think? Decide tonight and ask your questions on Twitter using the hashtag #AEIDebates.
