Thursday, August 6, 2009

Steven Lagerfeld: We've Made a Bad Bet on Taxes

The WQ's Steven Lagerfeld opened my eyes to the risky, two-way bet of tax cuts:

In another way, today's red vistas of debt recall the era of tax cutting under Ronald Reagan. The Reagan Revolution was in part a gamble: Cut taxes, and an alarmed public will demand budget cuts in order to avoid red ink. Now we may be witnessing a kind of reverse Reaganism: Increase the size of government and gamble that an alarmed public will eventually authorize the taxes to pay for it. [From Wilson Quarterly, Summer 2009, Vol. 33, No. 3, page 4]

Mr. Lagerfeld is absolutely correct--by refusing to cut government spending, we failed to uphold our end of the tax bargain. It seems that voters will always demand the same level of services or increased services; as a result, cutting taxes--which reduces revenue available for government services--might actually be a slow suicide pact. Californians just don't seem to have the stomach to cut spending, even when the money isn't there to provide the same level of services. Perhaps some kind of counterproductive but ingrained psychology is involved--after all, once you've tasted gourmet food on a regular basis, it's almost impossible to go back to the frozen microwave dinner--even if you have less money to spend and should be cutting back.

If Mr. Lagerfeld and I are both correct--that the bet on lower taxes failed, and once spending is increased, it's almost impossible to cut services--then cutting taxes should not be the main focus of any government policy. Instead, we ought to be focusing on the following areas: first, having a consistent tax policy to attract business and minimize inflation; second, requiring all new government programs to terminate at the end of the following fiscal year if sufficient revenue to fund the program does not exist; and third, to pass a balanced budget amendment to each state's constitution.

1 comment:

Adam Rogoyski said...

In good times, I eat sushi and go on vacation. In tough times, I stay at home and eat simply. Everyone understands this. The government needs to run the same way. Sometimes you have to sell your house and move back in to an apartment or with your parents. The end result is you become stronger financially with more experience to avoid the situation next time.