The Moral Case for Tax Cuts

The Moral Case for Tax Cuts
The ownership of tax money before the government confiscates it is a moral consideration, or at least ought to be.

A. Barton Hinkle
May. 1, 2017 12:01 pm

Say you walk into a store one day and there's a big sign inside: "Everything Now 20 Percent Off." What is your reaction?

(a) "This is great! I am going to save some money today!"

(b) "This is terrible! I demand to know how the store is going to make up the revenue. And I am outraged, because people who are richer than I am buy more stuff, which means they will save more money than I do!"

If you are a normal person, your reaction is more likely to resemble (a). But a lot of people—including most members of the media—apparently have a reaction more like (b), at least when the subject turns to taxes.

On Wednesday, President Trump laid out some general themes for tax reform, including cuts in the rates for corporations and small businesses and a hike in the standard deduction for individuals. The reactions were telling—and even a bit surreal.

Much discussion revolved around how much the tax cuts would cost. That is a funny question to ask, from the taxpayer's perspective. From the taxpayer's perspective, a tax cut doesn't cost anything. Like a price cut at a department store, it saves you money.

The only entity for whom a tax cut could be considered a cost is the federal government. But an impressive number of people in the media also see it that way, which tells you much about where their sympathies lie.

Along the same lines, debate erupted over whether Trump's plan would "pay for itself," a discussion Republicans foolishly invited with the Laffer Curve. So you get policy wonks arguing over whether the Congressional Budget Office should judge tax proposals using static scoring or dynamic scoring, and just how much we can expect the economy to grow under scenarios A, B, and C, and so on.

All great fun for those who see politics as a team sport. The trouble with such an approach, though, is that it turns taxation into a purely utilitarian issue, and one in which every perspective is just as valid as any other.

Which is simply not the case. Imagine a stranger walked up to you on the street and said, "Let's talk about the best way to spend your paycheck, shall we?" You would be entirely justified in replying, "Buddy, that's none of your damn business. Now go away before I call the police."

Most discussions of tax policy overlook a crucial initial condition: the ownership of the money before the government confiscates it. That is a moral consideration, or at least it ought to be. Pundits go on at great length debating whether the government can afford to let people keep a bit more of their own money. Very few ever ask whether the taxpayer can afford the high cost of government.

Sure, partisan hypocrisy enters the equation. Republicans don't care much about deficits unless Democrats are in charge, and vice versa. Let's take that as a given and set it aside for another time.

Any discussion of tax policy ought to start with the recognition that taxation entails taking the earnings of some people for the benefit of others. We need some level of taxation; government can't function without it. But the level should be kept as low as possible.

The standard objection here involves noting that tax cuts benefit the rich. Well, yes—they do. That is because the rich pay most of the taxes in the first place. The wealthiest 20 percent of American households earn 51 percent of all U.S. income but pay 66 percent of all income taxes. The bottom 45 percent of Americans pay no income tax at all. It is hard to cut taxes for people who don't pay them.

This is, indeed, a question about greed. But not in the way it is normally framed. As George Mason University economics professor Donald Boudreaux once said, it's an odd value set that considers "I want what's mine" to be selfish and greedy but "I want what's yours" to be selfless and noble.

Over the next two decades federal spending is set to soar from 20 percent of GDP to 28 percent, and much of that spending growth is on automatic pilot. Nobody ever asks how that spending is going to "pay for itself." Given that taxes already cost Americans more than food, clothing, and shelter combined, maybe they should.