Suppose that year after year, you spend more than you earn. You are worried that you’ve become fiscally irresponsible. Which of the following is not a path back to fiscal sanity for your household?
- Spend less.
- Earn more.
- Stop at the ATM more often so you’ll have more cash in your pocket.
Do we all understand why the answer is C? Good. Now let’s try another one.
Suppose that year after year, your government spends more than it collects in taxes. You are worried that it’s become fiscally irresponsible. Which of the following is not a path back to fiscal sanity for the government?
- Spend less.
- Collect more taxes.
The answer is not A. Spending less—at least spending less on things you don’t need—can certainly be a path back to fiscal sanity for a government just as it is for a household.
What about B—raising taxes? There seems to be this idea floating around that raising taxes is sort of like earning more income, and can therefore also be a path back to fiscal sanity. But that’s wrong. Raising taxes is not at all like earning more income; instead it’s very like visiting the ATM.
Here’s why: The government’s chief asset—in fact, pretty much its only asset—is its ability to tax people, now and in the future. The taxpayers are the government’s ATM. Make a withdrawal today, and there’s less available tomorrow.
Now the ability to tax is a pretty huge asset and the government has not (yet!) come close to depleting it. In that sense, there’s a lot of money in the bank. But no matter how much you’ve got in the bank, a policy of ever-increasing withdrawals is nothing at all like a decision to earn more income. (Besides, a lot of us have other uses in mind for that money.) It’s important to get the analogy right. And it’s clear from the op-ed pages that not everybody gets this.
There is this notion abroad that an extra billion in federal spending can be converted from “irresponsible” to “responsible” as long as it’s accompanied by an extra billion in tax hikes. That’s like saying a $500 haircut can be converted from “irresponsible” to “responsible” as long as you withdraw the $500 from your bank account.
So when the president appoints a commission on fiscal responsibility, as he did a couple of weeks ago, I find myself hoping that its members understand this simple point—and worrying that they don’t. Fiscal responsbility means spending less. Taxes have almost nothing to do with it.
Of course the problem with spending cuts is that there’s always someone opposed to them. The solution is to package a whole lot of cuts together so almost everyone has something to gain. Here, then, is an idea to get the commission started: Currently the Department of Agriculture steals from workers and business owners to give to farmers, the Department of Labor steals from farmers and business owners to give to workers, and the Department of Commerce steals from workers and farmers to give to business owners—with a lot of wealth falling through the cracks along the way. Eliminate all three departments and every American will lose one friend and two enemies. It’s the responsible thing to do.