We're Lying to Ourselves About Taxes, Spending, and the Debt

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2 days ago

Having extended most of the 2017 Tax Cuts and Jobs Act and added even more tax breaks, Congress is once again punting on the central fiscal question of our time: What kind of government do Americans want seriously enough to pay for?
Yes, the "Big Beautiful Bill" avoided a massive tax increase and includes pro-growth reforms. It also adds to the debt—by how much is debatable—and that's before we get to the budgetary reckoning of Social Security and Medicare's impending insolvency. Against that backdrop, it's infuriating to see a $9 billion rescission package—one drop in the deficit bucket—met with cries of bloody murder.
The same can be said of the apocalyptic discourse surrounding the Big Beautiful Bill's reduction in Medicaid spending. In spite of the cuts, the program is projected to grow drastically over the next 10 years. In fact, the reforms barely scratch the surface considering its enormous growth under former President Joe Biden.
Maybe we wouldn't keep operating this way—pretending like minor trims are major reforms while refusing to tackle demographic and entitlement time bombs ticking beneath our feet—if we stayed focused on the question of what, considering the cost, we're willing to pay for.
Otherwise, it's too easy to continue committing a generational injustice toward our children and grandchildren. That's because all the benefits and subsidies that we're unwilling to pay for will eventually have to be paid for in the future with higher taxes, inflation, or both. That's morally and economically reprehensible.
Admitting we have a problem is hard. Fixing it is even harder, especially when politicians obscure costs and fail to recognize the following realities.
First, growing the economy can, of course, be part of the solution. It creates more and better opportunities, raising incomes and tax revenue without raising tax rates—the rising tide that can lift many fiscal boats. But when we're this far underwater, short of a miracle produced by an energy and artificial intelligence revolution, growth alone simply won't be enough.
Raising taxes on the rich will fall short too. Despite another round of loud calls to do so, like those now emanating from the New York City mayoral campaign, remember: The federal tax code is already highly progressive.
Here's something else that should be common knowledge: Higher tax rates do not automatically translate to more tax revenue. Not even close. Federal revenues have consistently hovered around 17 percent to 18 percent of gross domestic product (GDP) for more than 50 years—through periods of high tax rates, low tax rates, and every combination of deductions, exemptions, and credits in between.
This remarkable stability is no fluke. It reflects a basic reality of human behavior: When tax rates go up, people don't simply continue what they've been doing and hand over more money. They work less, take compensation in nontaxable forms, delay selling assets, move to lower-tax jurisdictions, or increase tax-avoidance strategies.
Meanwhile, higher rates reduce incentives to invest, hire, and create or expand businesses, slowing growth and undermining the very revenue gains legislators expect. It's why economic literature shows that fiscal-adjustment packages made mostly of tax increases usually fail to reduce the debt-to-GDP ratio.
Real-world responses mean that higher tax rates rarely generate what static models predict as we bear the costs of less work, less innovation, and less productivity leading to fewer opportunities for everyone, rich or poor.
If the underlying structure of the system doesn't change, no amount of rate fiddling will sustainably result in more than 17-18 percent in tax collections.
Political dynamics guarantee further disappointment. When Congress raises taxes on one group, it often turns around and cuts taxes elsewhere to offset the backlash. Then, when the government does manage to collect extra revenue—through windfall-profits taxes, inflation causing taxpayers to creep into higher brackets, or a booming economy—that money rarely goes toward deficit reduction. It gets spent, and then some.
It's long past time to shift the conversation away from whether tax cuts should be "paid for." Instead, ask what level of spending we truly want with the money we truly have.
I suspect that most people aren't willing to pay the taxes required to fund everything our current government does, and that more would feel this way if they understood our tax-collection limitations. That points toward the need to cut spending on, among other things, corporate welfare, economically distorting subsidies, flashy infrastructure gimmicks, and Social Security and Medicare.
Until we align Congress' promises with what we're willing and able to fund, we'll continue down this dangerous path of illusion, denial, and intergenerational theft—as we cope with economic decline.
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The post We're Lying to Ourselves About Taxes, Spending, and the Debt appeared first on Reason.com.
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