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Why Tax Reform Must Be Tied To Major Federal Spending Cuts


“A government which robs Peter to pay Paul can always depend on the support of Paul.” ― George Bernard Shaw

It’s time to reject the notion that Congress must offset any reductions to some tax rates through increases in other tax rates. The idea that we must rob from Peter to pay Paul has led to historic levels of taxation in this country and helped stifle economic growth for decades.

Many have rightly noted that the United States has the highest corporate tax rate among Organisation for Economic Co-operation and Development countries, and these rates have seriously retarded our economic growth and led to many U.S. corporations reincorporating overseas. They have suggested reducing corporate rates to make America more competitive in the global economy. I wholeheartedly agree.

Unfortunately, because of the arcane reconciliation rules regarding budget and tax reform, Congress is (realistically) required to offset any predicted revenue reductions with greater offsets in revenue gains or spending reductions. (Let us leave aside the argument that the Congressional Budget Office’s scoring is woefully inaccurate regarding revenue projections.)

Double Taxing Is Not the Answer to High Taxes

Some have suggested—most notably the American Enterprise Institute—that reductions in corporate tax rates should be paid for with increases in capital gains and dividends taxes. Unfortunately, this proposal ignores the fact that these taxes already represent an unfair form of double taxation.

The vast majority of Fortune 500 companies are publicly owned. This means that the true “owners” of any given corporation are: you, me, owners of individual retirement accounts, people invested in public pensions, etc.

When a corporation earns a (gross) profit, they are taxed at a maximum rate of 35 percent. This obviously lowers their (net) profit. As a result, the dividends they disburse to their shareholders are reduced, effectively comprising a tax on shareholders. If shareholders own stock rather than receiving a dividend, their stock is reduced in value as the company’s value is reduced due to the taxes paid—another form of taxation.

However, when shareholders receive their dividends or choose to sell their stock and receive a capital gain, they are taxed again. This amounts to an unfair and economically detrimental form of double taxation.

Some will claim that by reducing corporate taxes, we can increase dividend and capital gains taxes because we are reducing the taxes Americans pay at the front end (in the form of corporate taxes). But robbing me less the first time shouldn’t allow you to rob me more the second time. And the economic benefits of reducing corporate taxes would likely, at least partially, be offset by the economic disincentive to invest in said corporations due to the higher dividend and capital gains taxes.

We Need Big Spending Cuts to Offset Tax Cuts

Instead of raising taxes elsewhere to offset supposed reductions in revenue from reduced rates — again, CBO’s success in static scoring regarding tax rate reductions is sketchy at best — why not reduce federal spending? Government spending has been spiraling out of control for 75 years or more.

Let’s examine the increase in federal expenditures during my lifetime alone (yeah, I’m old).

Fiscal Year Total Federal Spending (in billions of dollars)
1969 283.3
1970 302.3
1971 330.2
1972 360.8
1973 382.9
1974 422.7
1975 507.6
1976 563.2
1977 611.9
1978 675.9
1979 743.9
1980 857.8
1981 967.8
1982 1,061.5
1983 1,149.8
1984 1,219.1
1985 1,350.1
1986 1,431.0
1987 1,487.5
1988 1,582.5
1989 1,710.4
1990 1,876.2
1991 2,001.8
1992 2,116.4
1993 2,176.0
1994 2,257.0
1995 2,360.8
1996 2,430.1
1997 2,512.8
1998 2,594.6
1999 2,711.6
2000 2,870.0
2001 3,043.6
2002 3,290.2
2003 3,507.4
2004 3,701.6
2005 3,951.6
2006 4,204.9
2007 4,378.6
2008 4,743.1
2009 5,338.0
2010 5,274.2
2011 5,427.3
2012 5,412.3
2013 5,357.8
2014 5,433.0
2015 5,684.8
2016 5,899.2

(Source: Office of Management and Budget)

As you can see, that is an enormous increase in federal spending, although I don’t recall growing up in a Charles Dickens-like hellhole due to a lack of federal spending. Yet we are told we can’t reduce taxes on some without raising taxes on others. Is there really no federal spending that can’t be reduced in the interest of allowing hard-working Americans to keep a little more of their earnings while generating economic growth that will benefit everyone?

The obvious place to look would be our ballooning entitlement spending. If we do not reform our out-of-control entitlement spending, not only will greatly needed tax reform be impossible, funding our government will soon be impossible, regardless of how many taxes we raise.

As a wise, and somewhat cynical, man once noted: “When a new source of taxation is found it never means, in practice, that the old source is abandoned. It merely means that the politicians have two ways of milking the taxpayer where they had one before.” It is way past time that our government stop operating under the assumption that we cannot reduce taxes on some without increasing taxes on others. Why not try lowering taxes across the board while reducing federal spending? Crazy, right?