Are cutting taxes really raising taxes? It’s an interesting proposition, and one that economists are discussing in relation to President-Elect Barack Obama’s proposed stimulus plan. In Obama’s projected $775 billion dollar stimulus plan, up to 40 percent of the (borrowed) money is anticipated to go towards tax cuts, while the rest will be put into infrastructure projects like bridge and road building.
We have talked at great length about the dangers of Obama’s public works program; however, George Mason University Economics Professor Russell Roberts brings up a different angle: When a tax cut isn’t a tax cut.
If the government cuts rates or just gives rebates but at the same time increases the size of government, taxes are not lower. They’re larger. Government is taking a bigger share of the economic pie leaving less for the private sector to spend. The future burden of taxes is higher. As Milton Friedman used to argue, don’t focus on how government is financed, whether it’s out of current taxes or future taxes. Focus on the spending. If government grows as a percentage of the economy, then the burden on the private sector is bigger.
You can read the rest of Roberts’ article here.
If Roberts’ argument is valid (which, given the fiscal history of government, is sure to be correct), then this casts a very different light on Republicans who may cut taxes, but increase government spending.