Only Limiting Level of Taxation Can Control Government Growth

It is a mystery to liberals why conservatives are so adamant about cutting taxes. To them, the conservative fervor for tax cuts-anytime, anywhere-is irrational, almost a religious belief that is accepted on faith without any supporting evidence. In fact, tax cuts make perfect sense even if one does not think they will have any impact on growth whatsoever.

The core of the conservative view can be found in the work of a 19th Century economist named Adolf Wagner. He formulated a “law” regarding the expansion of government. Basically, he argued that as the wealth of society increases, so does the size of government. Wagner did not know why this is the case; he was simply making an observation based on the data he had. Of course, the 20th Century experience confirms his point even better.

The United States is a perfect example of Wagner’s Law. Prior to World War I, government spending as a share of the gross national product (GNP) was less than 3% almost every year except during wartime. Since then, spending as a share of national output has risen almost continuously. By the mid-1960s, federal spending consumed 17% of the economy. This year it is 19.5%, according to the Congressional Budget Office (CBO).

Conservatives believe that spending is the ultimate enemy, but it is fueled by higher taxes. They cite another “law” put forward by political scientist C. Northcote Parkinson. He argued that “expenditure rises to meet income.” In other words, government will always spend every penny it has, and more if it can. Therefore, the only thing limiting the size of government is the ability to take money out of its citizens’ pockets.

In the 1970s, Nobel Prize-winning economist James Buchanan formalized this relationship. He argued that the best way to limit the size of government was to limit its ability to tax.

This is a view that was endorsed by the American people in what came to be called the “tax revolt,” which began with Proposition 13 in California in 1978. Since then, voters have regularly supported the tax-cutting candidate against the tax-increasing candidate whenever they had a clear choice.

When one includes state and local governments, government at all levels now accounts for about 31% of national income. In short, almost one out of every three dollars in the U.S. economy is spent by government. One way or another, this money must be extracted from the wages of workers or the profits of investors, who have saved and risked their capital to earn a return.

As high as this is, however, in Europe it is far worse. According to the Organization for Economic Cooperation and Development (OECD), total government spending consumes about 45% of the economy there. In several countries, the figure exceeds 50%. Taxes are higher by the same order of magnitude.

Why Americans have been somewhat more resistant to Wagner’s Law than Europeans is an interesting question. It may lie in our history as a nation conceived in a tax revolt. Or it may be that Americans prize their freedom more than Europeans do. To an American, when government takes one third of his income, he views himself as one-third a slave, working for master government rather than himself one out of every three days.

Another reason for Americans’ resistance to taxes is that they never really see anything for the money they send off to Washington every year. Most non-interest, non-defense spending goes to people who pay little, if anything, in taxes-the poor and the elderly. What does the typical middle-class family really get from the federal government? In the view of most, the answer is nothing.

Of course, most Americans understand that not everything the government does can benefit them personally. But when taxes reach confiscatory levels, they have a right to ask why? Liberals have no answer, because to them one of the main purposes of taxation is simply to redistribute income-rob Peter to pay Paul. In short, for liberals taxation is an end in itself.

Americans also know that taxes are always rising even when Congress doesn’t explicitly raise them. Even with indexing, people are still pushed up into higher tax brackets whenever they get a pay increase. And they have seen over and over again that whenever taxes are cut, they never seem to pay less themselves.

Liberals would have us believe that they really don’t favor tax increases. They just oppose further tax cuts, including the extension of expiring tax cuts. However, as the CBO points out in a new report, failure to extend these expiring provisions will raise taxes on the American people by almost $1 trillion over the next 10 years. Thus, if Congress does nothing, taxes will automatically rise.