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Where Are the Tax Cutters?

The worst thing about the debt ceiling debate is that it is too narrow.

Everyone seems to agree that we need spending cuts to reduce our budget deficits. The only real question is whether these spending cuts should be accompanied by tax increases. The Democrats favor tax hikes, the Republicans oppose them.

Almost everyone expects that the likely compromise will be a combination of tax hikes and spending cuts. It’s very likely that the compromise cuts will be less severe than what Republicans want, and the compromise tax hikes less onerous than what the Democrats would impose.

So here’s my question: Where are the tax-cutters?

We’re probably coming to an end of a recovery cycle that was so weak it barely moved the chains on unemployment. Economists are racing to put out reports lowering projections for second-half growth. There’s renewed talk of a “double dip” recession.

As far as I can tell, there is no reasonable economic theory that says the government should increase taxes and cut spending just as the economy is slumping. You can find certain types of libertarian economists who will argue that government spending is always and everywhere economically destructive—and they might be right.

But this focus on deficit reduction—rather than spending cuts—is a little bit nutty. And it will be even nuttier if the deficit “hawks” wind up cutting spending and raising taxes.

Our government can borrow at extremely low costs right now. What grounds are there to prefer that we avoid funding the costs of government through debt and embrace funding it through taxes?

From the perspective of libertarian ethics, a government financed by taxes is worse than a government funded by debt. Debt funding means individuals and institutions are voluntarily giving the government money in exchange for the promise of interest and principal payments. Taxes are confiscatory. Libertarians should prefer debt to taxes, all other things being equal.

In the current mess, a libertarian should make the case that government spending has proven to be a bad way of stimulating the economy. But the conclusion from this shouldn’t be a call for purely reducing government spending and then using the unspent funds to cut the budget deficit. It should be to call for tax reductions to reflect the cuts in government spending.

As long as we have a non-zero tax rate and a recessionary economic outlook, there are no grounds for calling for deficit reduction. Only when confiscatory sources of government financing—that is, taxes—have been eliminated should we look to cutting back on voluntary sources of government financing.

Priorities matter here. The Republicans, which were once the Grand Old Party of tax cuts and growth, have become the “hold the line” party, arguing that taxes should be kept at current levels and borrowing reduced. Spending cuts are an after-thought, something made necessary by the urgently felt desire to reduce deficits. Tax cuts aren’t even on the table.

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