The Senate just passed a 500-page tax reform bill. Assuming it lives up to its promise, it will cut taxes on corporations and individuals. Predictably, the Left hates it and the Right loves it. I am writing to argue why the Right should hate it (no, not for the reason the Left does, a desire to get the rich).
The root of our problem is spending. The federal government spends much of our income, and an increasing amount of our wealth to the tune of over $4 trillion a year. That is over $11,000 for every man, woman, and child. But children don’t work and many adults don’t either (or they work for the government or a contractor). Assuming 100 million work in the productive sector, the government spends $40,000 in cash for each one, not counting the promises it racks up. This is the federal government only, and of course the people also bear the burden of spending at state, county, city, and municipal water district levels.
The government spends more than it takes in tax revenues. A lot more. The federal debt today is over $700 billion more than it was a year ago. The reason is simple. The people may love spending, but they hate taxes. So the government makes it up by borrowing.
I have written a lot about this concept, borrowing. They call it borrowing, but without the means or intent to repay it, it’s really a fraud. This is my definition of inflation—counterfeit credit. It is the compromise between the party of spend more, and the party of tax less: the policy of borrow more.
And that brings us to the present topic. Is it good to cut taxes? Economist Frederic Bastiat could have written this essay for me, in only 168 words. The first paragraph of the introduction to his 1850 book That Which is Seen, and That Which is Not Seen reads:
“In the department of economy, an act, a habit, an institution, a law, gives birth not only to an effect, but to a series of effects. Of these effects, the first only is immediate; it manifests itself simultaneously with its cause — it is seen. The others unfold in succession — they are not seen: it is well for us, if they are foreseen. Between a good and a bad economist this constitutes the whole difference — the one takes account of the visible effect; the other takes account both of the effects which are seen, and also of those which it is necessary to foresee. Now this difference is enormous, for it almost always happens that when the immediate consequence is favourable, the ultimate consequences are fatal, and the converse. Hence it follows that the bad economist pursues a small present good, which will be followed by a great evil to come, while the true economist pursues a great good to come, — at the risk of a small present evil.”
If they cut taxes, the seen is the lower tax you must pay. That is good and everyone is happy. But what is the unseen? What is that thing to which Bastiat refers as the “ultimate fatal consequence”?
It is an increase in borrowing. The “great evil to come” is the collapse of the debt, which is the backing for what we call money nowadays. When the debt is defaulted, our money will be worthless.
A reduction in tax revenues necessarily means an increase in net borrowing. Borrowing, of course, does not generate revenues. It is merely an addition to the debt.
To manage the rising debt—it’s rising exponentially—they suppress the rate of interest. This keeps the monthly payment down, but it has many other unseen but foreseeable consequences. Just ask a retiree trying to live on fixed income.
The bottom line is that when the government spends our income and our wealth, we are impoverished. That is a fact, and there cannot be any real debate over it. The debate is whether it is less bad to tax us or to borrow.
When the government taxes us, we know we are poorer. It is seen. We adjust downward our consumption and our quality of life. This is why everyone hates taxes.
When the government borrows, by contrast, we do not feel the pinch of the impoverishment. Instead, the government sells us bonds. The bond is a financial asset which not only pays interest, but has been in a bull market since Ronald Reagan took office in 1981. We not only don’t feel poorer, but we actually feel richer. The purchasing power of our investment portfolios is going up.
Borrowing is not a magic perpetual motion machine. It is not a way to spend above your revenues. It is not a way to consume without first producing. It is a just a way to deceive—to consume without the taxpayer realizing it.
It is Bastiat’s unseen.