Should Conservatives Favor Tax Hikes to Solve Long-Term Budget Gap? An Outline to Answering the Question

October 21, 2010

So earlier this week, a mini-“debate” among conservatives (National Review Online vs. Americans for Tax Reform) took place over the extent to which tax increases should be on the table to help solve the nation’s long-term budget problems. One side (NRO) says that revenue increases have to realistically be on the table. The other side (ATR) says that it’s all a spending problem and that conservatives should not give into tax hikes ever.

It’s a somewhat entertaining debate to watch, but who is right?

Theoretically, either side could be correct. But empirically, the side that is correct is the side whose theory of the political economy more accurately assesses the degree to which starve the beast works, or similarly, the degree to which feed the beast is a problem. Going forward given the current fiscal climate and the question of raising revenues, the question is one of the latter: feed the beast.

If feed the beast was only a minor problem whereby say a $100 billion tax increase in the form of a VAT led to $99 billion in deficit reduction and $1 billion in higher spending (compared to what it would have been without the VAT), the nation would be better off going forward. That’s because at the levels of debt we are talking about (approaching fiscal insolvency), $1 in additional VAT revenue is better than 99 cents of additional deficit, ceteris paribus. If you disgaree with this position given the hypothetical scenario outlined, then I would say you probably don’t deserve to be taken seriously on budgetary matters (even if you are conservative and assume the additional government spending is worthless).

Going even further in the pro-tax hike direction, if $100 billion in VAT revenues led to $110 billion in deficit reduction (due to say fiscal illusion as Bill Niskanen may argue), then in our current situation, we would be better off with such a policy.

But suppose $100 billion in VAT revenues merely led to $95 billion in higher spending (compared to what it would have been without the VAT) and $5 billion in deficit reduction. Under this scenario, the higher spending and minor deficit reduction, under the conservative banner, would not be socially beneficial when compared to the costs of a VAT.

Note: Implicitly included in the feed the beast question is the degree to which any “giving into” a tax hike would take the place of a spending cut that would have otherwise taken place. (That’s why I used the terminology “compared to what it would have been without the VAT.”) Also worth noting, however, is that holding off on tax hikes to wait for spending cuts as can be assumed in the scenarios above may end up working only via fiscal crisis-initiated cuts, thereby complicating the cost-benefit calculus.

Overall, this feed the beast question is the core question that conservatives must answer before taking a position on the role of tax hikes in solving the long-term budget problem. If feed the beast isn’t a problem at all (say Niskanen is right) but you still hold deep to your no tax hike position so as to support fiscal insolvency which would trigger enormous tax hikes, your position is so illogical that you don’t deserve to be part of the debate. And on the other hand, if feed the beast is a serious problem, but you still support tax hikes, then you probably aren’t conservative. Regardless of who is right, people should not let their normative views on tax policy bias their beliefs on what is fundamentally an empirical question of political probabilities.


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