As this election cycle has demonstrated yet again, Democrats are not shy about calling for tax increases. In every election cycle they call for more taxes, whether through corporate taxes or through taxes on unrealized capital gains.
Donald Trump, meanwhile, has pledged to cut some taxes. I say “some” because Trump has also pledged to raise taxes on imports.
Nonetheless, Trump ran on the idea that he would reduce the tax burden on Americans if elected.
Unfortunately, Trump has no plans to cut government spending, and this means there is little chance that ordinary taxpayers are going to experience any real tax relief.
This is because tax cuts without spending cuts don’t actually lessen the cost of government. A tax cut without a spending cut simply moves around the tax burden, and often replaces explicit taxation with the stealth tax of price inflation.
Unless accompanied by spending cuts, a tax cut simply increases deficit spending, and taxpayers will pay for deficits one way or another. Typically deficits are paid for using one or more of the following: future taxes, present interest payments, and monetary inflation. Unfortunately for the taxpayers, when it comes to paying off deficit spending, “the future” is already here. In the 2024 fiscal year, the taxpayers had to pay nearly $900 billion in interest on the debt. That huge tax bill exists because federal politicians in the past spent more than they had in revenues.
Forcing the taxpayers to pay off old debts isn’t exactly popular, however. So, federal technocrats have found a way to push down interest rates on government debt. This reduces the amount of interest owed and nominally reduces the cost of government debt.
But this also ends up costing the taxpayers bigtime because the way that technocrats suppress the cost of interest is by having the central bank buy up more federal debt. (By buying government debt, the central bank artificially drives up demand, so the Treasury doesn’t have to pay as much in interest to attract buyers.) And where does the central bank get the money to buy up government debt? It prints the money. That then leads to both monetary inflation and (eventually) price inflation.
So, tax cuts that increase deficits only end up placing new and different burdens on the taxpayers. They’re not a real tax cut at all.
The True Costs of Government Spending
There are also other reasons why we must never lose focus on cutting government spending.
In Man, Economy, and State, Murray Rothbard explained the error of focusing on taxes while ignoring government spending (p. 910):
There has also been a great amount of useless controversy about which activity of government imposes the burden on the private sector: taxation or government spending. It is actually futile to separate them, since they are both stages in the same process of burden and redistribution...
[S]suppose the government taxes the betel-nut industry one million dollars in order to buy paper for government bureaus. One million dollars’ worth of resources are shifted from betel nuts to paper. This is done in two stages, a sort of one-two punch at the free market: first, the betel-nut industry is made poorer by taking away its money; then, the government uses this money to take paper out of the market for its own use, thus extracting resources in the second stage. Both sides of the process are a burden. In a sense, the betel-nut industry is compelled to pay for the extraction of paper from society; at least, it bears the immediate brunt of payment. However, even without yet considering the “partial equilibrium” problem of how or whether such taxes are “shifted” by the betel-nut industry onto other shoulders, we should also note that it is not the only one to pay; the consumers of paper certainly pay by finding paper prices raised to them.
What Rothbard is saying here is that every time the government buys something with money looted from the taxpayers, it necessarily drives up the prices of those goods, and prevents those resources from being used by the private sector for private purposes. So, every time the government buys a gun or an airplane, it makes guns and airplanes more expensive for the private sectors, as well as all the factors that go into producing those goods. Needless to say, in addition to driving up prices, the government is also distorting the economy, as well as choosing winners (government employees, contractors, and suppliers) and losers (those not favored by the government). Whole industries — ones that were valued and profitable before the government got involved — can be destroyed in this manner; and the livelihoods of people with them. Rothbard goes on:
The process can be seen more clearly if we consider what happens when taxes and government expenditures are not equal, when they are not simply obverse sides of the same coin. When taxes are less than government expenditures (and omitting borrowing from the public for the time being), the government creates new money. It is obvious here that government expenditures are the main burden, since this higher amount of resources is being siphoned off. In fact, as we shall see later when considering the binary intervention of inflation, creating new money is, anyway, a form of taxation. [emphasis added.]
We’re forced to conclude that any Republican veto of taxes, if not accompanied by a veto of spending, has accomplished nothing at all but to simply shift the burden on the taxpayers to some form other than a transparent tax bill. Indeed, one could argue that if the GOP is to agree to huge spending increases, as it has done nonstop since 2020, it would be less dishonest to simply increase tax rates rather than seek political advantage by pushing the tax burden onto the public by the less obvious means of deficit spending.
And, even if the GOP found some magical unicorn-dust-method of paying for the extra spending without either ordinary taxes or money creation, the public would still suffer from the market distortions and price increases caused by the government’s use of scarce resources.
So, the next time a politician pledges to cut taxes, be sure to remind him that if he really has an interest in freedom and free markets, he’ll focus on cutting spending first. Then ask him which specific government programs he plans to cut. If he can’t credibly answer the question — and if he doesn’t do it once in office — you can be sure you’ve been had.
Read More:
- “Do We Want Real Tax Cuts? How About Cutting Government Spending?“ by Frank Shostak.
- “Tax Cuts Do Not Cause Inflation. Printing Does.” by Daniel LaCalle.
- “Austerity: A Real Solution to Help Heal the US Economy“ by Mark Thornton.
