62 Pages Posted: 2 Oct 2003
Date Written: September 2003
The Bush Administration's policy of sharply cutting taxes while increasing government spending is both misguided and harmful. Presumably rationalized in private as a way of shrinking government over the long term without paying a current political price, it in fact increases the government's distributional intervention by handing money to current voters at the expense of younger and future generations. The Bush policies have increased the future tax increases that are likely to be necessary. In addition, they are likely to require additional Social Security and Medicare cuts that can be seen in large part as negative taxes, refunding some of the positive lifetime net taxes that future retirees will by then have paid. Reducing future negative taxes is a lot like increasing future positive ones.
The fiscal gap is largely growth-proof because so much government spending, no less than taxes, is effectively pegged to the size of the economy. This means that we cannot outgrow it in the manner of past wartime national debts. High economic growth would concededly make default on the government's implicit obligations considerably less painful. However, the fiscal gap has the potential significantly to reduce economic growth, for two main reasons. First, it may result in large tax increases on workers to keep benefits flowing to seniors, reducing saving because the workers would have saved more of the transferred funds. Second, it may lead to an Argentina-style meltdown in the U.S. government's position as a borrower in world capital markets, potentially yielding chronic inflation, unemployment, and bank and currency crises that affect our economic productivity for an indefinite period.
The Bush Administration's policy of increasing the fiscal gap ought to be reversed as soon as possible, on both the tax and spending sides of the ledger. How this ought to be done is beyond this article's scope, although I have discussed aspects of it elsewhere. Current seniors ought to share in the burden, however, both through tax increases and Social Security and Medicare reform that should take account of differences in people's ability to pay. Unfortunately, policy changes in the near future are more likely to make things worse than better.
Keywords: tax cuts, size of government, generational accounting, fiscal gap
JEL Classification: H2O, H55, H60, H62
Suggested Citation: Suggested Citation
Shaviro, Daniel, Reckless Disregard: The Bush Administration's Policy of Cutting Taxes in the Face of an Enormous Fiscal Gap (September 2003). NYU Law School, Public Law Research Paper No. 71; and NYU, Ctr for Law and Business Research Paper No. 03-19. Available at SSRN: https://ssrn.com/abstract=444242 or http://dx.doi.org/10.2139/ssrn.444242