Raising Taxes Could Curtail Government Spending

Allowing taxes to go up could actually lead to decreased government spending, because people would feel the consequences in their wallets.

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New tuition announcements may help some families keep more money in their wallets next fall.
If your salary is $35,000, you will bring home $700 less this year thanks to the fiscal cliff deal.

Recent weeks have seen a flurry of conservatives breaking ranks by suggesting it may be time to consider raising taxes—and with good reason. Republicans have long championed the idea that holding down federal revenues puts a lid on the growth of government. In fact, in the 26 years since candidates began pledging not to raise taxes, federal net outlays have almost quadrupled. Government today is larger than ever—the difference is our leaders must now resort to borrowing the money they spend, rather than raising it from the people.

U.S. public debt has increased eightfold since 1986. Thus far, Americans have enjoyed more than $16 trillion in benefits beyond what they've actually paid for. As a result, we have precious little sense of the true costs of the programs we now expect our government to provide us. As any economist will tell you, being insulated from the price of something inevitably leads consumers to demand more of it. Is there reason to believe government is any different?

[See a collection of political cartoons on the budget and deficit.]

When people are prevented from "feeling" the "pain" of spending money, they are more likely to spend recklessly. We all know this to be true from personal experience. How much easier it is to put superfluous expenses on the credit card than to pay for them in cash. Were we forced to use only the dollars in our pockets, we might think twice about whether we really need the new gadget or pair of shoes. It is precisely because credit allows us to avoid carefully weighing the necessity of purchases before we make them that it leads so many into trouble.

Likewise, borrowing money on the scale our government does today has very real costs, whether or not we feel them right away. Beyond the literal price we pay to service our national debt, there are second-order effects that noneconomists don't always envisage. Debt creates uncertainty, causing employers to think twice before expanding their companies and entrepreneurs to think twice about starting new ones. More importantly, the money a government borrows comes out of the global economy. Every dollar that's tied up in our slow-moving big-government apparatus is one less dollar that's available to private borrowers.

[See a collection of political cartoons on the Democratic Party.]

A paper by the late economist William Niskanen found that higher taxes actually lead to curtailed government spending, while lower taxes tend to lead to profligacy. This is exactly the outcome we would expect given human nature—and reason enough for Republicans to rethink their hardened stance on taxes.

Obviously, taking money out of Americans' wallets is not something we should enter into lightly. People struggle when their tax burdens go up, and asking more of the middle class would lead to families questioning whether they'll be able to afford a home of their own or to help their children pay for college. Moreover, raising taxes has a depressive effect on economic growth in exactly the same way carrying excessive debt does. But if showing people how much government really costs gets them to think more carefully about the amount we truly need, it may well be worth considering.

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