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Tax Cuts without Spending Limits Will Not Make America Great Again

James A. Dorn

When the states ratified the 16th Amendment in 1913, the top
marginal personal income tax rate was 7% and federal spending was
less than 10% of GDP; today the top rate is close to 40% and
spending is 21% of GDP.

The tax code has become more and more complex, tax preferences
(loopholes) have politicized the system, and high rates are
penalizing success. Meanwhile, the mammoth IRS continues to oppress
people’s liberties.

President Trump’s tax reform would simplify the individual
income tax by closing loopholes and reducing the number of brackets
from seven to three — with marginal rates of 10%, 25% and
35%.

Those changes would take us closer to the flat-tax system first
proposed by Robert E. Hall and Alvin Rabushka in 1981, which
motivated President Ronald Reagan and Congress to cut the top
marginal personal income tax rate from 70% to 28% while closing
loopholes to make the reforms “revenue neutral.”

Tax reform is necessary
to make America great again, but so are effective limits on the
size and scope of government.

There is a strong case for a simple, flat-tax system on grounds
of both efficiency and freedom. But tax reform must be tied to
downsizing government.

The total tax burden is current taxes plus deferred
taxes
. Unless spending is cut, the current portion may fall,
but the deferred portion will rise, which doesn’t reduce the
overall tax load over time.

Limits on taxing and spending ultimately need to be embedded in
constitutional limits on the size and scope of government —
and those limits can only be enforced if there is a public ethos of
liberty. When government is asked to do too much, the private
sector suffers along with civil society.

“The sum of good government,” said Thomas Jefferson in his 1801
Inaugural Address, is “a wise and frugal government, which shall
restrain men from injuring one another, shall leave them otherwise
free to regulate their own pursuits of industry and improvement,
and shall not take from the mouth of labor the bread it has
earned.”

That vision of limited government — and the extension of
that vision to all Americans — is what made America
great.

Getting back to first principles is essential if America is to
be great again. When President Reagan signed the Tax Reform Act of
1986, he noted, “But for all (the) tax reform’s economic benefits,
I believe that history will record this moment as something more:
as the return to the (Founders’) first principles.”

The Reagan tax reform indicates, however, that unless tax reform
is linked to spending limits there will be a strong incentive to
raise tax rates to gain revenue and expand government.

Soon after President Reagan left office, marginal income tax
rates started to climb. The top rate of 28% lasted only three
years: 1988, 1989 and 1990. In 1991, the rate went to 31%, and then
rose to 39.6% in 1993, where it stands today. Meanwhile, federal
spending, especially on entitlements, has continued to grow, with
mounting unfunded liabilities — and thus deferred taxes.

Cutting the top rate to 35% would take us back to 2003, but not
to 1988. Hong Kong, the freest economy in the world, has a simple
flat tax of 15%. It has also lived within its means and limits
government spending to about 18% of GDP. Its mantra is “small
government, big market.”

It is not sufficient for prosperity and freedom to reduce tax
rates without at the same time reducing the size and scope of
government. Unless spending is constrained — for example, by
a constitutional cap that limits annual spending growth to
population growth plus inflation — there is no guarantee that
lower tax rates and fewer loopholes will survive political
gamesmanship.

When tax rates were lowered in the 1980s the economy benefited,
but the federal budget deficit went from $74 billion in 1980 to
$221 billion in 1986.

The budget was in surplus from 1998 to 2001, but has been in
deficit ever since. The accumulated deficits have increased federal
debt to more than 100% of GDP, and that doesn’t include the
trillions of dollars of implicit debt — that is, the
unfunded liabilities in Social Security, Medicare and Medicaid.

The true cost of government is spending, not taxes. Federal
spending is expected to reach 22% of GDP in fiscal year 2018, a
figure that is twice the share extracted by all state and local
governments — and a figure that would have astonished the
Founding Fathers.

Tax reform is necessary to make America great again, but so are
effective limits on the size and scope of government. Ultimately,
it will be up to the American people to restore an ethos of liberty
and choose leaders who put the principles of the Constitution
first.

James A. Dorn
is a senior fellow at the Cato Institute and editor of the Cato
Journal.