The Fiscal Shell Game

I hope you had a great holiday weekend.  I’m lucky to have friends and family that enjoy stimulating even sometimes heated discussion of economic and political matters.  This year one of the topics was the recent tax cuts.  I had raised some reservations about their merits, which was countered with the observation that people’s paychecks went up.  This was apparently supposed to be final proof that because of the tax bill people are better off and that it couldn’t be anything but beneficial.

By the same logic, if you take out a $10,000 loan, you have $10,000 today that you didn’t have yesterday.  Therefore you must be better off.  

Either that or having the federal government borrow it on your behalf makes it irrelevant to you.

On closer examination, those superficially enhanced paychecks ultimately won’t buy any more.  Their recipient has more dollars but of lesser value, making the pay increase an illusion.  For starters, the federal government is now going into the marketplace to borrow hundreds of billions more than it did before, competing against these same workers for loans, driving up their costs.  This is immediately obvious if you were to take your enlarged paycheck to a car dealership or mortgage lender and try to buy more with it than you would have pre-tax cut.  With interest rates on the order of 10-30% more than a year ago, depending on the type of loan, chances are you can buy less than before.  So simplistic arguments about larger paychecks are transparently invalid.  

Ultimately every dollar the government spends comes from somewhere.  It can straightforwardly present voters with the bill for them in the form of taxes.  It can borrow them, removing them from the pool of lending that would otherwise be available to the private sector.  It can create them from nothing, devaluing all dollars in existence and causing prices to rise.  Of these options, the first is actually the least costly, since it allows voters the most direct opportunity to evaluate both the costs and benefits of what their elected representatives are spending.  The last is the most costly because few connect the dots and realize they’re paying a tax bill every time they go to the gas station, grocery store, or pay their monthly bills.  It creates the appearance that government programs are cost free and that their rising costs of living are the result of some unrelated nebulous happenstance.  This  weakens the incentive for restraint, making it all the more likely spending will rise still further which in turn will be paid for by further increases in one or all of these three forms of taxation.

When is a tax cut not a tax cut?  When there are no spending cuts.  

And when spending instead goes up, make no mistake … in one form or another, so do taxes.