Acton Commentary

Do Less with Less: What the History of Federal Debt and Tax Leverage Teaches


As we approach Tax Day this year (which falls on Monday, April 18 instead of the more familiar April 15 due to vagaries of federal holiday celebrations) the national discussion focuses on budget fights over the sustainability of our current levels of taxation relative to entitlement promises and discretionary spending. As in many recent years, Tax Day comes later in 2011 than yesterday’s Tax Freedom Day (April 12), which is noted by The Tax Foundation as the day in which American taxpayers have to work from the beginning of the year to meet their annual overall tax burden. The calculation of this date includes tax liabilities at the federal, state, and local levels.

But dampening the celebration this year is the reality that the timing of Tax Freedom Day does not reflect actual government spending. It is calculated according to projected actual tax receipts and thus does not include, as The Tax Foundation puts it, “the current year’s deficit.” Of late this has become an increasingly ominous omission. Well over one-third (37 percent) of federal spending in fiscal year 2010 was deficit spending (almost $1.3 trillion). This is the latest entry in a depressing trend reflecting government’s inability to live within its means. Since 1978 there have only been four years (1998-2001) in which the government did not run up deficits at the federal level, and within the last few years the levels of deficit spending have skyrocketed.

Suplus and deficit at constant 2005 prices

What this amounts to is that the federal government has amassed a potentially crippling level of debt. For the first time since the end of World War II the gross national debt (now in excess of $14 trillion) will exceed gross domestic product sometime this year. As Senate Budget Committee Chairman Kent Conrad (D-ND) said last month, “That has to be a wake up call for all of us.” Some proposed solutions have focused on increasing government revenues by raising taxes on wealthy Americans and limiting tax breaks for charitable contributions.

The propensity for politicians to leverage tax dollars into greater and greater levels of debt argues against the wisdom of such proposals, however. In a recent update to ground-breaking research begun in the 1980s, Richard Vedder and Stephen Moore have shown that “over the entire post World War II era through 2009 each dollar of new tax revenue was associated with $1.17 of new spending. Politicians spend the money as fast as it comes in—and a little bit more.”

In assessing blame for the Great Recession, much has been made of the debt leveraged by corporations. But the same sort of analysis ought to be applied to government spending, and what we find is that lawmakers historically have been unable to resist leveraging increased tax revenues with matching increases in deficit spending. As Vedder and Moore put it, even while manipulating the variables for different time periods and other factors, “higher tax collections never resulted in less spending.”

This track record gives little hope that this time around things would be any different. There are simply no structures in place, such as a balanced budget amendment or limitations on increases of the debt ceiling, to prevent the same kind of leveraging of taxes into greater and greater levels of spending. Raising taxes without such assurances, even for such a critical cause as the public debt crisis, is pure folly. To really address the structural deficits at the heart of the federal budget, particularly with respect to entitlement programs like Social Security, Medicare, and Medicaid (which together accounted for 40 percent of federal spending in 2010), the government simply needs to find ways to do less with less.

The New Testament gives us a good standard for judging what responsible stewardship looks like, with respect to finances as well as other realities. As Jesus said, “Whoever can be trusted with very little can also be trusted with much, and whoever is dishonest with very little will also be dishonest with much” (Luke 16:10 NIV). In the case of the federal spending, the government has proved to be untrustworthy with very much. It’s time to see if the politicians in Washington can learn to be trustworthy with less.