NCPA - National Center for Policy Analysis


June 1, 2004

Tax cuts are usually enacted with the ultimate goal to reign in government spending. However, the 2001-2003 tax cuts will increase the size of government in the future as they redistribute wealth from younger to older generations, say economists Jagadeesh Gokhale and Kent Smetters.

The two developed a measurement of the government's long-term fiscal health, known as the Fiscal Imbalance (FI). They concluded that if government continues its current policies, it will have to substantially increase taxes or cut spending to meet all its obligations -- promised benefits as well as debts. Among the possible policies that could restore fiscal balance:

  • Taxes must be raised by 70.1 percent this year.
  • Or, pl tax collections must increase by 96.7 percent.
  • Discretionary spending must be cut 107.8 percent -- in essence, eliminating the defense budget and nonentitlement domestic spending, or Social Security and Medicare payments must be reduced by 45.9 percent.

Cutting taxes in the present just to necessarily increase them in the future does not reduce the size of government, say Gok

Moreover, with the passage of the new Medicare prescription drug benefit, which is predicted to cost over $400 billion over the next ten years, the tax cuts of 2001 to 2003 will not shrink government's future Medicare allocations, say Gokhale and Smetters.

Source: Daniel N. Shaviro, "The New Age of Big Government," Regulation, The Cato Review of Business and Government, Spring 2004, Cato Institute; based on Jagadeesh Gokhale and Kent Smetters, "Fiscal and Generational Imbalances" (Washington, D.C.: AEI Press, 2003).

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