The GOP Choice: Smaller Government or Lower Deficits

By :: March 15th, 2011

“The goal is to reduce the size and scope of government spending, not to focus on the deficit."                                             Grover Norquist

You’ve got to give Grover credit. Unlike most everyone else in Washington, at least he says what he believes. In a remarkably candid interview with Ezra Klein at The Washington Post, the head of the anti-tax lobby Americans for Tax Reform beautifully described the challenge faced by Republican lawmakers today.

When the GOP was out of power, it could easily paper over a profound internal disagreement: Should Republicans be the party of small government and low taxes, or the party of fiscal prudence? At first glance, these principles sound like the same thing. But they are not. And how a deeply divided GOP chooses between them says everything about the likelihood of both deficit reduction and tax reform any time soon, to say nothing about the party’s political future.

It is much easier for Republicans to take Grover’s route and build a legislative strategy around the goal of small government and low taxes. They can focus on slashing regulation and corporate taxes (for which the business community will continue to show them the love) and on cutting a few high-profile examples of  “waste, fraud and abuse” which will win them the support of many in the tea party movement.  

Aiming to slash the deficit, by contrast, takes the GOP down a very different road. It carries significant political risk and, thus, requires much more courage. That’s because cutting regulation and waste reduces the deficit by depressingly little, while slashing taxes almost always makes fiscal matters worse.

There is no evidence to support the old supply-side theory that major cuts in federal taxes increase revenues. Similarly, Grover’s claim that government can discourage spending by slashing taxes (aka starve the beast) got a real world test during the presidency of George W. Bush, who cut taxes, but also spent like the proverbial drunken sailor, fathering a huge new Medicare drug benefit and fighting two costly wars. The result: Bush and Congress turned a budget surplus into a $458 billion deficit. It turns out that one doesn’t need to tax and spend when one can more easily borrow and spend.  

That leaves only politically unpleasant choices. Politicians who are serious about deficit reduction, rather than modest cuts in the size of government, have no choice but to confront middle-class entitlements such as Medicare and Social Security, and support tax increases within a tax reform bill.

Based on the usually reliable rule that it is always best to judge a politician based upon what he does and not what he says, most Republicans remain squarely in the smaller government and lower taxes camp. Just look at their unanimous support for extending all the Bush-era tax cuts and their current focus on cutting only a narrow slice of domestic spending. Still, a handful of GOP pols (such as Indiana Governor Mitch Daniels) are thinking more broadly. I suspect Republicans will be fighting this internal battle throughout the upcoming presidential primary season. Watch closely to see how it turns out.


  1. Justin Anderson  ::  4:00 pm on March 15th, 2011:

    Can we please (PLEASE?) stop talking about Mitch Daniels as some sort of deficit hawk when his record at OMB under George W Bush clearly does not merit such accolades? If Daniels were not required, as a governor, to balance a budget would he really be this concerned with fiscal responsibility? Were the current occupant of the White House not a Democrat, would he care about deficits at all?

  2. Justin Anderson  ::  4:04 pm on March 15th, 2011:

    Also, while I agree that this conflict does exist within the GOP, I hardly believe it to be anything resembling a fight between equal sized factions. Despite all of their rhetoric to the contrary, the Tea Party has proven remarkably supportive of politicians whose policies either do nothing to address, or make worse, our fiscal situation.

  3. Michael Bindner  ::  5:03 pm on March 15th, 2011:

    Gridlock will fix the tax cut problem, provided the economy is growing in 2012. In that case, Obama is re-elected and can veto any extension of the Bush tax cuts (and not just those on the wealthy).

    As for Medicare and Medicaid, nothing will happen there until the impact on the ACA on insurance companies washes out. The mandates in the law are clearly inadequate to stop people from abusing the pre-existing condition reforms. The only real questions are whether the SCOTUS will revoke the entire bill, the mandates only or the mandates along with the pre-existing condition reforms – or they could simply affirm.

    Before any of this happens, I suspect that smart people will realize that the best option is a public option for people who are denied or removed from insurance, with subsidies funded by a VAT or Business Revenue Tax – which will also replace income and payroll tax funding for both Medicare and Medicaid.

    Problem solved. (Social Security is not a problem for 20 years).

  4. lasvegasaccountant  ::  5:53 pm on March 15th, 2011:

    I agree that Social Security and Medicare must be restructured in the future. The public still believes that if we just got rid of other wasteful expenditures, then our problems would be solved. This is not so because Social Security and Medicare are becoming an increasingly huge portion of our liabilities.

  5. Sid F  ::  8:39 pm on March 15th, 2011:

    Yes, Obama is going to re-elected in 2012 on a platform of vetoing any extension of the Bush tax cuts inlcuding those on the middle class. Sure sounds like a winning campaign strategy to me.

  6. Michael Bindner  ::  9:52 pm on March 15th, 2011:

    Doubling the Medicare Payroll tax would only be a 2.9% tax bite, of which employees would pay only 1.45%. No one would go hungry at such an increase. Indeed, in a capitalistic (and therefore monopsonistic) labor market, it would not even impact total employment. It would only impact employer profit. Given continued gains by employers in the last decade – in fact in the last 30 years, I think they can afford it.

  7. Steve Thompson  ::  10:02 am on March 16th, 2011:

    Any signs of a U.S. (and, by extension, world) recovery could be thrown off track in the next two to three months as Congress wrangles over raising the country’s debt limit. In 1995 – 1996, a partisan Congress under Newt Gingerich refused to raise the debt ceiling which resulted in a shutdown of government and a massive impact on the United States economy.

    Here is an examination of the issue showing just how frequently the debt ceiling has been raised in the past decade and how the entire situation has reached the point of absurdity under both Republicans and Democrats:

  8. Sid F  ::  12:09 pm on March 16th, 2011:

    This post is important because it highlights the role of the one person who is most critical to a tax and spending deal that would reduce the deficit, Grover Norquist. Norquist may be the most honest person in public life; he has a position about which he is open and forthright. He wants to shrink the role of the Federal government to about 14-15% of GDP and to do this by keeping tax revenues at their current level relative to GDP and reducing the spending levels to produce a balanced budget. To this end he has enlisted a large majority of the House to pledge not to raises taxes at any time, for any reason under any conditions.

    Norquist is key at this point in time because the deal that could raise tax revenue and cut spending involves a judgment call on his part. Conservatives like Sen. Coburn would get around the pledge not to raise taxes by the following scheme.

    1. Tax expenditures, most notably the mortgage interest deduction would be reduced or eliminated.
    2. Tax rates would be decreased.
    3. While the lower tax rates would offset some of the higher tax revenue from eliminating tax expenditures, it would not be a perfect offset and overall tax revenues would rise.

    The key question for Norquist and House Republicans would be whether or not this scheme is a tax increase. Proponents would point to lower tax rates and say they have not violated their pledge, and in fact they have reduced tax rates. Norquist is currently of the opinion that this scheme is a tax increase and would violate the pledge and if he continued in this manner that position would certainly doom any deal.

    Norquist may well relent, thinking that the higher revenues are a reasonable price to pay for lower tax rates and lower government spending, and that once Republicans take control of the Senate which they will almost certainly do in 2012 and control of the Presidency which they will likely do in 2016 and maybe in 2012 they can further reduce tax rates on individuals, eliminate taxes on capital income and capital gains and corporations and thus in the long run offset what he would regard as a temporary increase in revenues.

    This change in position on the part of Norquist is possible but not likely, Norquist is smart but maybe not that smart. Also, it is not clear if Tea Party advocates and House Republicans would go along this deal even with Norquist’s blessing. However, thanks to this post and other reports we now know who the key players are and how the game is to be played.

  9. AMTbuff  ::  2:53 pm on March 16th, 2011:

    The 1986 tax rates, which did not take effect until 1988, lasted only 3 years. In 1991 the top rate increased from 28% to 31%, and in 1993 it increased to 39.6%. This history shows that trading a broader base for lower rates yields a permanently broader base but only temporary lower rates.

    To advocates of higher levels of government spending this is an advantage, not a deficiency. Regardless of any assertions to the contrary, both sides know that Congress will increase the rates post-reform.

    Once the public has decided whether it prefers federal spending at 20% of GDP or at 30% of GDP, tax reform’s bargain will be durable, rather than just another skirmish in the long battle over spending levels.

    If enacted now, tax reform would primarily serve to relieve fiscal pressure and delay resolution of the spending debate. Tax reform might therefore postpone a fiscal crisis and make it more likely.

  10. Jacob AG  ::  6:33 pm on March 16th, 2011:

    $458 billion? Is that all? FY2009 was Bush’s budget too, and it had a $1.4 trillion deficit…

  11. Vivian Darkbloom  ::  6:06 am on March 17th, 2011:

    To be precise, doubling the Medicare payroll tax would be a 2.9 percent tax hike. Employers and employees currently each pay 1.45 percent on covered wages (Medicare tax will also soon be imposed on investment income of high-earners due to the PPACA).

    Your assertion that raising Medicare (or other payroll taxes) would not affect total employment is unfounded and incorrect. Assuming here that we are talking about US employment that additional 2.9 percent tax on US labor would make the offshoring option even more attractive than it now is.

    And, since when is “not going hungry” the proper measure of assessing the appropriateness of tax increases? If there is any federal program for which spending, or even the rate of spending, needs to be curtailed, it is Medicare.