The GOP Choice: Smaller Government or Lower Deficits

“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.