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Taxes, Spending, and the U.S. Government’s March Toward Bankruptcy

What’s in a word? Plenty, when it’s a word such as “taxes,” “spending,” or “deficits” that pervades Washington political debate despite lacking coherent economic content.

   The United States is moving toward a possible catastrophic fiscal collapse. The country may not get there, but the risk is unmistakable and growing. The “fiscal language” of taxes, spending, and deficits has played a huge and underappreciated role in the decisions that have pushed the nation in this dangerous direction.

   Part of the problem is that, by focusing only on the current year, deficits permit politicians to ignore what is looming down the road. The bigger problem lies in the belief, shared by people on the left and the right alike, that “tax cuts” and “spending cuts” lead to smaller government, when in fact the characterization of any new policy as a change in “taxes” or in “spending” is purely a matter of labeling.

   This book proposes a better fiscal language for U.S. budgetary policy, rooted in economic fundamentals such as wealth distribution and resource allocation in lieu of “taxes” and “spending,” and in the use of multiple measures (such as the fiscal gap and generational accounting) to replace misguided reliance on annual budget deficits.

Daniel N. Shaviro is Wayne Perry Professor of Taxation at New York University Law School, where he has taught since 1995. He previously served on the faculty of the University of Chicago Law School from 1987 to 1995. Professor Shaviro was a Legislation Attorney for the U.S. Congress’s Joint Committee on Taxation from 1984 to 1987, and he worked on the landmark Tax Reform Act of 1986. His previous books include Who Should Pay for Medicare? (2004), Making Sense of Social Security Reform (2000), When Rules Change: An Economic and Political Look at Transition Relief and Retroactivity (2000), and Do Deficits Matter? (1997). Professor Shaviro has served as a Visiting Scholar at the American Enterprise Institute and chaired the Tax Sections of the American Association of Law Schools and the American Law and Economics Association. He has published articles in the Harvard Law Review, University of Chicago Law Review, Michigan Law Review, University of Pennsylvania Law Review, and Tax Law Review. His blog, Start Making Sense, may be found at http://danshaviro.blogspot.com.

TAXES, SPENDING, AND THE U.S. GOVERNMENT’S MARCH TOWARD BANKRUPTCY

Daniel N. Shaviro
New York University Law School

CAMBRIDGE UNIVERSITY PRESS
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© Daniel N. Shaviro 2007

This publication is in copyright. Subject to statutory exception
and to the provisions of relevant collective licensing agreements,
no reproduction of any part may take place without
the written permission of Cambridge University Press.

First published 2007

Printed in the United States of America

A catalog record for this publication is available from the British Library.

Library of Congress Cataloging in Publication Data

Shaviro, Daniel N.
Taxes, spending, and the U.S. government’s march toward bankruptcy /
Daniel N. Shaviro.
p. cm.
Includes bibliographical references and index.
ISBN 0-521-86933-1 (hardback) – ISBN 0-521-68958-9 (pbk.)
1. Fiscal policy – United States. 2. Taxation – United States. 3. Budget deficits – United
States. I. Title.
HJ257.3.S53    2006
336.973 – dc22    2006008552

ISBN-13 978-0-521-86933-1 hardback
ISBN-10 0-521-86933-1 hardback

ISBN-13 978-0-521-68958-8 paperback
ISBN-10 0-521-68958-9 paperback

Cambridge University Press has no responsibility for
the persistence or accuracy of URLs for external or
third-party Internet Web sites referred to in this publication
and does not guarantee that any content on such
Web sites is, or will remain, accurate or appropriate.

For the late David F. Bradford,

a colleague and friend whose untimely

loss I still mourn

Contents

Acknowledgments

I am grateful to Lily Batchelder, Thomas Firey, Jason Furman, William Gentry, David Kamin, Edward McCaffery, Margaret Shulman, and four anonymous reviewers for their comments on earlier drafts of the manuscript or on particular chapters.

   An earlier version of Chapter 2 appeared in Regulation Magazine. An earlier version of Chapter 8 appeared in the Tax Law Review. Some of the ideas in Chapters 2, 4, and 5 were earlier articulated in Daniel Shaviro, “Reckless Disregard: The Bush Administration’s Policy of Cutting Taxes in the Face of an Enormous Fiscal Gap,” Boston College Law Review 45 (2005): 1279, copyright © 2005 by Boston College Law School.