Oct. 31 (Bloomberg) -- ``The Democrats consistently oppose cutting your taxes,'' President George W. Bush said to applause during a campaign stop in Sarasota, Florida, on Oct. 24. ``They think they can spend your money better than you can. We believe you can spend your money far better than the government can.''

Or maybe cut your taxes and spend your money.

Over substantial Democratic opposition, Bush and a Republican-controlled Congress have cut taxes significantly over the past six years. The problem is that -- with plenty of cooperation from Democrats -- they have also greatly increased spending.

From fiscal 2001 to 2006, federal outlays shot up 42 percent, more than double the 19 percent increase over the previous five years.

In the short run, you can cut taxes and spend more. In the long run, as Nobel laureate economist Milton Friedman has potently argued, to spend is to tax.

In that vein, economist V.V. Chari of the University of Minnesota explained at a conference for journalists on Oct. 17, ``The true burden of government is what it spends today and in the future.'' When a politician brags, ``I cut your taxes,'' that's not what really matters, he said.

When a government spends money, it commands resources that are no longer available for use by the private sector. If it chooses to borrow the money rather than levying taxes to finance transfer payments and the purchase of goods and services, the government is only postponing the inevitable taxes, Chari said.

``The political system works very hard to obfuscate this issue,'' he said.

The Fact Sheet

A good example of such obfuscation is a White House fact sheet about the fiscal 2006 budget results released on Oct. 11.

The fact sheet said the Bush tax cuts ``have helped fuel economic activity that has produced two years of record revenue growth,'' 14.5 percent and 11.8 percent in fiscal 2005 and 2006, respectively.

It conveniently overlooks the fact that revenue in 2004 was lower than back in 2001. So while spending was going up 42 percent from 2001 to 2006, revenue was up only 21 percent, half as much.

One result of spending rising twice as fast as revenue was that the budget swung from surplus to deficit in a big way. The inevitable consequence was a large increase in the sale of Treasury securities to the public.

Higher Debt

Over the last five years, debt held by the public rose by more than $1.5 trillion, to $4.84 trillion, a 46 percent increase.

What does it cost the Treasury to finance an additional $1.5 trillion? Even with today's unusually low level of longer-term interest rates, probably around $70 billion a year. Essentially, that's the cost of lowering taxes without curbing spending.

Of course the fiscal history of Bush's time in office isn't just a matter of the tax cuts. The 2001 recession was on the way before the president took office. The terrorist attack on Sept. 11, 2001, required costly homeland security expenditures, and the related U.S. attack on the Taliban in Afghanistan added to that bill. And then came the invasion of Iraq with a cost so far estimated at half a trillion dollars and rising fast.

With large budget surpluses projected in future years, Federal Reserve Chairman Alan Greenspan supported a large tax cut in 2001. At the same time, he urged that the cut be phased in so that later installments could be rescinded if the budget outlook deteriorated.

More Cuts

Well, it did. And instead of limiting the tax cuts, the president pushed -- and is still pushing -- for more cuts and for making permanent any of those set to expire in future years.

In August, the Congressional Budget Office said that if all of the tax provisions that are set to expire over the next 10 years were assumed to continue -- except one relating to the alternative minimum tax expiring at the end of this year -- the cumulative deficit over those 10 years would equal 2.3 percent of gross domestic product.

Those persistent deficits would lift the government's interest bill as the ratio of debt to GDP rose steadily.

Neither Republicans nor Democrats, though, have shown any political appetite for letting the alternative minimum tax gradually affect ever more middle-income taxpayers. Simply indexing it for inflation would reduce revenue by around $400 billion over the next decade, according to Congressional Budget Office estimates. Repealing it would reduce revenue much more.

`Lower Taxes'

Given that sort of inexorable arithmetic, Bush and congressional Republicans nevertheless enacted the big new Medicare drug benefit while understating its likely cost and making no provisions to pay for it. That one piece of legislation created a greater long-term unfunded liability for the government than that of Social Security, which Bush said had to be addressed urgently.

Against this background, and with the first baby-boomers eligible to receive Social Security benefits in 2008 and Medicare costs already soaring, Bush told his campaign audience in Saratoga, ``We believe in lower taxes, and we intend to keep them that way.''

He probably can do that for his remaining two years in office. His successor won't have that luxury.

In a Wall Street Journal op-ed article on Oct. 20, Harvard University economist N. Gregory Mankiw, a former chairman of Bush's Council of Economic Advisers, proposed raising federal motor fuel taxes by 10 cents a year for 10 years. Such an increase, he argued, would benefit the environment in a variety of ways and raise needed government revenue.

Taxing by Spending

Some critics complained that the added tax revenue would just lead to more spending. On Oct. 26, Mankiw responded on his Web site, ``The reason I am less concerned that the extra revenue will be spent is that it already has been spent.''

`` At some point the nation will have to reckon with the looming fiscal gap. The most likely political compromise will involve higher tax revenue. We should, therefore, be ready to increase revenue in a way that does the least damage -- or, better yet, the most good,'' Mankiw said.

Indeed, taxes are going to have to go up. To spend, as Milton Friedman said, is to tax.

(John M. Berry is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: John M. Berry in Washington at jberry5@bloomberg.net

Last Updated: October 31, 2006 00:03 EST