Are government, taxes, and spending really such irredeemably bad things?
Is their only effect to reduce prosperity and retard growth–the very things that have been improving everyone’s lot, worldwide, for decades?
Should taxes be reduced to 10 or 20% of gross domestic product (GDP)? (The current figure for the U.S. is about 26%–local, state, and federal combined.)
So-called conservatives have been making these claims for the last thirty years–notably by hurling the "tax-and-spend Democrats" brickbat–and with a great deal of success. Even so-called progressives like Bill Clinton have let them frame the debate as if those things were true.
The problem is, they’re simply not true. I’ll show you all the charts and graphs in later posts. Here’s the short story.
- For 140 years starting in 1789, U.S. tax rates and government spending were very low. And U.S. GDP growth was dismal–downright Zimbabwan–for all that time. GDP took off like a rocket ship following A) the New Deal and its accompanying tax and spending increases, and B) WWII–when government spending as a percentage of GDP was at the highest levels ever (>45%), before or since.
- OECD member countries–the club of modern, stable, successful, prosperous countries–all tax between 25 and 50% of GDP (Turkey and Greece are at 24 and 22 percent, respectively), with an average of 36%. None of these successful countries taxes less than 25% of GDP. With the exception of a few small tax havens and (mostly oil-rich) city states, there is no stable, prosperous, developed country–one that most Americans would consider to be a good place to live–that taxes less than that. If the rhetoric of the red-ink Republicans were true, wouldn’t there be a least one country in the world that demonstrates its truth?
- In a scatter-plot of these prosperous countries–comparing taxes/GDP to GDP growth–the correlation between taxes/GDP and GDP growth over recent decades is almost nonexistent.
- GDP per capita, a reasonably good measure of prosperity, is highest in the US–if you measure it according to purchasing power parity (PPP: how many loaves of bread can you buy?). But measured at market exchange rates, Norway, Iceland, Switzerland, and Denmark are all more prosperous than we are, despite much higher tax and spending levels. Sweden, the Netherlands, and Finland are just behind us.*
This doesn’t prove that taxes and government spending in those ranges increase prosperity. (Though I will argue that government spending in that range is necessary to long-term prosperity.)
It does prove, incontrovertibly, that taxes in the range of 30-50% of GDP have not prevented and do not prevent the spectacular worldwide growth in prosperity that we’ve seen since the 1930s. When so-called conservatives argue that drastic tax cuts are needed to avoid precipitous crashes in prosperity and growth (often invoking apocalyptic language that makes An Inconvenient Truth seem soft-spoken), we need to point out that it’s just not true. In fact, the evidence–all these prosperous countries with high tax rates–suggests the opposite.
They will counter with economic, ideological, and–frequently–moralistic arguments pitched with a fervor and belief worthy of Marxism in its heyday. We need to simply point out that while their arguments seem hermetically logical to them, the empirical facts contradict that logic. (cf. Chico Marx: "Who you gonna believe, me or your own eyes?")
In future posts I’ll go into more detail–with the facts, figures, charts, and graphs–demonstrating that the catastrophic rhetoric which has dominated debate for three decades is, in fact, empty.
* Wikipedia says, quite wisely, regarding PPP and market-rate/"nominal" GDP measurements:
"Often people who wish to promote or denigrate a country will use the figure that suits their case best and ignore the other one, which may be substantially different, but a valid comparison of two economies should take both rankings into account, as well as utilising other economic data to put an economy in context."