May 29, 2003

Tax Equilibrium

Kevin Drum of CalPundit has an interesting post on taxes as a percentage of GDP. He also points out the looming financial burden that the Baby Boomers are going to create on the welfare system and he opines that tax increases are needed over time.

I concur that there are some serious fiscal choices that need to be made vis-a-vis Medicare and Social Security (privatization, anyone?), but that really isn't what motivated a comment.

Rather, the noteworthy thing about his post is that it is classic Democratic thinking on the budget and taxes--he assumes that the percentage of GDP that the government received in taxes is solely the result of one element of fiscal policy: the tax rate. Not only does he ignore the issue of whether spending can or should be changed, he also ignores that the main issue that impacts revenue is the health of the economy--receipts to the federal government surge when the ecnomy soars (as I pointed out here). Indeed, this spreadsheet from the Bureau of Economic Analysis shows that there is a fairly close correlation between growth and spikes in the percentage of GDP controlled by the budget, as shown on the chart Kevin posted.

Indeed, this view of tax dollars is one of the most fundamental differences between Reps and Dems. I noted a similar difference in perception in Joe Kleins's current column in Time. He starts off with the following:

The money we talk about in Washington, D.C., is not the government's money," said President Bush, celebrating the imminent passage of his latest tax cut, as he liberated an estimated $22 million from the party faithful at a fund raiser in the nation's capital last week. "The money we talk about in Washington, D.C., is the people's money." Bush used this formulation throughout the 2000 campaign, and I always found it a bit confusing. It sounded as if the Federal Government were a toxic fungus implanted upon the banks of the Potomac by communists, space aliens or Hollywood celebrities and not, in the words of history's greatest Republican, "of the people, by the people, for the people."

But then, on the eerie afternoon of Sept. 11, 2001, Bush's counselor Karen Hughes appeared at FBI headquarters � the President had just touched down at Offutt Air Force Base in Nebraska � and announced that "your Federal Government continues to function effectively." The pronoun was almost as astonishing as the sentiment, but the moment of common purpose seems to have passed.

And his perception of what it means to talk about the "people's money" is quite striking. Somehow to him pointing out that all the dollars in Washington come from citizens is to paint DC as a fungus. I don't see it that way at all--I agree that it is "our" government, and I also see the need for our government--but I also know that our government is funded by our dollars.

In short--it is not a crime, nor is it just being nice to "the rich", or even government loathing to think that the Feds control too much of the GDP and that taxes ought to be cut.

The basic difference between Dems and Reps on this issue is that Dems see the programs, both that exist and that they want to exist, and the Reps see that the tax dollars come from the citizenry. It is a matter of perspective.

Posted by Steven Taylor at May 29, 2003 04:44 PM | TrackBack

The government isn't a fungus? But public spending continues to mushroom?

Posted by: John Lemon at May 29, 2003 04:57 PM

Ye hath a pointe.

Posted by: Steven at May 29, 2003 04:59 PM

But lots not get to warm and fuzzy about the Reps here. In the words of Larry Elder "Democrats and Republicans...MAYBE a dime's worth of difference".

They're all politicians, and they're all happy to spend your money to get themselves re-elected. Let me know the next time Bill Frist turns down a pork project for Tennessee.

Posted by: Nick at May 29, 2003 10:46 PM

Yeah. Missing from the debate are the following questions:

What does government do better than the private sector?

How much does doing that cost?

Is it worth it?

I tell you what. If I am ever elected to office, I will cut a porkbarrel project that would benefit me politically (since I can always return to a tenured chair at my university). To start off, I'm all for cutting 90% of all NSF funding that goes to the social sciences.

Posted by: John Lemon at May 30, 2003 01:18 AM

I'm a little puzzled by this post. I certainly didn't say that tax rates are the only thing that affects tax receipts. In fact, I specifically noted that whenever receipts crept up to about 20%, tax cuts were enacted to get them back down.

John: my post was directly related to your question. Government performs social welfare functions such as Social Security better than the private sector. The cost of SS is about 4% of GDP today, rising to 7%. Is it worth it? That's the key question.

Posted by: Kevin Drum at May 30, 2003 01:27 AM


Actually, the private sector would handle social security quite well. The Chileans have been quite successful with privatized retirement. And is it a coincidence that the Congress relies on something other than social security to hand their retirements? Indeed, teacher retirement systems (which I plan to rely on far more than SS), are publically managed, but derive their income from private investment.

And perhaps I overstated your position vis-a-vis tax receipts and federal receipts. However, the focus of your post was clearly oriented to the idea that over the long term that taxea would have to be increased, which is not necessarily the case. Indeed, if the economy gets out of the doldroms, tax receipts will increase to the treasury, even at reduced tax rates. And, really, some sort of adjustments to the welfare structures are going to be needed--SS being the best example.

Posted by: Steven at May 30, 2003 08:46 AM

I wouldn't count your Chilean eggs before they hatch. That system isn't in such great shape at the moment....

However, that's not really the biggest issue. Regardless of what they do with the money, the government is collecting the dough and then disbursing it. That makes it a government program, and there's no one else who can do this on a wide scale.

And as for tax rates going up, unless you want to make program cuts there's no choice. As a % of GDP, tax receipts just won't go up without rate increases.

Posted by: Kevin Drum at May 30, 2003 10:35 AM

Over the long-term the Chilean model was worked fairly well--certainly better than the previous model they employed.

And there is an important distinction to be made here: I agree that we need to maintain some type of government managed system for retirement pensions. Indeed, one of the few parts of the government of the state of Alabama that works well is its teacher retirement program--which includes K-12 and higher ed. However, the revenue is generated not through a pay-as-you go system, which is essentially what SS has become--but rather through managed investment in primarily the private sector. For that matter, over the long run I would prefer a 401k program to SS.

And, no: if GDP grows, tax receipts grow--even if tax rates remain steady.

Posted by: Steven at May 30, 2003 10:54 AM
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