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Measuring the Burden of High Taxes
July 1998
Public Spending and Social Progress
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"Despite the trillions of dollars thrown at the problem, not much progress has been made I eliminating poverty in America." "The rate of social progress was much more rapid in earlier decades, when government was smaller." "Government played only a small role in medical research and care prior to 1960."
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If one of the principal purposes of taxation is the promotion of social progress and harmony, are tax dollars collected at increasing marginal rates in the United States effectively employed to meet these objectives? Are we as taxpayers getting our money's worth, considering the rising tax burden?
In an interesting 1995 paper, V. Tanzi and L. Schuknecht question the value of the enormous growth in government expenditures among industrialized nations after 1960. They conclude that "...various government performance indicators suggest that the growth in spending after 1960 may not have brought about significantly...greater social progress. The group of countries with 'big governments' - those that increased spending the most - did not 'perform' better than the ones with 'small governments'..." 16 Significantly, they also conclude that "for the period up to 1960, a reasonable claim can be made that the increased public-sector spending (on education, health, training, etc.) had led to measurable improvement in social indicators." 17
Their conclusion is probably warranted for "free" compulsory schooling, which has raised the number of school years completed from what it might otherwise have been. (This leaves aside the issue of the quality of education produced by the public school monopoly.)
Perhaps it is also true that government spending has largely smoothed business cycles and thus worked to reduce unemployment. Certainly, we have not again experienced the levels of joblessness recorded during the Great Depression. Even so, "full employment" now is considered to be an unemployment rate in the 6 percent range, rather than the 4 percent target enshrined in the 1946 Employment Act. Currently, the United States is experiencing a "tight" labor market, with unemployment below 5 percent. The size of the budget, the deficit and public debt in the United States are sufficiently large to have eliminated the use of fiscal policy as a tool for economic stabilization. In Europe, where governments are much larger in a fiscal sense, fiscal policy not only is ineffective but unemployment rates are two or more times that in the United States.
Despite the trillions of dollars thrown at the problem, not much progress has been made in eliminating poverty in America. In 1960, 22.2 percent of the population lived below the poverty level. Great Society spending programs reduced that rate to 11.4 percent by 1978, but thereafter it rose again. In 1993, 15.1 percent of the population was classified as impoverished.
Public Spending and Social Indicators. Most researchers measure social progress with such indicators as the infant mortality rate, the death rate, life expectancy, literacy and educational attainment, the unemployment rate and how equitably income is distributed. Social harmony may be measured by the amount of criminal activity in society.
Various social indicators are presented in Table III for some years between 1870 and 1995. The achievement in social progress is remarkable. Infant mortality and the death rate show a continuous decline over the past 12-plus decades, and life expectancy and years of schooling show an upward trend. But it is clear that the rate of social progress was much more rapid in the earlier decades, when government was smaller, than in the later ones when government was much larger. In 1960, 144 more infants per 1,000 live births survived than in 1870 (170 deaths per 1,000 in 1870 compared to 26 in 1960) and the death rate was reduced by more than 50 percent. Over that 90-year period average life expectancy increased by 27 years.
Since 1960 these social indicators have improved, but at a much less rapid rate. Infant mortality was reduced from 26 per thousand live births to 8.5 between 1960 and 1992. The death rate fell from 9.5 to 8.8 per 1,000. Life expectancy grew by 6.1 years.
If social harmony is measured by the absence of crime, we live in a much less harmonious society today than in the past. As a proxy for social disharmony, the number of persons imprisoned per 100,000 population is revealing. The rate of imprisonment (not criminal activity, necessarily, but related) did not change much from 1940 to 1980, but it has since grown so substantially that today more than twice as many people per 100,000 population are behind bars as in 1980. While the causes of crime are arguable and controversial, whatever its cause, government has not done a very good job of curtailing it.
Public Spending and Public Health. Communicable diseases were the main killers of people up until about 1930. For example, in 1870 tuberculosis, diphtheria, typhoid, measles and smallpox were responsible for 27 percent of the deaths in Massachusetts. 18 In 1900, 44 percent of deaths in the United States resulted from tuberculosis, typhoid, scarlet fever, diphtheria, whooping cough, measles and influenza. 19 The influenza outbreak of 1918 alone was responsible for a third of the nation's deaths that year. It was so severe that life expectancy fell from 50.9 years in 1917 to 39.1 years in 1918. 20
By 1960 these diseases caused 4.8 percent of deaths and now are responsible for only a tiny fraction. Certainly, government played an important role in the eradication or reduction of communicable diseases, promoting and paying for clean drinking water, sanitation facilities, public health programs and mass inoculations. But it is important to note that private medicine and research were the source of the cures, not government. In 1929 we spent only 3.5 percent of our GNP on health care. Of the $3.6 billion expended, only $600 million was from public funds and almost none went to medical research. Not until 1940 did government spending on medical research reach $3 million, and this was prompted by the imminence of war.
The perception of a large government role in medical research and care for the elderly and indigent is a post-1960 phenomenon. Medicare and Medicaid began in 1966. The National Institutes of Health, the principal source of funding for medical research, was established a few years later.
Cancer and heart disease are today's main disease killers. In 1900 almost 24 percent of deaths were from these diseases. By 1960 they were the cause of 70.6 percent of deaths and in 1993 of 65 percent. Enormous expenditures are made to treat these diseases and to fund curative research. There has been some progress, but the death rate from cancer and heart disease has only declined from 671 per 100,000 population in 1960 to 572 in 1993. 21
Some scientists say that the life span of humans could be as much as 150 years if heart disease were controlled and cancer cured. Biotechnology and genetic engineering offer the tantalizing prospect of eliminating genetically based diseases and of dramatically advancing organ transplantation techniques. Perhaps this is a realistic dream, perhaps not. But based on past performance, it is important to note that massive public funding of medical research and high expenditures on health care produced sharply diminishing returns to social progress after 1960.
Conclusion
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"Welfare states are failing, with fiscal policies that are simply unsustainable." "Because of the burden of taxation, our standard of living is lower than we could have had now." |
We have shown that tax rates in the United States, as well as in nations with more aggressive welfare programs, are substantially higher than the rates that would maximize growth. Thus we have proved that the marginal cost of taxation is high. By the standard of maximizing per capita output (another way of saying economic growth), Americans are overtaxed by about 50 percent. By penalizing success with taxes and subsidizing failure with transfer payments, the United States and other OECD nations have lower standards of living than they would have if tax rates were lowered. The slower rise in various social indicators and the increasing societal disorder since 1960 demonstrate the consequences of higher tax rates.
In terms of social progress, increased taxes have not bought very much for the United States. It is true that infant mortality and the overall death rate are down and life expectancy is up since the 1960s, but these gains are small compared with those of the previous 90 years, when government was smaller and tax burdens much less oppressive. Little progress has been made in reducing poverty. Criminal activity, as measured by incarceration rates, has skyrocketed.
Many European nations have gone further than the United States in efforts to reduce income inequality and establish welfare states. To reach the European level of income equality, government in the United States would have to be expanded to the point that taxes would take about 45 percent of GDP instead of the current one-third. But the price for further homogenization of incomes is even lower economic growth, reduced job formation and increased unemployment - exactly what Europe is experiencing now.
Welfare states were successful for nearly two generations after World War II. They had reasonable rates of economic growth, low unemployment and very little poverty. Sweden became the liberal utopian model. The Swedes were widely praised for their attention to jobless workers, who received 90 percent of their pay for several years while seeking new employment, and for the fact that, after taxes, university professors earned little more than bus drivers. Asser Lindbeck makes the point that such social programs may change individual behavior temporarily, but eventually - probably after more than one generation - the disincentives to productive labor become fully visible. Habits, social norms, attitudes and ethics constrain purely economic incentives. But before long, a critical mass of welfare recipients begins to undermine the old norms and the overall economy. As public benefits expand and marginal tax rates rise, the net payoff to private productivity shrinks and the demand for inclusion in welfare programs rises. 22
Now welfare states are failing. Many European nations have fiscal policies that are simply unsustainable. High taxes and large deficits have sucked the marrow from their economies, and governments have been forced to scramble to pay the interest charges on huge public debts. Labor peace has been purchased with massive long-term transfers of wealth to the unemployed and a host of social programs from health care to baby-sitting. Many of these governments recognize that the size and scope of the welfare state has to be reduced or there may be an economic collapse. But shrinking the welfare state is politically difficult, unless a serious crisis arises. 23 For example, France tried to modestly reduce individual entitlements and got rioting in the streets.
For the United States, the evidence points to a need to revise the structure and philosophy of taxation. Considering the deadweight loss from tax rates above the growth-maximizing level and the diminishing gains in terms of social progress from increased taxes since the 1960s, the marginal cost of taxation is far higher than the marginal benefit. Rather than improving lives, the current burden of taxation has resulted in a lower standard of living than we could have had now.
NOTE: Nothing written here should be construed as necessarily reflecting the views of the National Center for Policy Analysis or as an attempt to aid or hinder the passage of any bill before Congress.