Thursday, March 8, 2012

Taxes, Spending, and Revenues

William Voegli has a fascinating and informative article in the City Journal on the anti-tax argument. Basically, he argues that the "anti-tax absolutists" are committed to shrinking the welfare state, which has been the main source of increases in government expenditures over the past few decades.  I found Voegli's graphs, which I reproduce here, particularly thought provoking.
The first graph shows inflation-adjusted per capita spending, revenues, and GDP from 1965 to 2008.  Given that the graph ends about the time that we plunged into a major recession, it would be interesting to continue this for a couple of years.  But Voegli's main point here is that our spending has increasingly outpaced our revenues, except for a brief period in the late 1990s when there was a spike in revenues (probably due to income generated from the bubble economy of that period). I note that the increase in spending flattened out some during the 1990s, and then moved sharply upward throughout the 2000s. This graph also indicates that the revenue-spending gap isn't something recent, or a consequence of a particular set of policies of events, but a long-term trend. This suggests that there is a deep structural problem in the American political economy.

The second graph shows where the money went. Voegli divides spending into welfare expenditures, national defense, and "housekeeping" (basically, everything except the first two).  This is where it gets really interesting. Defense did rise in the periods of the Vietnam War, the military buildup of the 1980s, and then again in the era of the Iraq-Afghanistan actions. It also fell just after Vietnam and following the collapse of the Soviet Union. But the huge growth came in per capita welfare expenditures. For a brief time in the early 80s these did not go up, but they also didn't go down.  After that, welfare spending rose sharply, with no evidence that it would end. So, Voegli argues that the anti-tax folks are really questioning the realism of the ceaseless expansion of the welfare state.

I'd be interested in finding out how much of the welfare growth is due to population aging, increasing both medical expenses and the number of retirees per worker. There is also the problem of how to cut spending more generally, given that every program creates an interest group. It would have been less painful (but politically problematic) to cut back in the 1990s when jobs were more abundant. Still, I think it reasonable to interpret this growth in government welfare spending as analogous to the household that puts more of its income into consumption than into investment. Ultimately, this will drive the household to bankruptcy.

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