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Raise My Taxes – I Want to be Rich

March 31, 2012

In 1941, Time-Life publisher Henry Luce called on his countrymen to make the 20th century “the first great American Century.”  The phrase caught on, and the American Century came to refer to American economic, political, cultural and military predominance in the world.

During the American Century, we educated our people, we built a national highway system of unprecedented size and scope, we fought and won two world wars, we virtually ended poverty among our senior citizens, we initiated the great social programs of FDR and LBJ, we implemented the Marshall Plan, and we launched a program of near space exploration that inspired the world.  By government regulation of private enterprise, we created stable, transparent markets for the efficient trade in goods, services, securities, and even pork belly futures.  Federal regulation made our farming industry the supermarket of the world.  American medical technology surpassed all others.  We did all this while voicing the aspirations symbolized by the statue in New York harbor, a beacon to the world.

Having met the basic material needs of individuals and communities by the beginning of the American Century, we devoted the 20th century to the fulfillment of expanded demands.  Government spending as a share of gross domestic product grew from seven percent in 1902 to 35 percent in 2010.  I leave to others to decide whether government spending growth is a cause or an effect of national prosperity and power; but it is quite clear that government spending is a feature of national prosperity and power.

Most countries finance government spending through taxation.  A few are able to finance spending through state-owned assets like oil, although a survey of the oil-rich countries gives good reason to question whether they are better off or worse off than countries that rely on taxes to fund spending.

In any event, the correlation between taxing and government spending on the one hand and national prosperity is high.  Below is a chart that plots countries by their tax burden as a percentage of GDP versus their GDP per capita – in other words, countries’ tax burden versus their economic prosperity.  The y-axis, GDP per capita, is logarithmic, to keep the display to a reasonable size.  The chart hits you in the face with the fact that higher tax burdens correlate with greater prosperity.

You’ll note a group of eight outliers in the far upper left corner – those are oil producers (Bahrain, Equatorial Guinea, Kuwait, Libya, Oman, Qatar, Saudi Arabia, and the United Arab Emirates) that obtain per capita prosperity without much taxation.  But they are outliers, and correlation remains the rule.

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Countries that fall above the line are economic overperformers based on their tax burdens.  In other words, those countries have higher GDP per capita than would be predicted by their tax burden.  Or conversely, they have lower tax burdens than would be predicted by their GDP per capita.  I gave the United States a round data point among all the other diamond-shaped data points, to help fix the U.S. in its international context.  The U.S. manages more than $48,000 GDP per capita with a tax burden of just 26.9 percent of GDP.  For comparison, the other countries with tax burdens in the 26 – 27 percent range are Argentina, Jamaica, Kazakhstan, Morocco, Papua New Guinea, St. Lucia, and South Korea.  The other countries with GDP per capital from $47,000 to $49,000 are Belgium and Ireland, with tax burdens of 46.5 and 30.8 percent of GDP, respectively.

Americans are engaged in a fundamental, maybe existential debate whether government spending is good or bad.  Conservatives from time to time try to re-frame the debate to be about debt, but it’s about spending.  (I’ll do a post on this point someday.)  And since the debate is about government spending, it’s about taxes.  Today’s conservatives sincerely and truly believe that taxes and government spending are bad per se, and therefore reducing taxes and reducing government spending are always good.

The House of Representatives this week passed the Paul Ryan budget, which would slash domestic spending to GDP-relative levels not seen in almost 70 years – closer to the beginning of the American Century than to the end of it.  The Paul Ryan budget would shred the safety net that Mitt Romney promised to patch.  Some might think nostalgically of the 1940s, but I doubt that many Americans want to return to the standard of living of those times.

The conservative vision of government leaves no room for investment in high-speed rail, the 21st century equivalent of Eisenhower’s interstate highway system.  It leaves no room for investment in renewable energy – the best answer to most of our geopolitical problems, and to global warming, not to mention our export-import imbalance.  As the spread of liberal democracy in the 20th century bears capitalist fruit in the 21st, demanding that Americans speak globally with one voice in order to remain competitive and influential, conservatives want to slash the power and authority of our unified federal government and enhance the scope of the states’ power to do things in 50 different ways.  As information technology overtakes manufacturing and the marketplace becomes global, conservatives want to decentralize and privatize education – Rick Santorum even questions whether we need schools at all, and whether college is really all that good an idea.

Correlation is not causation, so my chart does not prove that government spending causes prosperity; nor does it prove that prosperity increases government spending.  But it does show a high correlation.  And it shows to anyone who looks seriously that, on the whole, we would rather be like those that tax more than us than like those that tax less.

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