Wednesday, March 31, 2010

Dude, where's my utopia?

It's true that as a percentage of GDP the U.S. tax burden is small relative to other wealthy nations, like those in Western Europe. This fact leads many on the left to two incorrect conculsions. One, our looming fiscal problems can be fixed by raising taxes, after all we've got relatively low taxes now, so raising them moderately can't hurt. And two, that we can increase taxes and increase government spending until the U.S. is transformed into a paradise of government provided services.

With respect to the first conclusion, The Armchair Economist warns that fixing your fiscal problems by increasing taxes is like paying off your credit card bills by going to the ATM more often, and is not a recipe for success.

And as far as the second goes, holding on to this vision of a high-service utopia is at best foolish and at worst dangerous. It's as if these folks have never heard of the Soviet Union, or read Brave New World, or recognized the fact that Western Europe's combination of high-immigration and low birth rate is a path to extinction.

Quite apart from these criticisms though, is the question of whether or not we really are a low-tax state.

Economist Greg Mankiw offers an alternatvie persepctive of our tax burden by taking a look at taxes per person, rather than as a percentage of GDP. He finds that on this basis the U.S. falls between.........Canada and the U.K. Not exactly tax-haven territory. He notes:
The bottom line: The United States is indeed a low-tax country as judged by taxes as a percentage of GDP, but as judged by taxes per person, the United States is in the middle of the pack.
So maybe our tax burden isn't really light enough to fully transform the United States into a government catered paradise, even if such a thing were possible.

Yglesias offers a criticism, but he loves the idea of a high tax/high service state, and thinks it's a real possibility.


J. Strupp said...

#1. Progressives do not believe that raising taxes will solve our looming fiscal woes. This is a simplistic view of their argument. They do, however, believe our current tax rates are not optimal and not progressive. The trillion plus dollar shortfall created by the 2003 tax cuts is proof that tax rates are not optimal. The explosion of top-tier income growth to pre-1930's levels being proof that our current tax rates are not progressive.

#2. Progressives do not believe that we can increase taxes and increase government spending until the U.S. is transformed into a paradise of government provided services. I've heard this utopia argument before and it's just rhetoric. They do, however, believe that we can increase taxes (in more stabile economic conditions) and reduce the deficit via a more effective government. This runs contrary to their opponents, who believe that we can cut taxes, reduce the deficit and keep our medicare the way it is, all at the same time.

...and calculating taxes per person rather than per GDP makes no difference. Cutting taxes, given their current levels, is simply another form of deficit spending. When in a liquidity trap, it's a flat out poor use of resources.

Jeremy R. Shown said...


I enjoy your comments, but you're just plain wrong on both accounts.

RE #1 Here's Paul Krugman in a recent post on dealing with the debt: "That’s not, in economic terms, a huge number. We could raise taxes that much and still be one of the lowest-tax nations in the advanced world." I'd say this is a pretty straightforward, whether or not my view of it is "simplistic".

And on #2: Have you ever read Yglesias's blog? He advocates for this explicitly with some regularity.

J. Strupp said...

I'm very familiar with Krugman's work and his position on the issue of deficit reduction. He was the leading voice of opposition to the 2003 tax cuts citing the glaringly obvious impact on future deficits.

And your quote is a bit misleading. Krugman was talking about stabilizing debt/GDP ratios and not outright deficit reduction. Given the current economic climate and the massive entitlement spending projections in the future, swift, sizeable deficit reduction would do more to harm than good in terms of GDP growth. This is a deflationary policy when we're already at the brink of deflation as it is.

I'm familar with Yglesias' blog as well. He is a good example of what i'm talking about. We obviously disagree on this.