Airs – Ian Lance Taylor

Debt and Taxes

During the Reagan administration, the U.S. reduced tax rates and increased defense spending. The national debt as a percentage of overall GDP increased from 32.5% to 53.1% (Reagan called this increase in debt the “greatest disappointment” of his presidency). During the first Bush administration, it continued to rise, reaching 66.1%. During the Clinton administration, the government raised taxes, the economy grew, and defense spending was reduced somewhat; the debt decreased to 56.4% of GDP. During the second Bush administration, again taxes were reduced and defense spending was increased; the debt increased to 83.4% of GDP.

Today fiscal conservatives are arguing that the high levels of debt require that government spending be reduced. At the same time, the plan put forward by Republican representative Paul Ryan, and strongly supported by the Republican House, calls for more tax cuts and higher defense spending. While it’s understood that his plan will not be adopted, it’s hard to see how it can be a serious proposal for debt reduction.

It’s clear that the U.S. has a high level of debt due largely to past steps of reducing taxes while increasing spending. One can argue details back and forth quite a bit, but it’s also clear that the debt has increased significantly under Republican administrations. Fiscal conservatives now argue that the high level of debt shows that the U.S. can not afford social programs like Social Security and Medicare. But while one can argue about increasing health care costs, history suggests that that simply isn’t true. What is true is that the U.S. can not steadily cut taxes without cutting spending.

It’s perfectly consistent to say that the U.S. should be a low-tax, low-service country. But arguments about debt which don’t mention the possibility of tax increases are not telling the whole truth about how the U.S. got into its current situation. What has happened, intentionally or not, is that tax cuts are being leveraged to reduce spending on social programs.

Incidentally, I think most people agree that governments should use tax money to invest in infrastructure. It’s generally most efficient to let the government build and maintain roads and bridges, as they require a large investment and the payback is indirect. I think one could make a good argument that health care is another form of infrastructural investment, an investment in people, which is most efficiently done by government.

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8 responses to “Debt and Taxes”

  1. etbe Avatar
    etbe

    Comparing roads to health is an interesting analogy. The logical implication of it is that we should look at the history of toll roads when considering various pay as you go models for basic health care.

    I don’t know what it’s like in the US, but in Australia the typical toll road project involves the government closing alternate routes to drive traffic to the toll road as well as guaranteeing the profits for the corporation that builds the road (the government will have a schedule of fees to pay if toll revenue drops). The construction of the road typically involves no excess expenses so you have long sections of road with no emergency lanes – and the occasional mass road fatality as a result.

  2. fche Avatar
    fche

    “What is true is that the U.S. can not steadily cut taxes without cutting spending.”

    This is a good statement of the fundamental polarization of the conversation. Conservatives would argue that taxes are inherently evil, and thus spending should be limited to the bare essentials to minimize the necessary evil.

    Liberals appear to argue that most spending is inherently good, and thus taxing should be increased as necessary to keep the spigots flowing.

    I don’t know how to reconcile these in polite conversation, but then economic reality eventually does anyway. With debt-driven currency debasement, push will come to shove soon.

  3. Simetrical Avatar
    Simetrical

    The reason that roads are best built by the government isn’t because they’re infrastructure. It’s because there’s no possibility of competition. Roads take up a lot of room, and you can’t feasibly have many roads side-by-side going to the same places that drivers can choose between. Also, eminent domain is necessary to build roads, because otherwise a single recalcitrant property holder can force giant detours. Once you can’t have competition, the benefits of privatization are slim to none. A government monopoly is little worse than a private monopoly, if worse at all.

    In many other cases, competition on infrastructure is hard because the cost to enter the market is prohibitive. This is what gives us monopolies or duopolies on things like water, power, phone, and home Internet service. In those cases, unlike with roads, it’s at least potentially (although not necessarily) possible to encourage competition by finding ways to require private infrastructure be shared without reducing the incentive to build it too much.

    But this isn’t true at all of health care. A properly constructed health care system could be extremely competitive, which would result in lower costs and higher quality of service. The current US system is not very competitive for a variety of reasons, mostly because people don’t pay for care out-of-pocket, but socializing it will only make it less competitive.

    Even your own reasoning of “they require a large investment and the payback is indirect” doesn’t apply to health care, though. You might argue that the payback for health care is mostly indirect, but health care and health insurance don’t require larger investments to provide than any other business. So you haven’t supported your analogy to roads by any reasoning that I see.

    (I don’t particularly disagree with the main part of your post, only the last paragraph.)

  4. etbe Avatar
    etbe

    Simetrical: There is no realistic possibility of having multiple water and sewage pipes to each household, when you have one dam, one water pipe, one sewer pipe, and one sewage treatment plant you have a monopoly.

    For power there is also no real possibility of having multiple cables, it’s been tried in the US in the time of Edison and it didn’t work well. So you have a few power plants which are located based on the locations of resources and which usually involve compulsory purchase of private property and a single set of cables to it’s a monopoly. The libertarians should note that to avoid compulsory purchase the best option is renewable energy as it doesn’t have the same location constraints – the best locations for wind turbines are farms (where land is cheap) and off-shore (where the government already has rights).

    Economies of scale matter a lot in health-care. At the simplest level you need bulk purchasing power to get good prices on drugs and medical equipment. Then there’s the herd effect, there are lots of things which are cheaper if done for the whole population than done for a subset, and many things which are simply impossible if not done for the entire population (such as disease eradication).

    If health-care was to be privatised then the way to do it would be to have a mandatory link between health “insurance” and life insurance and assurance. If the insurance companies competed on the basis of a ratio of premiums paid to life insurance/assurance pay-outs then they would have a financial incentive to keep people alive. For many areas of business the model is to have the least profitable customers cease being customers, in the case of US health insurance that often means to cease living.

    fche: I don’t think that your summary of liberal vs conservative positions is accurate.

    Conservatives are totally in favor of a strong military, that comprises just over half the US federal spending. When “bare essentials” has a definition that includes among other things more than half of expenditure (and increasing if the conservatives get the war on Iran that they want) there isn’t much scope for cutting taxes and balancing the budget.

    There are very few liberals who claim that the US having a military expenditure greater than the rest of the world combined is a good thing. There are also very few liberals who support corporate welfare payments to big corporations. So it seems that there is a significant scope to decrease US federal spending without any argument from liberals.

  5. fche Avatar
    fche

    etbe, “… When “bare essentials” has a definition that includes among other things more than half of expenditure …”

    Note that my argument is independent of whatever amount of (constitutionally-required) military spending is appropriate. Conservatives don’t argue for the most possible military spending, “just enough”, whatever that is. Many conservatives want that part of the fed budget to shrink too. The point is that its funding is considered a necessary evil. (“More than half of expenditure” it isn’t, of course. Even wikipedia nails it at 20%.)

    “There are very few liberals who claim that the US having a military expenditure greater than the rest of the world combined is a good thing.” Well yes, I did say “most spending”. But my point is again that the other spending is thought of as some sort of inherent good.

  6. etbe Avatar
    etbe

    http://www.warresisters.org/pages/piechart.htm

    fche: The above URL has it at 54%, they count “past military” expenses (veterans’ benefits) and military expenses from other departments.

    http://en.wikipedia.org/wiki/Military_budget_of_the_United_States

    Wikipedia says “19% of the United States federal budgeted expenditures and 28% of estimated tax revenues. Including non-DOD expenditures, defense spending was approximately 28–38% of budgeted expenditures and 42–57% of estimated tax revenues”. It seems to me that Wikipedia agrees with War Resisters.

    http://en.wikipedia.org/wiki/Military_budget_of_the_United_States#Recent_commentary_on_military_budget

    Also the above section is worth noting, a Democrat advocating military budget cuts and a Republican advocating spending more.

  7. fche Avatar
    fche

    The only way 54% of the “War Resisters” agrees with wikipedia’s numbers is if one uses the “fraction of estimated tax revenues” number, which with today’s giant deficits is hardly equivalent to “fraction of expenses”. The “28-38 / 42-57” numbers are uncited, so who knows what exactly that is to represent.

    As to democrat politicians advocating military cuts and republican politicians the opposite, this is not news, nor does it contradict the ideological spending-vs-taxing focus I suggested at the top.

  8. ppluzhnikov Avatar
    ppluzhnikov

    Related: http://rondam.blogspot.com/2011/04/patriotic-millionaires-mix-it-up-with.html

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