Do We Really Need a Tax Hike?
ONCE again, ``read my lips'' is on everybody's lips, and no one needs prompting as to the topic thus evoked. The Great Tax Debate of 1990 is under way. Most debates on public policy have a conventional wisdom - the ``knowing'' interpretation offered by the national press and the preponderance of experts as to the conditions which apply and the actions which are needed. In today's debate over taxes, the conventional wisdom goes like this:
``The federal budget deficit is a serious problem - we're eating our `seed corn' - and there are urgent unmet needs. Hence, taxes simply must be raised. The public sometimes seems to understand this, but its unawareness of the depth of present problems, and its inherent preference for personal consumption in the short term, leaves it easily gulled by `no new taxes' politicians. George Bush has been gulling the American people, and it can only be hoped that he is ready to stop.''
I'm going to have to leave ``seed corn'' and unmet needs for another day - except to say that while the US is a very wealthy society, it's not so rich that it can meet all wants and needs. Disagreements are bound to occur over which areas require more spending - both because groups have differing self-interests, and because the long-term consequences of economic actions are sometimes not really known.
Even without disposing of that part of the argument, though, a little digging uncovers data which raise questions about today's conventional wisdom. Government revenues have in fact been rising steadily throughout the 20th century - not just in terms of inflation-controlled dollars adjusted to a per capita base, but as a proportion of the country's gross national product. When the books are closed on fiscal year 1990, they will show government's share well over one-third of GNP and the largest it has been in US history, World War II included.
Before plunging into the numbers, we should take note that what I'm calling ``government's share'' gets figured in somewhat different ways. Some analysts use narrow definitions of taxation, others broader definitions which encompass all government revenue, including user fees. Whether something is a ``tax'' can be a matter of debate, budget director Richard Darman's famous ``duck test'' notwithstanding. The distinction between a tax and a user fee is often not clear. Liquor taxes are included in the tax count, but revenues from state liquor stores aren't.
The authoritative Advisory Commission on Intergovernmental Relations (ACIR) gets around these confusions by presenting data only on federal, state, and local ``revenue'' (excluding intergovernmental transfers), rather than on ``taxes.'' I'll do the same - adding that at present total government revenue is roughly a 5 percentage point greater share of GNP than are taxes, by the conventional definitions.
The accompanying table shows that in 1927 all government revenues in the US were roughly 13 percent of the national product, with the state and local share nearly twice that of the national government. The New Deal years increased government's claim - but by an amount that from our present vantage point seems to be remarkably modest. By 1952, government revenues had jumped enormously as a proportion of GNP, but with virtually all the increase required by just one area of federal spending: Defense expenditures were 11.6 percent of GNP.
In recent decades, defense spending has declined markedly as a proportion of the national product - though it increased somewhat in the Reagan years - and in 1990 will total a bit over 5 percent. Spending in the other principal sectors has grown markedly, however, and in response government revenues have continued to climb even as a share of a rapidly growing GNP.
Much of the increase has come at the state and local level: Revenue there (exclusive of federal grants and other intergovernmental exchanges) as a percent of GNP grew from 11 percent in 1962 to 13.4 percent in 1972, 15.3 percent in 1985, and 15.7 percent in 1988, the last year for which firm figures are available.
All government revenue in 1988 was about $1.78 trillion, 36.4 percent of GNP. Preliminary estimates for fiscal 1990 suggest that it has inched up a bit further still. Federal, state, and local taxes are roughly 31 percent.
Within the overall totals, important shifts have occurred in revenue sources. Thanks to the 1981 Economic Recovery Tax Act, personal income taxes have declined slightly as a share of GNP. The big proportional increase at the national level has come in social insurance taxes (Social Security, Medicare, etc.) which grew from 1.2 percent of GNP in 1950 to 2.5 percent in 1960, 6.2 percent in 1976, 6.3 percent in 1980, and 8.1 percent in 1989.
It's true that government revenues in the US are still smaller in relation to the national product than in most other advanced industrial democracies. But at more than 36 percent of GNP and rising even without new federal taxes, they're not easily dismissed as reflecting an irresponsible unwillingness to support public services. Americans respond to ``no new taxes'' because they are in fact taxed a lot, and don't believe that the government's take should continue to climb.
All around the globe, the idea is spreading that government has grown too big and intrudes too much. It's more than a little ironic, then, that in the land where the ideal of limited government has flourished historically, sophisticated opinion now insists that government's share should be expanded further.
Government Revenue as Percent of GNP
All Fed. State and Local 1927 12.8 4.7 8.1 1940 17.9 7.0 10.9 1952 29.0 20.8 8.2 1962 30.0 19.0 11.0 1972 32.3 18.8 13.5 1980 34.1 20.6 13.5 1985 35.3 20.1 15.2 1988 36.4 20.7 15.7
SOURCE: SIGNIFICANT FEATURES OF FISCAL FEDERALISM, 1989 EDITION, BY THE 1989 ADVISORY COMMISION ON GOVERNMENTAL RELATIONS