Social Policy in Ontario

America’s Aversion to Taxes

Posted on September 2, 2012 in Governance Policy Context

Source: New York Times — Authors: Eduarto Porter

nytimes.com – business/economy
August 14, 2012. Eduarto Porter

There is something to be said for universal health care systems.

When my son developed a rash on an Italian vacation in Liguria last month, the pharmacist showed me to the doctor downstairs, who diagnosed the problem at no charge and sent me off with a handshake and a joke about a daughter in med school at the University of California, San Diego.

Italy may be in a funk, with a shrinking economy and a high unemployment rate, but the United States can learn a lot from it, and not just about the benefits of public health care. Italians live longer. Their poverty rate is much lower than ours. If they lose their jobs or suffer some other misfortune, they can turn to a more generous social safety net.

Every developed country aspires to provide a better life for its people. The United States, among the richest of all, fails in important ways. It has the highest poverty and the highest infant mortality among developed nations. We provide among the least generous unemployment benefits in the industrial world. Not long ago one of the most educated countries in the world, the United States is slipping behind.

The reason is not difficult to figure out: rich though we are, we can’t afford the policies needed to improve our record. The politicians in Washington all know that we face a long-term fiscal crisis. By 2020, 70 million Americans are expected to be on Social Security, up from 45 million in 2000. The ranks on Medicare will swell to 64 million, up from 40 million in 2000. Virtually every economist knows that just maintaining Medicare and Medicaid benefits will require raising taxes on the middle class.

But though the nation’s fiscal challenge has taken center stage in the presidential election campaign, raising more taxes from American families remains stubbornly off the table.

President Obama is willing to accept higher taxes on families earning over $250,000 a year. But he is going nowhere near higher taxes on the middle class. And Mitt Romney and his vice-presidential pick, Paul Ryan, are moving decidedly in the opposite direction. Not only do they want to extend indefinitely the tax cuts passed by President George W. Bush, but they are also calling for a piñata of additional ones, and would cut social spending in return.

Citizens of most industrial countries have demanded more public services as they have become richer. And they have been by and large willing to pay more taxes to finance them. Since 1965, tax revenue raised by governments in the developed world have risen to 34 percent of their gross domestic product from 25 percent, on average.

The big exception has been the United States. In 1965, taxes collected by federal, state and municipal governments amounted to 24.7 percent of the nation’s output. In 2010, they amounted to 24.8 percent. Excluding Chile and Mexico, the United States raises less tax revenue, as a share of the economy, than every other industrial country.

No wonder we can’t afford to keep more children alive. In 2007, the most recent year for which figures are available, the United States government spent about 16 percent of its output on social programs — things like public health, food and housing for the poor. In Italy, that figure was 25 percent.

American policy makers justify our choice for low taxes with the claim that they foster economic growth. But the evidence is, at best, mixed. Since 1980, income per person has grown roughly the same across developed nations, about 300 percent, according to the International Monetary Fund. It has grown a little faster in the United States than in the European Union and Canada, but slower than in higher tax countries like Japan, Norway and Sweden.

To a large extent, this is because we have chosen a tax system that raises relatively little revenue and inflicts maximum economic harm. Every other industrial country has a national consumption tax, which can be used to raise a lot of money without distorting people’s economic incentives. The United States, by contrast, relies mostly on taxes on labor and capital that damp people’s drive to work and invest, putting a drag on economic growth. And the tax code is riddled with preferences and loopholes that further distort people’s economic behavior.

It is tempting to blame the administration of George W. Bush for the tax shortfall. At the end of the administration of President Bill Clinton, tax revenue reached almost 30 percent of the nation’s economic output. The federal government ran a budget surplus. The Bush tax cuts sharply reduced the federal tax collection. Then the Great Recession further eroded tax revenue. And, of course, nobody wants to raise taxes in the middle of an economic downturn.

Yet Americans’ aversion to taxes runs deeper. We’ve been collecting less in taxes than other rich countries at least since the early 1970s, relative to size of the economy. But according to Gallup, only three times since the 1950s have more Americans said their taxes were “about right” than said they were “too high.” Scholars have resorted to cultural traits to explain our reluctance to pay for our government.

Alberto Alesina, an Italian-born economist at Harvard, contrasts American individualism rooted in the belief that effort brings success with Europeans’ belief in state redistribution — born of Europe’s long history of inherited wealth. Americans who think they have a fair shot at striking it rich vote against high taxes on their expected future wealth. Europeans who believe wealth is mostly a matter of luck and connections are less resistant to paying taxes for collective welfare.

Support for taxes also depends on how the money is spent. In Italy and throughout Western Europe, every time a voter goes to the doctor, he or she sees taxes at work.

By contrast, the ethnic, linguistic and cultural diversity of the United States can sap support for government redistribution. Ten years ago, the sociologist William Julius Wilson wrote that American whites rebelled against welfare because they saw it as using their hard-earned taxes to give blacks “medical and legal services that many of them could not afford for their own families.” In more homogeneous European countries, taxpayers may be more willing to pay for social programs because recipients are similar to themselves.

Where does this leave American society? Many conservatives in the Tea Party movement believe the government is already too big. Mr. Romney and most Republicans in Congress have even signed a formal pledge not to raise income taxes. Will no administration ever again dare raise taxes on the middle class?

It may not be impossible for the American political system to accept the case for a bigger government, with higher taxes and better public services. Ronald Reagan, George H. W. Bush and Mr. Clinton passed tax increases to address budget deficits.

Bruce Bartlett, a tax expert who worked in the administrations of Mr. Reagan and the elder Mr. Bush, says he believes that the deteriorating budget outlook will ultimately persuade the political class. “We need a few more years in which conservatives try to deal with the problem solely through spending,” he said. “We need to travel down this road a few more years and then people will recognize it is futile.”

There are tentative signs that Americans may become more willing to give money to Uncle Sam. Two of the three times that more Americans said their taxes were “about right” than “too high” have occurred since 2009. And the economic crisis might even increase support for government action.

The economists Paola Giuliano of the University of California, Los Angeles, and Antonio Spilimbergo of the International Monetary Fund found that Americans who experienced economic shocks tended to become more supportive of government redistribution, especially when the shock came in their late teens or early 20s.

When elections are decided by today’s 18- to 25-year-olds, perhaps the American debate over taxes will come to resemble that in the rest of the world.

< http://www.nytimes.com/2012/08/15/business/economy/slipping-behind-because-of-an-aversion-to-taxes.html >
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Fewer Government Resources
Industrialized countries have offered more public services over time, largely financed by tax revenue. But the United States collects the same amount of taxes as it did 45 years ago, leaving less money for services. Related Article » Taxes as a share of gross domestic product < 0815-porter.png >

Source: Organization for Economic Cooperation and Development

Tags: economy, globalization, ideology, rights, standard of living, tax

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