Where does the New Zealand government spend its money?

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Spot the Reagan revolution on this chart?

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via How We Pay Taxes, in 14 Charts — Atlantic Mobile.

Be careful for what you wish for when you call for moderation and bipartisanship in politics

What was the impact of neoliberalism on welfare spending in the USA?

Total Welfare Spending Since 1950

via Social Security Disability Insurance is Vital to Workers With Severe Impairments — Center on Budget and Policy Priorities.

More on More Efficient Tax Systems Leading to Bigger Government

…in Deadweight Costs and the Size of Government (NBER Working Paper Number No. 6789) , [Gary Becker and Casey Mulligan] conclude that flatter and broader taxes also tend to encourage bigger government because taxpayers offer less resistance to increases in flat tax rates than in rates of more onerous and less efficient forms of taxation.

Any decline in the resistance of taxpayers leads to larger government budgets since an endless number of groups agitate for greater government support.

Flat tax rates, such as the VAT and Social Security taxes on earnings, usually start at very low levels but invariably increase over time.

The VAT is now 20 percent and higher in some countries. And payroll taxes began at a modest 2 percent in the 1930s in the United States, but have been increased 21 times to the present 15 percent combined rate on employees and employers.

via More Efficient Tax Systems Lead to Bigger Government.

More Efficient Tax Systems Lead to Bigger Government

 

The role of equality in subsequently increasing the size of government

Sam Peltzman

Sam Peltzman argues that:

governments grow where groups which share a common interest in that growth and can perceive and articulate that interest become more numerous.

Growth in the size of governmental is driven by the evolving demands of voters. Peltzman maintains that:

the levelling of income differences across a large part of the population . . . has in fact been a major source of the growth of government in the developed world over the last fifty years [because this levelling created] a broadening of the political base that stood to gain from redistribution generally and thus provided a fertile source of political support for expansion of specific programs. At the same time, these groups became more able to perceive and articulate that interest . . this simultaneous growth of “ability” served to catalyse politically the spreading economic interest in redistribution

Growing income equality, which was a result of the Industrial Revolution and modern economic growth, caused the size of government to then grow. The reduction in inequality preceded the rise of the welfare state in the mid-20th century.

Sam Peltzman and the great restraint in the growth of government, 1980-2007

From 1950 to 1980 the size of government doubled in the developed world and then stopped dead in 1980. This great restraint on the growth of government happened everywhere. It was not just Thatcher’s Britain or Reagan’s America. It was everywhere, in France and Germany, and even in Scandinavia.

Peltzman’s data below has government spending double between 1950 and 1980, and then nothing much happened in between 1980 and 2007 – the size of government is pretty flat as a share of GDP for 27 years.

Source: Sam Peltzman, The Socialist Revival? (2012).

There is a noticeable reduction in the size of government spending in Scandinavia. Reagan and Thatcher had nothing on those Social Democrats in Scandinavia when it comes to cutting the size of government.

Governments everywhere hit a brick wall in terms of their ability to raise further tax revenues. Political parties of the Left and Right recognised this new reality.

Government spending grew in many countries in the 20th century because of demographic shifts, more efficient taxes, more efficient spending, a shift in the political power from those taxed to those subsidised, shifts in political power among taxed groups, and shifts in political power among subsidised groups.

The median voter in all countries was alive to the power of incentives and to not killing the goose that laid the golden egg.

After 1980, the taxed, regulated and subsidised groups had an increased incentive to converge on new lower cost modes of redistribution.

More efficient taxes, more efficient spending, more efficient regulation and a more efficient state sector reduced the burden of taxes on the taxed groups.

Most subsidised groups benefited as well because their needs were met in ways that provoked less political opposition.

Gary Becker made this warning about the political repercussions of tax reform and economic reform in general for the size of government:

…the greater efficiency of a VAT and its ease of collection is a two-edged sword.

On the one hand, it would raise a given amount of tax revenue efficiently and cheaply.

Since economists usually evaluate different types of taxes by their efficiency and ease of collecting a given amount of tax revenue, economists typically like value added taxes.

The error in this method of evaluating taxes is that it does not consider the political economy determinants of the level of taxes.

From this political economy perspective, the value added tax does not look so attractive, at least to those of us who worry that governments would spend and tax at higher levels than is economically and socially desirable.


Reforms ensued after 1980 led by parties on the Left and Right, with some members of existing political groupings benefiting from joining new political coalitions.

The deadweight losses of taxes, transfers and regulation limit inefficient policies and the sustainability of redistribution.

Peltzman likes to note that at the start of the 20th century, the United States government was about 8% of GDP. The two largest programs were education and highways. The post office was as big as the military.

Government is about five times that now with defence, health, education and income security accounting for 70% of this total. Peltzman makes the very interesting point that:

There is no new program in the political horizon that seems capable of attaining anything like the size of any of these four.

For the time being the future government rest on the extent of existing mega programs.

Health and income security account for 55% of total government spending in the OECD. It is in these two programs where the future of the growth of government lie.

The pressure for that growth in government will come from the elderly. Governments will have to choose between high taxes on the young to fund these programs for the elderly or find other options.

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