Johan Norberg: The Truth about Swedish Socialism
05 Jun 2018 1 Comment
in applied price theory, economic history, macroeconomics, Public Choice, public economics Tags: growth of government, size of government, sweet
Efficient taxes lead to higher taxes
19 Mar 2017 1 Comment
in economic growth, fiscal policy, macroeconomics, public economics Tags: growth of government, size of government
Why the polarisation of Congress? The Great Restraint? Sound-bite politics?
01 Jul 2016 Leave a comment
in constitutional political economy, economics of media and culture, income redistribution, politics - USA, Public Choice, rentseeking Tags: competition for political influence, congressional polarisation, growth of government, interest groups, political polarisation, size of government, soundbites, special interests
My two cents on the sharp rise of partisanship and congressional polarisation is they are driven by the great restraint in the growth of government spending in the 1980s.
From 1950 to 1980 the size of government doubled but then stopped dead in the 1980s. This great restraint on the growth of government happened everywhere. It was not just Thatcher’s Britain or Reagan’s America. It was everywhere, France and Germany, and even Scandinavia.
Source: Sam Peltzman, The Socialist Revival? (2012).
Peltzman’s data which I have charted has government spending in the USA, Britain, France and Scandinavia doubling between 1950 and 1980, and then nothing much happened between 1980 and 2007 – the size of government was pretty flat as a share of GDP for 27 years.
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 m-d-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 Importantly for explaining later political polarisation, that growth of government was concentrated in four programs – defence, health, education and income security
The median voter in all countries was alive to the power of incentives and to not killing the goose that laid the golden egg which underwrote the initial growth in the size of government. The rising deadweight losses of taxes, transfers and regulation limit inefficient policies and the sustainability of redistribution.
After 1980, the taxed, regulated and subsidised groups had an increased incentive to converge on new lower cost modes of redistribution to protect what they had. More efficient taxes, more efficient spending, more efficient regulation and a more efficient state sector reduced the burden of taxes on the taxed groups. Reforms ensued after 1980 led by parties on the Left and Right, with some members of existing political groupings benefiting from joining new coalitions.
A lot more is at stake when the main political battleground is dividing a relatively fixed revenue pie post-1980 than a growing pie Between 1950 and 1980. Fiscally conservative voters will elect parties strongly committed to no new taxes. Their opponents will look for equally ideologically committed parties. 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 the current generosity of social insurance, healthcare and old-age pensions or find other options. Peltzman explains this political tension for programs benefiting the elderly in his essay The Socialist Revival:
Deficit financing of future growth in these programs becomes increasingly problematic. So we now have the seeds of political conflict rather than consensus.
These very large programs confer substantial benefits on some. These beneficiaries resist any change in the status quo. But the benefits have to be financed at substantial cost to today’s workers. Many of them will not benefit on balance from these programs over their lifetimes. It is by no means clear whether the number of winners exceeds the number of losers today.
Policies that were once unthinkable now can be discussed and even implemented here and there. These include increased retirement ages, less generous public health care programs, more reliance on private saving for retirement and so forth.
Given that intergenerational and other struggles over who is taxed and who faces benefit cuts, middle-of-the-road politicians lose their appeal to the electorate.
Another reason for greater political polarisation is the rising cost of time. Sound-bites news programs and current affairs are now a couple of seconds long when they used to be 15 seconds long maybe 30 years ago.
People have less time to pay attention to politics so they want to work out quickly from short sound-bites whether the politicians they are contemplating supporting are made of the right stuff. For voters in a hurry, conviction politicians are more appealing be they of the left or of the right. Voters want someone who will hold fast against new taxes or for new taxes as the case may be. Much is at stake as Sam Peltzman explained in his 2012 essay The Socialist Revival:
The steady growth of the old age population share is on the verge of a substantial acceleration… This means that government health care and public pension spending growth will also have to accelerate merely to keep the promises implicit in present programs.
The political economy will have to choose between higher taxes on the young to keep these promises, an accelerated shrinkage of the rest of the budget or less generous public health and pension programs. It is not clear yet which way the decision will go.
What is clear is that for the first time since the invention of the welfare state the magnitude and generosity of its signature programs is at political risk.
In this stand-off between those who might have to pay more in taxes and those who might receive less in old age pensions, welfare benefits and services including healthcare, neither side wants a politician naturally inclined to blink and compromise. They will elect politicians who hang tough for their side of the argument and their share of the budget.
Tax bracket creep in Australia
24 May 2016 Leave a comment
in politics - Australia, politics - New Zealand, public economics Tags: bracket creep, growth of government, size of government, taxation and inflation
Be careful for what you wish for when using irrationality as a rationale for the scope of government
07 May 2016 Leave a comment
in applied price theory, comparative institutional analysis, constitutional political economy, economics of information, Public Choice Tags: behavioural public choice, growth of government, rational irrationality, size of government
Source: Gary Lucas and Slavisa Tasic‘s "Behavioral Public Choice and the Law" (West Virginia Law Review, 2015) via Bryan Caplan
SPECIFIC TYPES OF IRRATIONALITY THAT CAUSE GOVERNMENT FAILURE
21 Apr 2016 Leave a comment
in applied price theory, comparative institutional analysis, constitutional political economy, economics of bureaucracy, economics of information, Public Choice Tags: behavioural public choice, growth of government, rational irrationality, size of government
Source: Gary Lucas and Slavisa Tasic‘s "Behavioral Public Choice and the Law" (West Virginia Law Review, 2015) via Bryan Caplan
Forget avoidance outrage: public’s real attitude to tax is revealed by their actions @JordNZ
21 Apr 2016 Leave a comment
in applied price theory, constitutional political economy, economic history, economics of media and culture, politics - Australia, politics - New Zealand, politics - USA, Public Choice, public economics Tags: British economy, British politics, expressive voting, growth of government, rational irrationality, revealed preference, size of government, voter demographics
Taxpayers Alliance mistaken about tax revenues as a stable % of GDP @the_tpa
12 Apr 2016 Leave a comment
in applied price theory, economic history, public economics Tags: British economy, British taxes, growth of government, Margaret Thatcher, size of government, taxation and entrepreneurship, taxation and investment, taxation and labour supply, Taxpayers Alliance
The British Taxpayers Alliance got carried away a bit when it said taxes as a share of British GDP have not varied much over the last 50 years or so. Margaret Thatcher would be turning in her grave.
A stable tax take is more the case in the USA. Federal tax receipts stay within the range of 18-20% of U.S. GDP as shown in the charts below and above.
There were large cuts in the top tax rates in the USA without any fall in tax revenues as a percentage of GDP because of base broadening.
Margaret Thatcher really did make a dent in taxes as a share of GDP in the 1980s. They fell by 5% of GDP but then went back up again in the 1990s as is shown in the Centre for Policy Studies chart below.
That 5% drop was a big variation as a share of GDP which is also shown in the Taxpayers Alliance chart if you look closely at the 1980s. That sharp drop in taxes as a share of British GDP is clearer in the Centre for Policy Studies chart because it magnifies the data.
There are also big changes in the British tax mix in the 1970s and 1980s. The large rise in tax in personal income in the 1970s as a percentage of GDP, also shown in both British charts above as well is the one below, coincided with the rise of the British disease and British economy becoming widely known as the sick man of Europe.
Source: OECD Stat.
The large decline in taxation in personal income under Thatchernomics was followed by an economic boom. The UK grew at above the trend annual real GDP growth to 1.9% for most of the period from the early 1980s to 2007 as shown in the detrended data in the chart below.
Source: Computed from OECD Stat Extract and The Conference Board. 2015. The Conference Board Total Economy Database™, May 2015,http://www.conference-board.org/data/economydatabase/.
In the above chart, a flat line is growth at the same rate as the USA for the 20th century, which was 1.9% for GDP per working age person on a purchasing power parity basis. The USA’s trend growth rate in the 20th century is taken as the trend rate of growth of the global technological frontier.
A falling line in the above chart is growth in real GDP per working age person, PPP at less than the trend rate of 1.9% per annum while a rising line is real growth in GDP per working age person in excess of the trend rate.
The Swedish tax mix as a percentage of GDP since 1965
21 Mar 2016 Leave a comment
in economic history, public economics Tags: growth of government, size of government, Sweden
British tax mix as a percentage of GDP
19 Mar 2016 Leave a comment
in economic growth, economic history, entrepreneurship, fiscal policy, macroeconomics, public economics Tags: British disease, British economy, growth of government, sick man of Europe, size of government, taxation and entrepreneurship, taxation and investment, taxation and labour supply, Thatchernomics
The large rise in tax in personal income in the 1970s coincided with the rise of the British disease and British economy becoming widely known as the sick man of Europe. The large decline in taxation in personal income under Thatchernomics was followed by an economic boom.
Source: OECD Stat.
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