Bob Cropf

Posts Tagged ‘taxes’

Why taxes aren’t so bad

In economics, public finance, statistics on February 25, 2009 at 5:59 AM

Ever since the Reagan administration, the American people have been bombarded with the unrelenting message that tax increases are unacceptable. The idea is that taxes hinder economic growth and sap the incentives of individuals and families to earn more because the government will just take it all away.

In the meantime, government spending continued to grow. Entitlements like Social Security and Medicare kept expanding as a result of demographics and increased benefits. The US embarked on an expensive military venture in Iraq and Afghanistan. So while taxes have been holding steady over the last three decades, spending has continued to grow. In the simple calculation of public finance, if spending grows and revenues from taxes remain flat then deficits have to grow. As we have seen, these deficits have been financed from borrowing–increasingly from countries with more robust rates of growth than ours. See the chart from the Times article cited below:

In today’s NY Times, Dave Leonhardt writes a thoughtful piece on the “upside of tax increases.” For many Americans bamboozled by years of being told we can pay for everything we need without raising taxes, his title might seem strange. However, as he points out, there is a fundamental law of economics, known as Wagner’s Law, which says that as society matures then taxes show a tendency to grow. This law was discovered in the 19th century and recent economic research confirms that it still operates.

Taxes, as Oliver Wendell Holmes, Jr., said are the price we pay for civilization. Without them, there would be no schools, highways, defense and many other things that make life worth living today. As a society, we have accepted half of the equation: The part that recognizes that we need those things to have a properly functioning society. But we seem to have forgotten or ignored the other half, the part that says that we have to sacrifice something to get what we want.

The bottom line is we cannot keep pushing off into the indefinite future paying for things we need today. By continuing to do this, we burden future generations and reduce their opportunities for economic advancement or we risk our creditors strangling our economy with higher interest rates as demand begins to outstrip supply of capital.