Filed Under (U.S. Fiscal Policy) by Jeffrey Brown on May 25, 2010
USA Today released an article last week that made a big deal of the fact that average individual tax rates in the U.S. are now at their lowest level since 1950. The spin of the article was essentially that Tea Party activists, tax cut advocates, and other proponents of small-government are misguided in their concerns about our current fiscal state.
This spin, however, ignores one of the most basic, essential important lessons of public economics (the sub-field of economics that studies the public sector). This lesson is that spending, not taxes, are the true measure of the burden of government. (I will ignore other problems with the analysis, such as the fact that from an efficiency perspective we care more about marginal than average tax rates.)
The reason that spending is key is really quite simple. All government spending must be financed by taxes. So it is somewhat meaningless to argue that small-government conservatives are misguided simply because average tax rates are low if that argument is coming at a time when spending is above recent historical trends. High spending and low tax rates are a nasty combination, of course, because the result is a large government budget deficit that crowds out private investment, hinders economic growth, and passes the tax burden on to future generations.
In short, once we have chosen to allow the government to spend a dollar, that dollar must be financed through higher taxes, either on the current generation of taxpayers or on a future generation of taxpayers.
As I have written before, our federal budget is on a fiscal death march. We face a fundamental choice between reining in spending or raising taxes (or both). These are not pleasant options, but they are choices that ordinary American households and businesses have to make every single day. If only our elected officials in both parties would provide some honest leadership on this issue.
On that note, if you would like to see the mix of changes that are required and figure out what you think would be the optimal mix of tax and spending changes required to balance the budget, take a look at the new federal budget calculator put out last week by the Committee for a Responsible Federal Budget. You will quickly see why the required changes are so politically difficult.