The Hidden Price Tag Of Taxes
Little is said about why a larger government decreases economic growth, although symptoms of this are regularly reported. In July 12 issue of The Wall Street Journal, Andreas Bergh and Magnus Henrekson report on the Swedish experiment in socialism and its effect on that economy.
For comparative purposes the gentlemen went back to 1960 when Sweden and the US both spent a “…a bit under 30% of GDP” on government. Over the next few decades Sweden raised its percentage of government to 60 percent of GDP and its wealth per capita went from #4 in the world to 17th. They reported evidence that when government spending grows by 10 percent, GDP slows by 1 percent. For a person making $46,405 that would mean a loss of $354,000 over 30 years. In any event, in the 1990’s, when Sweden went through an economic crisis with government at 60 percent of its economy, the political class decided to become more market-oriented; become more business-friendly, one might say.
From that change, Sweden has found shrinking government improves its economy. For strictly comparative purposes the authors tell how those in Sweden do many of the manual labor chores that we in the US hire out – cutting grass, for instance. Thus those who cut grass lose their jobs, so someone in government may have one. But why is this so?
Those who argue for larger government tell us that spending on government is no different than spending in the private sector. They use roads for example. In fact, roads are not a good example because roads actually perform a necessary function in the economy: they enhance transportation. Further, during the building of roads normal economic functions are performed. Machines are used to move asphalt or concrete, and the various accoutrements of roads must be made and purchased. This is turn provides jobs to others who produce some economic constituent, while the road itself is useful to the economy. This cannot be said of many other government functions. Prisons and schools are a case in point.
From an economic point of view they are very similar. Prisons and schools are built that provide an addition to GDP; but after that their function is to decrease economic output, not increase it. They both require supervisors for the inmates and students. These supervisors produce nothing while tending those who are, by their inclusion in the prison or school, required to produce nothing while they attend. This is not to say prisons and schools should be eliminated, but rather to show they are a drag on the economic life of society. Both share the ideal that those who attend will be able to participate in society as functioning productive members when they graduate, but those who run the institutions will never attain that level of import.
Worse are the various departments of social services. Here the whole function is to pay people to do nothing, with no ambition that they will graduate to a better level of participation in the economy. The armed services and police are similar to prisons and schools, in that they have certain associated expenditures that enhance the economy, but beyond that are strictly costs. Police cars and tanks give jobs to those who make them, but are not economic assets that may be described as increasing wealth. They are in fact no different than the prison that keeps people busy but not participating in the growth or maintenance of the economy.
What has been shown is that some government functions are better for the economy than others; but more importantly, that all are drags on the economy. The choices we make about which to fund reflect our beliefs about how society should function and what government should do. In making those choices it can be shown mathematically that the symptoms of slow growth reported by Bergh and Henrekson are related to various government functions.
If one assumes a 3-percent growth rate in GDP and a 1-percent decline in this for each 10-percent growth in government as a percentage of GDP as described above, then government expenditures must not be providing the same amount of impetus for growth as expenditures in the private sector. In order to produce a 1-percent decline with government being 30 percent of the economy, one may do the following:
Separate government into two types of expenditures. As described above, the ratio of growth or decline may be predicted by the type of expenditure: Assigning roads and similar infrastructure expenditures a ratio of 75 percent of the normal growth rate associated with economic activity shows an increase in growth 25 percent below the level of private sector expenditures. For the rest of government a ratio of 66 percent is used. This means that things other than infrastructure provide only 66 percent of the economic impetus of normal private-sector expenditures.
Using these two ratios and increasing or decreasing them shows the effect on the total economy. As the ability or need to increase infrastructure is relatively insignificant, that number should be held constant. It is the rest of government that grows. So as we spend another $10,000,000 on government, the economy grows $3,333,333 less than it would have otherwise.
This is the multiplier effect that economists often use to tell us what economic effect some new government project will have on the local economy. But it shows us the actual effect of government expenditures is negative. The reasons for this are not made clear by the authors of the study, but a simple conclusion may be drawn. A government employee produces nothing, but those in the private sector who are paid from his salary do produce something. In paying a government bureaucrat to shuffle paperwork and money, the actual cost to the taxpayer is about 1.3 times the bureaucrat’s salary. This is a negative growth rate for taxes, which indicates the larger government gets the poorer the taxpayers will become. How much poorer? Take your pick.
In Mecklenburg County, if the stated sales tax is 8.25 percent, the actual cost to the taxpayer is 10.73 percent. If the property tax is 1.4 percent the actual cost to the taxpayer is 1.82 percent. If your North Carolina income tax rate says 7 percent, your actual cost is 9 percent. The list goes on. Every tax you pay has the hidden cost of its drag on the economy. Since your taxes are paying someone to produce nothing, that lack of production is part of the cost of your tax. Increase every tax you pay by 30 percent and you will see your actual tax bill.
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