Enhancing economic growth through higher taxes
The New York Times
April 15, 2004
Economic Scene
By Jeff Madrick
In widely reported comments before a Congressional committee in February, Alan Greenspan, the Federal Reserve chairman, suggested that President Bush’s tax cuts should not be even partly rescinded. Rather, Mr. Greenspan said, the nation should cut future domestic spending, including Social Security benefits, to balance the budget. Higher spending or higher taxes would deter economic growth, he warned.
The committee should have asked the statistically oriented chairman for the evidence. A comprehensive analysis by the economic historian Peter H. Lindert, published in a new book, “Growing Public” (Cambridge University Press), contends that there simply is none.
Mr. Lindert is a professor at the University of California, Davis; former president of the Economic History Association; and an associate of the National Bureau of Economic Research. He has examined levels of taxes, public investment in education, transportation and health care, and social transfers like Social Security, and finds a stark contradiction between conventional wisdom and the evidence. “It is well known that higher taxes and transfers reduce productivity,” he writes. “Well known - but unsupported by statistics and history.”
He compares the level of social spending over nine decades up to 2000 in 19 developed nations, including most of Western Europe, Japan, Australia, the United States and Canada. His analysis differs from many studies in part because he focuses on social programs, not overall government spending.
He finds that high spending on such programs creates no statistically measurable deterrent to the growth of productivity or per capita gross domestic product. As many nations in Europe built welfare states after World War II, they continued to grow faster than the United States, a nation with low social spending.
For many people, this defies common sense. Higher taxes to support social programs surely deter investment or the willingness to work to some degree. As Mr. Lindert points out, estimates by some economists, like Martin Feldstein, a Harvard professor and president of the National Bureau of Economic Research, find that extra government spending leads to a large reduction in gross domestic product.
In fact, taken literally, these studies suggest that the gross domestic product of Sweden, to take an example of a nation with heavy social spending, should have been reduced by up to 50 percent. But nothing remotely like that has happened.
The principal problem with such studies, Mr. Lindert writes, is that they are simulations of a highly simplified world. The economists recreate an economy where almost all incentives lead to slower growth, Mr. Lindert said, but that world does not exist.
Why, then, have high levels of social spending proved no deterrent to growth in the real world? Mr. Lindert has several explanations, some of them
surprising.
First, he says, the tax systems of countries with high social spending are less antigrowth than is realized because nations in Scandinavia and Continental Europe typically derive so much tax revenue from regressive consumption taxes. In fact, these nations do not penalize profits and capital investment any more than the United States or Japan does, and possibly even less.
Mr. Lindert cannot be pigeonholed as a conservative or a liberal. He says he believes that less tax on capital will promote growth. But nations with high social spending typically tax alcohol, tobacco and gasoline highly, he notes, which contributes to better health and environmental quality. Healthier workers are more productive, and cleaner air requires fewer expensive environmental regulations.
Second, he finds that social programs in nations with high welfare levels usually include everyone. Because benefits are generally not cut off as incomes grow, the disincentive to get jobs or invest is reduced.
But third, he finds, much of the public spending in these nations is also conducive to economic growth. Among such spending is that for education and health. Mr. Lindert argues firmly that under comprehensive public health programs, people are healthier and live longer, which also makes them more productive. He cites a study by the economist Zeynep Or for the Organization for Economic Cooperation and Development that finds that in nations where a higher proportion of all health outlays are public, life spans are significantly increased.
This summary does not do justice to Mr. Lindert’s book. He also, for example, provides a valuable history of social spending and proposes a theory about why some nations spend more than others that is closely related to how well democracy works. This is a piece of research that is rich in insight and grounded in empirical evidence. There will be challenges. But the upshot is unmistakable. Government spending, if administered wisely, can have great value for everyone, including but not limited to the especially disadvantaged.
http://www.nytimes.com/2004/04/15/business/15scene.html
Comment: One of the arguments made against the adoption of a national health insurance program is that the increase in taxes required would deter economic growth. Implicit in that argument is that fact that our health care system, currently 15.5% of our Gross Domestic Product, somehow is not part of our economy. Tax spending on health care might deter economic growth in the private health insurance industry, but it would stimulate growth in the health care delivery system and in the health technology industries that support it. Also considerable evidence indicates that tax dollars spent on health care provide a significantly greater value in our health care purchases than when those dollars are spent through our current wasteful, fragmented system of funding care.
An equitable tax that funds equitable access to an efficient, comprehensive system of health care is a good tax, and is not a deterrent but is a stimulant to economic growth in the health care service industry. If the private sector sources of those tax revenues cannot survive in the marketplace because of the tax burden (shared by all), then perhaps it is because their product or service is not providing adequate value. Marketplaces have little sympathy for products or services without value.
Tax policies that favor health care over mediocre products and services are tax policies that we should support.
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