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Is tax good for you?

Is tax good for you?

Ideas taken from "Growing public: social spending and economic growth since the Eighteenth century." Lindert P CUP (2004) ISBN 0-52-82174-6)

Welfare amounted to less than 1% of European GNP in the Eighteenth century, and is now nearly a third of it in the Scandinavian countries, and over a fifth elsewhere. The industrial nations now vary quite widely in their patterns of income distribution, state spending and taxation. Variations in their declared ethos spread even wider.

Peter Lindert is an expert on long-run patterns of state and private spending, wealth distribution and social spending. He has written a deep, two volume book which attempts to answer some of the questions which this experiment raises. How did the historical differences arise, and what lessons can we learn from what has come from this? What kind of social spending is good for which kinds of outcome? Is spending that is done by the private sector more or less likely to product productivity improvements that similar spending from the public purse?

In summary, the book suggests that the long run rise in social spending has had no adverse affect upon economic growth. Welfare policies result from democratic checks and balances which have allocated resources skeptically and rationally in ways which were perceived to be necessary for states to function. Charitable giving may be seen as a voluntary tax that parallels such developments. It is telling that charity amounted to around 0.2% of GNP in the Eighteenth and Nineteenth century to some 2% today in countries for which data are available.

The book traces the history of individual countries over almost three centuries of development, showing that these outcomes were far from random, and far from the fulfillment of the gloomy Eighteenth century observation that "Few societies long withstand the discovery by the electorate that it is possible to vote itself bounty from the public purse." Rather, the evidence points to democracy as an analogue of the market, whereby information sources are fused in order to arrive at a optimal balance. They do his through checks and balances, not least - perhaps - as politically astute elites defuse populist initiatives to raid the public purse. For example, the lead set by Britain in welfare provision after the Chartist disturbances of the 1830s was led by still-acute fears of a revolution in the manner of France, five decades earlier. The mechanisms which brought this about in turn depended on then-recent political reforms, and the added weight that this gave to urban constituencies - where the problem was acutely visible - over the shires.

The books are nothing if not quantitative - see here for this and a host of other historical data. Data and regression analysis are used to underpin most of the arguments, although historical interpretation is inevitably subjective. The affect of war on state spending - sometimes ratcheting into social spending thereafter, as particularly the case with World War II - is perhaps the least well handled aspect of the analysis. Essentially, did the political chicken lay a necessary or a populist egg from established levels of taxation and spending?

Analysis does, however, overthrow some pre-established views. Econometric analyses have tended to show a weak inverse relationship between growth and the level of taxation. However, if poor nations are omitted from this analysis - and such nations are poor in large measure specifically because of the state of their institutions, as we have shown elsewhere - then this affect is removed from the analysis.

For interest, we have shown World Bank and Heritage Foundation data above. This shows the strong relationship between income per capita and economic liberalisation (on the left) and income per capita and state spending as a proportion of GDP (on the right). Notice that constraint in economic matters is inversely related to state spending, not proportional to it.

Lindert also shows that high-taxing countries usually have less progressive tax rates - are less redistributive - than low taxing nations. They raise taxes socially-harmful activities - smoking, drunkenness - and on labour, through income taxes and levies. They also have proportionately more tax exemptions which are specifically intended to drive saving. High welfare societies are shown to have directed much of this spending to actions which increase productivity (education, health) or which reduce costs (transport, labour mobility and measures aimed to increase the labour pool, by employing more women more widely, for example.)

Let Lindert summarise matters for us. ".by 2050, most countries cutting the share of GDP spent on social transfers and public education will be troubled countries. The way to keep social spending from rising over the first half of the C21st would be to have no growth in average real income, no gain in life expectancy and no shift towards democracy."

To set this in contrast with what is in fact happening in the US economy, we show four charts derived from Piketty T and Saez E (2004), which you can see in full here. In essence, middle income earners have seen static real income, whilst the poorer groups have experienced a fall in the real terms. Wealthy groups have prospered, with the top 1% of the population earning about 45% of national income. The top 0.01% own around 10% of America, and the top 10% own around 90% of all tradable sources of wealth.

The series marked in triangles on the figure shows how the real income of the top 1% of the US has changed since 1917. (The fall at the end marks the dot.com crash.) The numerical axis is the one on the right, which shows constant $2000. The series marked with dots, using the left hand scale, shows the average income of everyone else in the US. This has been largely static since 1972. I conceals a significant and real fall in the income of unskilled workers.

Gains by the top 1% were chiefly from those of rentiers: dividends and capital, and the struggle between labour and capital had been won decisively by shareholders and capital. This is shareholder value in action, seen with a social slant. However, as shown below, there is a limited fight-back going on amongst the highly skilled.

Top earners have managed to extract considerable sums from capital in the period after 1990, when the shareholder value and down sizing movement took off. The figure shows real remuneration to CEOs, and the multiple of that this represents of average earnings. Whether this represents fashion, scarcity value or simply cosiness remains to be seen.

The final figure shows the proportion of the national wealth that is owned by the top 10%of the US population. The period before the Depression reflected both the value of agricultural land, and asset price inflation. The period after 1973 represents a reversal of a fundamental deal struck in the depression and the second world war: in essence, that of Organisation Man, whereby small community values were expressed in large organisations, accepting the overheads that this imposed. Japanese competition, a new generation of managers, the oil shock, information technology and union activism all had their parts to play in destroying this consensus. Be that as it may, in this aspect at least, the US of 2006 is equivalent to the US of 1920.

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