This Week:

Quote of the Week

Tax the Rich

Taxes and Budget Surpluses: Myth and Reality

Greetings,

I’ve been doing so many short pieces lately, I thought is was about time to do a slightly more in- depth article. And what could be more timely than a look at taxes and budget surpluses? It is not popular to resist the idea of cutting taxes, but I do think somebody’s gotta do it. So here are a couple thousand words on the subject. More will be coming in future editions.

The exciting news from the copy editing department is that Nygaard Notes sees its first footnote this week, noted with an asterisk in paragraph 16 of Part 3. Pretty exciting, huh?

Hasta la proxima semana,

Nygaard

"Quote" of the Week:

"Patients enrolled in profit-making health insurance plans are significantly less likely to receive the basics of good medical care -- including childhood immunizations, routine mammograms, pap smears, prenatal care, and lifesaving drugs after a heart attack - than those in not-for-profit plans, says a new study that concludes that the free market is “compromising the quality of care."

-- from The New York Times of July 14, 1999, referring to a recent study appearing in the Journal of the American Medical Association.

Taxes and Budget Surpluses: Myth and Reality

I just received my Minnesota State Sales Tax Rebate check in the mail, and I don’t want it. Oh, sure, I need the money, but I think it would do me more good if it were pooled with the taxes of my fellow Minnesotans and spent on the public welfare. I said as much in NN #38 (“What Is a Budget Surplus?”) Still, the most typical response to my statement that I would rather not get a tax rebate is “Huh?”

You hear a lot of complaining about taxes, with the result that 33 states have awarded tax cuts and rebates to their citizens that will take effect within the next two years. The federal government is deep in the throes of a discussion about doing the same thing, with the only debate being about how much and when. Is this a good thing? I don’t think so.

Since we are in the middle of such a tax-cut mania, it seems like a good time to attempt to refute several myths that seem to be driving our budget discussions on all levels. Some of these myths are so well-established that I wouldn’t be surprised if some readers of Nygaard Notes believe them.

MYTH NUMBER ONE: Taxes are high in the United States, and especially in Minnesota.
ACCOMPANYING MYTH: Our tax system is a drag on the economy.

Well, yes and no. Our tax system may in fact be a drag on the economy, but that would likely be because taxes in this country are too low.

Too LOW?!

Consider the following: Total taxes as a share of Gross Domestic Product are lower in the United States than they are in many other countries, such as Australia, Belgium, Germany, France, The United Kingdom, Italy, Norway, Portugal... In fact, using this measure (which I think is a good one) taxes are lower in the United States than they are in 25 out of the 28 countries included in a recent report of the Organization for Economic Cooperation and Development. Only Korea, Mexico, and Turkey had lower taxes than the good old U.S. of A. (For a full discussion of the nature of the OECD, see NN #32, “The Oligarchy for Economic Cooperation and Development.”)

But how could low taxes pose a threat to our economy? An often-overlooked economic point is that many of the things that governments typically spend money on are essential to a society’s long-term economic health. Not coincidentally, they are often the very things that private businesses are reluctant to spend money on. The popular example is roads - businesses don’t build them, but they couldn’t live without them. This is an example of your taxes providing infrastructure to support “the economy” as well as the people. But governments invest in far more than roads. Governments also invest in human development by looking after (and paying for) such things as education, public health, research, and product safety.

Yesterday’s Star Tribune (Newspaper of the Twin Cities!) conveniently provided me with a couple of quotes to illustrate this point. Both are from a front-page story in yesterday’s Star Trib (August 19th) which was headlined “Minnesotans are receiving largest tax cuts in nation; Despite relief, state remains among highest taxed.” The article points out that “even with three successive years of rebates and the shaving of half a percentage point off income tax rates, Minnesota isn’t likely to escape the ranks of the top 10 states in total tax burden any time soon, tax experts agree. That’s a status Minnesota has held for three decades.” You kind of get the idea that this is a bad thing, do you not?

Keep that quote in mind as you read the following quote from former Republican governor of Minnesota Arne Carlson, which appeared nine paragraphs later. Mr. Carlson noted, according to veteran political reporter Dane Smith, “Minnesota is blessed with a diverse economy that is ‘pretty much No. 1 in the nation.’”

Now, if Minnesota has had high taxes for decades, and now has the No. 1 economy in the nation, what does that do to the theory that high taxes are a drag on the economy? (Leave aside for the moment the fact that Minnesota’s economy has some big problems, not the least of which is a habit of providing large taxpayer subsidies to corporations and getting little but low-wage jobs in return. For the purposes of this discussion, we can agree that Minnesota’s economy is quite strong relative to other U.S. states.)

Not only have high taxes not hurt the state’s economy, but there is good reason to believe that they have actually been a big plus. For decades Minnesota has had a relatively high level of investment in the things that I mentioned earlier - education, public health, research, public safety, and so forth. These are the things which undergird a healthy economy. For example, companies like to invest in a state that has a population that is well-educated and healthy, and that has a well-funded system of public education that carries out the pure research which lays the foundation for future economic development. Such amenities as parks and green spaces, not to mention the basics of clean air and water, are the sorts of things that are provided and maintained with public investment and that are valued by the skilled workers that large companies need to recruit to work in their offices and plants.

Far from being a “drag on the economy,” therefore, Minnesota’s tradition of being a “high tax, high service” state is arguably a big reason that Minnesota has an economy that Arne Carlson rightly claims is the envy of most other U.S. states, in good times and bad.

MYTH NUMBER 2: If the federal government keeps taxing and spending as it is now, we expect to have a huge national budget surplus in the next few years.

This is simply false. Surpluses are projected to come in large part from cuts in spending that have been written into law. If the federal government were to maintain spending at the current levels, let alone at the increased levels that human need calls for, our projected surpluses would largely disappear. In a very real sense, then, tax cut proposals are financed by cutting spending that would address human need.

In their recent report, “The Budget Surplus Comes From Cuts in Discretionary Spending,” watchdog group OMB Watch puts it quite clearly: “The on-budget surplus over the next few years will be made possible because of severe cuts in discretionary spending. Congress has been operating under strict budget limits or “caps” on discretionary spending that were imposed in 1990, and renewed in 1997.”

“What are ‘discretionary funds’?” you may ask. Discretionary funds derive from the annual appropriations process and cover almost all government activities other than mandated entitlement programs [such as Social Security], including defense spending, international programs, NASA, environmental programs, national parks, community economic development, job training, Head Start, public health programs, housing, veterans hospitals, law enforcement, rural programs, general government operations, highways, and certain research activities.”

The OMB Watch report continues, “According to the Congressional Budget Office, discretionary spending - which includes defense spending - will decline from 6.6% of Gross Domestic Product in Fiscal Year 2000 to 5.0% in FY 2009. By comparison, discretionary spending in FY 1980 was 10.2% of GDP. Again, most, if not all the cuts will need to come from domestic discretionary programs.”

They won’t come from “defense” (i.e. “attack”) spending, that’s for sure. Readers may not know that “defense” spending is now roughly equal to all other discretionary spending combined. And “defense” spending is increasing, while the Balanced Budget Act of 1997 will likely force major cuts in everything else over the next few years.

Here’s how Bob McIntyre of Citizens for Tax Justice (http://www.ctj.org/) puts it: “Let's redo the surplus projections using some more realistic arithmetic. If, for example, we assume that defense spending will stay even with inflation and adjust domestic appropriations only for inflation and population growth, then the $996 billion projected surplus drops to only $224 billion over ten years - 78 percent less than the official figure.

“Alternatively and more plausibly, if defense keeps up with inflation and domestic appropriations keep up with the economy, as they have since the end of Ronald Reagan's first term, then the supposed surplus turns into a cumulative deficit of $76 billion over the next ten years.

“In other words, absent giant and implausible spending cuts, there is little or no surplus.”

Meanwhile, the debate in Washington is about how to spend the “surplus.” Citizens who get their news from television and newspaper (as opposed to Nygaard Notes) can be forgiven for thinking that this debate actually means something.

MYTH NUMBER 3: The tax laws are too complex and need to be simplified.

Minnesota Governor Jesse Ventura has been known to utter this phrase on frequent occasions. My response has always been: “Oh, get serious!”

As I write these words, I am looking at my recent Minnesota Income Tax form (Form M-1). I can’t for the life of me figure out what’s so blasted complicated about it. It’s only one page long, and I only had to write numbers on 6 of the 22 lines. Once I figure out my income (and we are not talking about a big number there), all I need to do is go and look on that little table where it tells me how much money I owe.

That’s not too complex. I don’t recall hearing my friends complain about being intellectually challenged by this annual ritual, either.

As a rule, the more wealthy one is, the more complicated one’s taxes become, and that tells you something about our governor. Mr. Multi-millionaire Ventura’s complaint can be seen as an indicator of the types of people he hangs around with, and the types of people he has chosen to advise him. Rich people see the world differently.

I don’t think any democratically-minded person should object, in principle, to paying taxes. Many, many things that our taxes are spent for are things that we should support, and there are things that the government does better than the private sector, and always will. Public health is a great example, but there are many, many more.

The real issue with taxes and surpluses is the same as it is with any public policy question: Who benefits, and who pays? The push for cutting taxes is a push to reduce the amount that the rich pay, and to concurrently reduce the services that benefit the majority of our citizens. To cut taxes is to shrink the size and power of the government. Any honest conservative will tell you so. The problem is, if we shrink the size and power of government, we will also reduce the role of the only existing institution that has any chance of reining in the power of the giant corporations that increasingly define how our lives are lived.

Imperfect as it is, government in the United States does a lot of things to make our lives better, and it has the potential to do a lot more. We should be working to make it more accountable and to make sure it has the money to carry out its responsibilities, not to starve it to death.