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Special Report- Taxation, April 15, 1998

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RE: Special Background Advisory: Taxes and Spending

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* This is an experimental piece, but since it is Tax Day and since I had selected these particular essays for their clear trend charts, here they are.

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Less Government, More Growth

By JAMES GWARTNEY

Propelled by a confidence that politicians could solve problems, government spending has soared in the U.S. and other Western countries since 1960. Has wise "government planning" improved economic performance? Quite the opposite. Robert Lawson, Randall Holcombe and I recently completed a study on the size and functions of government for Congress's Joint Economic Committee. Here are some of our findings:

" As the size of government has expanded in the U.S., growth of real gross domestic product has steadily fallen. Even though the U.S. economy is now moving into the eighth year of an expansion, the growth of real GDP during the 1990s is only about half what it was during the 1960s and well below even that of the turbulent 1970s. Likewise, as the size of government in other nations has increased, economic growth has declined. On average, government expenditures in the Organization for Economic Cooperation and Development's 23 long-standing members rose to 48% of GDP in 1996 from 27% in 1960. The average economic growth rate fell from 5.5% in the 1960s to 1.9% in the 1990s.

"As the chart shows, there has is a striking relationship between the size of government and economic growth. When government spending was less than 25% of GDP, OECD countries achieved an average real growth rate of 6.6%. As the size of government rose, growth steadily declined, plunging to 1.6% when government spending exceeded 60% of GDP. While growth has declined in all of the OECD countries, those countries with the least growth of government have suffered the least. Between 1960 and 1996, the size of government as a share of GDP increased by less than 15 percentage points in the U.S., Britain, Iceland, Ireland and New Zealand. The average growth rate for these five countries was 1.6 percentage points lower in the 1990s than in the 1960s. In contrast, the size of government increased by 25 percentage points or more in Denmark, Finland, Greece, Portugal, Spain and Sweden. The growth rate of these six countries fell by 5.2 percentage points.

" In the world's fastest-growing economies, furthermore, the size of government is small, and there is no trend toward bigger government. On average, government expenditures in 1995 consumed only 20% of GDP in the five economies with the most rapid real economic growth rates during 1980-95: Hong Kong, Singapore, South Korea, Taiwan and Thailand. In these countries, the size of government in 1995 was virtually the same as in 1975. When we looked at a diverse group of 60 nations, we found that the negative relationship between bigger government and economic growth is present in all types of economies.

" Many policy-makers seem oblivious to these facts. Even though the evidence clearly shows that excessive government expenditures are retarding economic growth, politicians continue to focus on new spending programs, budget deficits and how to spend a possible surplus. What the U.S. and other nations need instead is a long-range strategy to reduce the size and scope of government.

" Had the public-sector expansion of the past four decades accelerated economic growth, politicians would be rushing to take credit. Since the opposite has occurred, how can we fail to hold them accountable?

Mr. Gwartney is a professor of economics at Florida State University. Copyright © 1998 Dow Jones & Company, Inc. All Rights Reserved

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Workers Need Tax Cuts , Not a Minimum Wage Hike

By J.T. Young

" President Clinton and Sen. Ted Kennedy (D., Mass.) are pushing for another increase in the minimum wage, which has already gone up twice in the past two years. But while it's true that Americans have been financially squeezed, especially during the Clinton years, the real culprit is not employers' parsimony but the government's voracious tax appetite. If Messrs. Clinton and Kennedy are serious about easing the burden on American workers, they should be pushing for tax cuts.

" According to the most recent data from the Department of Commerce's Bureau of Economic Analysis, total wages and salaries (for both government and private-sector workers) rose 6.7% in 1997, well ahead of the 1.7% inflation rate. Now for the bad news: The bureau reports that total federal, state and local tax payments by individuals rose by 11.4% in 1997. As the chart nearby shows, wage growth has lagged behind tax growth during every year of Mr. Clinton's term in office. (See accompanying illustration -- WSJ Feb. 23, 1998)

" The bureau has been collecting such data since 1960, and the record is striking. Before 1993, taxes had not grown faster than wages since 1989, the first year of the Bush administration. The last time taxes outpaced wages two years in a row was 1980-81. On the other hand, on Jimmy Carter's watch, as on Mr. Clinton's, tax growth exceeded wage growth every single year. In fact, during the 17 years in which Democrats have occupied the White House (1961-68, 1977-80 and 1993-97), only once -- in 1964 -- did wages grow faster than taxes.

" This record of excessive tax growth shows every sign of continuing. Last year, federal tax revenue as a percentage of gross domestic product reached its highest level since World War II --19.8%. Total federal revenues will reach 19.9% of GDP this year and, If Mr. Clinton's budget is enacted, 20.1% next year -- a post-World War II record. Add in state and local taxes, and the total approaches one-third of GDP.

" These are not just abstract figures, as Senate Majority Leader Trent Lott pointed out in his response to the president's State of the Union address. They have a real impact on America's families. The typical American family's total tax burden is 38% of income. No wonder Americans feel financially squeezed.

" But liberals like Messrs. Clinton and Kennedy are all too happy to raise taxes. Their solution to the financial pressure their policies have imposed on American families? More federal interference. In short, they seek to make Main Street pay Pennsylvania Avenue's bill. Do they really want Americans to prosper? If they do, they should start by cutting taxes.

* Well, there you are; I needed to learn how to slap charts into the newsletter and these were a worthy start.

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