December 3, 2003

In theory, economics has a lot to say about the size of government.  No resources should be extracted from the private sector that will not be used for more good in the public sector.  Unfortunately, measuring public goodness is not so easy. 

A famous American document states that government is instituted to insure inalienable rights.  Some of those rights are listed and most Americans probably agree that the list should include those as well as others. 

Therefore, when someone comes along and wants to see government so small that it can be drowned in a bath tub, one wonders if those rights no longer are valid, if government no longer is needed for that purpose, or if our founding fathers were wrong and government cannot achieve that purpose. 

If government is the problem, when our heritage indicates that it can and must be a solution, then one wonders what those running government have done to create such ill will.  Indeed, the debate should be how to get government back to insuring those rights, not how to destroy government. 

But I no longer want to tarry over the size of government or the purpose of government.  Instead, I wish to discuss how rather than why resources are extracted from the private sector. 

Government has three means of directly extracting resources from the private sector.  We know it can tax.  It can also borrow and a central government also can print money.  In addition, government uses indirection through regulation and subsidies.  Government also manages resources through government enterprises, such as water works, post offices, etc. 

In other words, government has fees as well as taxes to allocate the resources it manages. 

I firmly believe that the size of government and the extraction of resources are two separate activities.  That is why I always opposed a balanced budget amendment for the Federal government.  When interest rates are unusually low (doesn't that apply now?) borrowing may be much preferred to taxing.  Low rates suggest that little damage will be done to the private sector by borrowing while taxing creates all the distortions contained in the tax system. 

Of course, when interest rates are high (and that must be measured relative to prevailing economic conditions, such as during the mid 1980s), then taxing is a more efficient method of extracting purchasing power from the private economy.  There also are optimum monetary rules, but I do not wish to get into the policy issues of the Federal Reserve at this time. 

I also will oppose any movement to deny any tax increase at any time as either simplistic or duplicitous.  Certainly, elected officials should engage in the debate of government's size and its purpose and not be handicapped by accepting the tax codes as the maximum tax extraction from the private sector. 

A no tax increase pledge is simplistic because it does not deal with the issues of government that elected officials should debate.  After 9/11, emergency codes have impacted varying costs upon public safety at even the smallest levels of government.  Many of these governments have limited borrowing power and cannot issue money.  So, should safety codes dictate how much government activity other than safety should be provided by those governments?

There also is a problem concerning what is a tax versus what is a fee.  If transportation requires more resources to relieve congestion or diminish air quality deterioration, does it make more sense to use general fund resources (as Georgia is doing) or additional gasoline fees to meet those concerns?  If gasoline fees are taxes and no taxes can be raised, than the economically most appropriate means of addressing these problems is denied to Georgia's government. 

Only allowing taxes to fall means different things to different governments.  In Tennessee, where the sustainable revenue growth is so far below the growing needs of programs that new taxes must be introduced every few years, a no tax increase pledge means a budget crisis in only a few years.  Fortunately, Georgia does not have such a structurally unsound tax system. 

Finally, the duplicity comes in realizing that governments have unfunded promises that will create conflict with prevailing programs as those promises mature.  In Atlanta, the promise of healthy infrastructure already is creating conflict with other programs.  At the federal level, the promises of social security, medicare and Medicaid are not fully funded.  When their needs grow, other programs will need to be cut. 

Some conservatives know that, but do not wish to join the painful and politically dangerous discussion of what programs need to be cut.  Let's get rid of the simplicity and duplicity of the no tax increase movement and start the debate, long overdue, of what we want from our government and how we are going to pay for it. 


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