October 11, 2015

Why the Public Wants Lower Taxes Today

Dan Henninger of the Wall Street Journal wrote a column in the December 16, 2010, issue entitled “What are Taxes For?” This simple question triggered a thought in my mind about the broader purposes of government.

Most people would agree that government has certain roles as a provider of security, a deliverer of basic services, a regulator, an enforcer of societal norms through criminal and civil laws and the court systems that enforce them, and a provider or a creator of certain “safety net” services, such as unemployment compensation and welfare.

There may be people on both political extremes who either believe the government has a broader role, such as redistributing wealth and equalizing income (the far left) or that government should have a much narrower role (the far right). However, most people would conceptually agree on the various roles of government, and, therefore, would agree on what purposes should trigger the collection of taxes.

What has broken down in the last few decades and called our tax system into question is the fact that government has failed to fulfill its traditional missions well. I believe there are three reasons for that, aside from the hyper-partisanship with which we are all familiar:

  • Lawmakers have made a decision, which I believe to be mistake, to take traditional governmental functions and expand them to serve additional and unrelated goals. For example, we have taken the government purchasing function, which was originally designed to acquire goods and services with the best value at the lowest cost, and stretched it beyond recognition to serve additional, unrelated, and arguably socially worthy goals like increasing employment diversity of government contractors, forcing government contractors to pay “prevailing wages,” or requiring certain contractors to unionize. Whether these goals are truly valid and meritorious is not the issue, although some, including me, would argue with the way “prevailing wage” rules have been interpreted and enforced, and unionization has been imposed on people; enforcing them through the government’s purchasing power hides their implementation from public scrutiny.
  • We have become so distrustful of government that we have gradually added more procedural steps to protect against “corruption,” or “arbitrariness,” “financial mismanagement,” or “secrecy.” We have added steps to protect individuals, families, or organizations against government decisions, with the result that the cumulative effect of all these procedural steps is to render government slow and ineffective in delivering its core services.
  • Lawmakers have made government a provider of “middle class” employment even if the jobs government creates for individuals would not merit a “middle class” paycheck in any other employment sector. The problem has been compounded by collective bargaining agreements that prevent government officials from eliminating individual jobs or categories of jobs in a way in which individuals are involuntarily terminated. The “middle class” job commitment extends to employment benefits, some of which, like retiree benefits, when added to a “middle class” pay package, take the cost per job up to what Americans would normally consider “upper middle class.” For example, the 44-year-old Yonkers police officer who made $75,000 per year in his second last year of employment would be considered as holding a “middle class” job earning a “middle class” salary. When he earned $148,000 , with the benefit of overtime pay, in his last year of employment, and triggered a $100,000 per year pension benefit for the rest of his life after age 45, the combination of his pension and retiree medical benefit turned his position and his pension and medical benefits into an “upper middle class” level of cost overnight.

In most cases, the decisions that make government ineffective and cause Americans to rebel against paying taxes to enable government to get bigger or even stay the same size are made one at a time, and their cumulative impact is not understood until it reaches a critical mass. That is what happened over the last two years, and why the Obama Administration and the Democrats who supported the President were so soundly defeated in the 2010 elections. We crossed a line beyond which Americans were saying: “Whatever has been done has gone too far.” They are communicating that government has to shrink or, in the alternative, become far more effective in fulfilling its core missions. The message Americans are sending is quite simple: we are unwilling to pay more taxes when we are not getting anything sufficiently good for them.

The recent tax legislation reflects another failed premise of government today: governments do not stimulate long-term economic growth solely by lowering taxes broadly or selectively. Lowering taxes can eliminate a financial obstacle to the creation or growth of businesses that would otherwise take root. However, businesses get started or grow bigger because they offer goods and services the public wants to buy. People get employed because they have skills the marketplace needs. Simply making more money available will help businesses at the margins, but it cannot overcome an unemployment problem largely caused by the fact that many individuals have obsolete or inadequate skills. The businesses will start and grow, but getting people who are unemployed back to work will require multiple steps and take a long time. They will need new skills, and to be more flexible in their career paths, and to be passionate about lifelong learning.