Tax Analysts Blog

Will Americans Foot the Bill?

Posted on Aug 10, 2009

Gregory Clark, an economist at UC-Davis, has peered into the future, and he's not happy:

    In the next chapter, abundance beckons -- for some. Advances in technology drive economic growth, and there is no sign that they are slackening. The American economy is likely to continue unabated on the upward path that began with the Industrial Revolution.

    No, the economic problems of the future will not be about growth but about something more nettlesome: the ineluctable increase in the number of people with no marketable skills, and technology's role not as the antidote to social conflict, but as its instigator.
Sounds familiar: economic change has always been unsettling. In the late 19th century, people worried that widespread mechanization would impoverish artisans and skilled workers. During the early 20th century, they fretted that a "mature" consumption-driven economy would be marked by slow growth and permanently high unemployment.

In the past, Clark notes, such worries have been misplaced, especially for unskilled workers.

    For much of the past 200 years, unskilled workers benefited greatly from capitalism. Before the Industrial Revolution, for example, skilled construction workers earned 50 to 100 percent more than unskilled laborers; today, that premium has fallen to 33 percent in the United States. The era of the two world wars, 1914 to 1945, was one of particularly sharp gains for the wages of unskilled workers, relative to the rest.

But things might prove different from here on out. Machines seem likely to conquer even the last redoubts of unskilled labor, Clark says. Fast food restaurants, call centers, and other businesses dependent on human interaction have not yet fallen to the forces of mechanization, but they probably will. "And as machines expand their domain," Clark writes, "basic wages could easily fall so low that families cannot support themselves without public assistance."

Which brings us to taxes. As government at every level assumes more responsibility for keeping food on the nation's collective table, we'll need higher taxes to pay the tab. If a permanently enlarged welfare state is going to protect us from social discord, then we'll need taxes to protect us from fiscal ruin.

Or maybe not. The real danger is that Americans will accept big government but refuse to pay for it. In fact, it's already happened. Remember the unfunded Medicare prescription drug program? Or the looming entitlement crisis more generally? Sure, the current debate over health care reform purports to address these problems. But I'm unconvinced. Once upon a time, it was considered axiomatic that new spending programs had to be paid for. Nowadays, not so much.

Clark, too, is not optimistic.
    The United States was founded, essentially, on resistance to taxes, and to this day, an aversion to the grasping hand of the state seems fundamental to the American psyche. The share of total income collected in taxes by all levels of government in the United States is 27 percent, compared with 51 percent in Sweden, at the other extreme. The conflicts to come are foreshadowed in California, where popular anti-tax sentiment has forced substantial reductions in medical care for the state's poorest children.
I share some of this pessimism. The power and resilience of anti-tax politics has been impressive, especially over the last 40 years. Which might be OK, if the power and resilience of pro-spending politics weren't just as strong. (Well, it wouldn't actually be OK in my book, but at least it would be consistent.)

Nevertheless, history offers some hope. Sure, Americans hate taxes. But so do people everywhere. Yet other countries have managed to swallow hard and accept higher tax burdens as the price of social justice and political stability.

And as a matter of fact, so has the United States. Tax resistance in America is different today (in scale and substance) than it was 100 years ago. And different then than it was 100 years before that. American attitudes about taxation have changed dramatically over time. And many of the most important changes -- including a tolerance for higher taxes and a penchant for progressive taxes -- have been sparkled by the sort of large-scale economic change that Clark is predicting.

Which is not to say that Americans have been on a clear trajectory from small government/low taxes to big government/high taxes. If nothing else, the last forty years of anti-tax politics have put the lie to that sort of teleological view.

But we shouldn't lose hope just yet. In the past, Americans have come to grips (not always happily but at least eventually) with changing economic circumstances. They have made necessary adjustments in policy and ideology, forcing both to comport with reality rather than the other way around. Who knows, they might just do it again.

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