Observations Concerning Governments and Taxation

In this country today we have some serious problems with deficits. Anyone who takes the time to look into the situation soon understands that this is a problem that has consistently grown since the Reagan revolution. After the national deficit had basically stabilized since the early 1940’s Reagan’s Administration managed to double the deficit in just eight years. The vast mobilization of armed forces that the United States won WWII with temporarily doubled the deficit but it was quickly paid back down shortly afterwards. Reagan and his policies managed to double the deficit during peacetime with the added legacy that the policies he espoused have directly led to the fact that we still have not managed to get it back under control in the thirty years since.

Governments, unlike personal budgets have regularly and routinely run budget deficits since the beginnings of organized governments in Sumeria some 4000 years ago. The reason for this is very simple. Revenue for governments can come only from taxation and taxation is based upon last year’s expense so there is always a time delay in the reaction of taxation to expenditure. While this is a little alien to the way the most people understand budgeting on a personal level, it is inherent in government expenditure. It is only in recent modern history that methodologies for predicting expenditure have come into common usage for governments and the success rate of these methods is not exactly stellar as governments are frequently faced with situations that require immediate response. We must always remember that any government’s ability to raise revenue is not immediate; it is always lagging behind the need to make expenditures. Modern budgeting methods are predictive modeling attempts at seeing future need and setting money aside accordingly. Barring a discovery of omniscient future sight governmental budgeting will always be at best a very inexact science.

From the very beginnings of organized governments it has been necessary to match revenues (money coming in) with expenditures (money going out). While there is an inherent delay in this process it is still necessary to adjust expenditures and revenues accordingly. While most everyone understands this process from their own efforts to balance their household budgets the public at large in this country today seems unnaturally predisposed to seeing only one side of the budgeting method of our country; expenditures. In a nation as large as ours with as many different obligations as we have it is inevitable that we will disagree on the relative importance of expenditures. Largely these disagreements center on regional interests but they are often further divided based upon our individual status in the economic hierarchy. Farmers in Iowa consider government agricultural subsidies to be of prime importance while government workers in Alabama who work on government facilities are much more likely to favor government investment in military research and development. This discussion can go on ad infinitum without respite, the point being that part of belonging to such a diverse country is an inherent disagreement on priorities. While this diversity is a weakness when it comes to budgeting it is in many other ways the source of our greatest strength as a nation.

Let’s look at some history of governments and taxation to better understand the problem. There is a large push in this country today to do away with big government; to go back towards smaller government and more of a pure capitalist system. Virtually everyone seems to believe this is the path we need to take to recover our economic strength and upgrade our standard of living. Unfortunately for the proponents of this theory, history seems to teach us just the opposite. The advents of organized governments throughout history have directly corresponded with marked advancement in civilization. The Sumerian city states were the first organized governments and marked the beginnings of advancement in cultivation techniques that allowed the growth of populations that had never before been seen on this planet. It is the combined efforts of groups of people and the resultant division of labor that has led to all advancement in living conditions since the beginning of recorded history, not the individualistic efforts of the strongest amongst us. The pooling of labor resources and revenue resources led to large irrigation projects that simply could not have occurred by individual effort. The source of this combined effort, whether in labor or capital was taxation. Each individual by contributing his part in the group effort advanced his own standard of living infinitely quicker than he could have in isolation. This is the root source of all government, the bonding of individual effort for the common good.

Government provides stability. Stability is necessary for advancement. Without government, people are forced to fend for themselves spending large proportions of their time defending their gains from becoming plunder for others. Division of labor collapses and efficiency collapses along with it. Even a cursory glimpse of the history of civilization proves the indivisibility of these two concepts; progress and government. The larger and more effective the government the greater the progress and the higher the standard of living for its citizens; there is an undeniable and direct correlation.

Sumerian civilization with its localized city state governments was closely followed by Greek civilization with its larger city state governments. Each led to rapid advancements in agriculture, science, and business practices that led directly to rapid advancements in standards of living for its citizens. Along with these governments came taxation which also directly corresponded to this advancement. It was the advances in taxation policies which gave the governments the labor and capital they needed to protect and advance this standard of living, allowing it to further advance.

Roman civilization featured even larger governments with further refined systems of taxation that led to stronger central government and more rapid advancement in standards of living for its citizens. With the collapse of Rome and the drift of European civilization towards feudalism and this system's inherent individualism we had the advent of the dark ages which saw standards of living regress and scientific knowledge collapse. It was the inherent inability of governments to centralize power that led directly to these problems and the resultant drop in standards of living all across the western world.

As western national governments began to re-emerge and consolidate power we saw the return of economic advancement and a corresponding steady increase in the standard of living for their citizens. Larger, more centralized governments subsidize economic prosperity by providing security for their citizens and allowing ever greater divisions of labor which in turn lead to higher efficiency. In short, the strength of central governments and their ability to raise revenue for the common good have always directly corresponded to increases in standards of living. Smaller, less centralized governments have always had just the opposite effect throughout the history of the civilized world.

This leads to the United States and our own history of economic growth compared to governmental strength. The United States, even though it possessed the greatest abundance of natural resources of any one nation, was basically a third world power economically and militarily until the consolidation of power in our central government began to take place. Our economic prosperity is directly correlated to the size and strength of our central government and this has held true throughout our nation’s history. For the same reasons that western civilizations advance has always been tied to the strength of government, the explosion of economic power that the United States experienced happened along with the growth of the central government and the resultant revenue increases that came with it.

The United States financed much of the world’s economic recovery after WWII through the ability to raise revenue. The growth of our national educational system, our national road system, our national electrical power system, and virtually every other economic engine that led to our world leadership in both standard of living and economic capacity are all directly related to the strength of our national government and its ability to raise revenue and disburse it for the common good. Individuals didn’t build the road systems, they didn’t build the schools, they didn’t subsidize the space exploration that led to most of the technologies that have so rapidly advanced our standard of living in this country. The central government with its vast ability to raise revenue for the common good did. Individual companies didn’t bring the cost of food down to its lowest relative level the world has ever seen, the central government with its subsidies of crops did.

Americans once understand this concept. No one likes paying taxes but it is a necessity to finance government and government of the people, by the people, is the guarantee that makes the whole system work. The idea that our government, the one we elect and control, is somehow an evil thirsty beast that must be slain so that we can inherit economic prowess is directly in conflict with the truths that our own history conveys. We have been sold a bill of goods by a small wealthy minority in this country who believe they should have the benefits this national system allows them without paying the costs associated with maintaining it.

Adam Smith, in his “Wealth of Nations”, which is widely espoused as the founding tome of capitalist theory addresses the idea of taxation as follows:

The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state. The expence of government to the individuals of a great nation is like the expence of management to the joint tenants of a great estate, who are all obliged to contribute in proportion to their respective interests in the estate. In the observation or neglect of this maxim consists what is called the equality or inequality of taxation.

This is exactly why we as a people voted in a progressive income tax in 1916. The people of this nation well understood the idea that those who prosper greater under the protection of the government are most responsible for paying its costs. The top tax brackets in this country were historically in the 70-90% range previous to Ronald Reagan. Since he was a product of some very wealthy patrons it is only natural that he would attempt to advance their interests but it is literally amazing to me that the general public fails to make the obvious connection between the drastic cuttings of this tax rate with the immediate rise of the deficit. The theory that cutting taxes on the wealthiest Americans and Corporations would lead to economic growth has been tried for the last thirty years and we find ourselves in the same kind of depression that this kind of fiscal irresponsibility netted us in 1929. George Bush Senior was right, it is "Voodoo Economics".

If cutting taxes on the wealthiest Americans leads to economic prosperity we should be in the biggest economic boom this country has ever seen right now because we have been doing it for 30 years now. What we have actually seen is the distinct degradation of every facet of our national economic infrastructure along with a drastic redistribution of the wealth of this country from the middle class to the wealthiest one percent of Americans. The tax burden has shifted dramatically to the middle class while the wealthiest Americans get relief. We have the highest deficits ever seen along with the lowest tax burdens for those that prosper most under the umbrella of protection our government affords.

Government finance is always an adjustment between revenue and expenditure. We cannot solve the problems we have by attacking only one of the two basic levers that control our system. The only way we will regain our economic strength is to return to the proper balance between what is earned under the protection of the government and what is owed in its support and that means raising the tax rate on those who prosper most.