Hidden reasons your taxes are killers

Robert Kuttner

April 23, 1991|By Robert Kuttner

TAXPAYERS are not getting their money's worth, but the reasons have little to do with to the conservative myth of ever expanding, wasteful government.

It hurts more to pay taxes for three basic reasons: First, income growth has been flat or declining for the bottom four-fifths of the population for more than a decade. When incomes are stagnant, taxes pinch.

Second, to add insult to injury, the tax system has become more regressive -- partly because of the "supply side" cuts of 1981, partly because of the declining share of taxes paid by corporations and most dramatically thanks to the huge increase in payroll taxes, the most regressive taxes of all.

Third, more government spending is being consumed on outlays that do not directly benefit most working taxpayers: interest on past debt, Social Security, and Medicaid and Medicare.

The result: The average taxpayer is paying more and getting back less from government than two decades ago. But this does not mean government has become bigger or more wasteful, or public employees lazier. Rather, it is the result of demographic trends combined with wrongheaded policies.

Here are some surprising numbers: Last year, the federal government spent about 23 percent of the gross national product. This represented an increase of just one percentage point over what government spent in 1975.

However, in 1990, the government spent $184 billion on interest payments, compared to just $23 billion in 1975. Last year, the government's interest payments equaled 3.4 percent of GNP, more than double the 1.5 percent of GNP spent on interest payments in 1975.

In other words, the increase in interest payments, all by itself, more than accounted for the total increase in federal spending. This is the first hidden reason why taxpayers are not getting their money's worth. Set aside those interest outlays, and government spent less on real services in 1990 than in 1975. The huge increases in interest costs, of course, are the bequest of that fiscal conservative, Ronald Reagan, under whose leadership the federal debt more than doubled.

The second culprit is Social Security. In the 1960s and 1970s, Congress increased Social Security benefits in real terms, but inflation-adjusted benefits have not increased since 1983. However, the elderly population has continued to grow.

As a result, Social Security outlays have risen from about $65 billion in 1975, to $249 billion in 1990. Contrary to what you may have heard, living on Social Security is no picnic. The rate of poverty among the elderly has declined, but it is still slightly above what it is among the population as a whole.

But because of the aging of the population, this rapidly growing use of government outlay does nothing for working-age people, except by easing concerns about their future retirement or about the well-being of their aged parents.

The third monster, Medicare, has burgeoned from $14 billion in 1975 to about $100 billion last year. Medicare, like Social Security, is mainly for people over 65. Although old folks pay some of the costs directly, it is partially financed by general payroll taxesand is thus another case of taxes paid that do not translate into current benefits received, for most of the population.

Defense spending as a fraction of the total budget, by the way, is higher than it was in 1975, but only slightly.

Here is the bottom line: Strip away increases in Social Security, medical costs and interest outlays, and government is actually delivering less in general public services than it did 15 years agoeven though most people's taxes are higher.

All other categories of federal non-defense spending accounted for 9.6 percent of GNP in 1975, but about 8 percent last year. So if you think you're paying more for government and getting back less, you're right. Anti-poverty spending is not to blame. Discretionary spending on the poor has declined by 48 percent from its peak. Nor is the bureaucracy increasing. The number of non-military federal employees is about what it was in 1975, while U.S. population is up about 15 percent.

It's true that state and local government spending is up, but much of that has gone either to make up for reduced federal aid, or to pay for the same runaway areas of interest costs, retirement benefits, and medical costs.

What, then, to do?

Rather than ritually bashing government, we should address the real problems. The only way to get interest costs down is to get the deficit under control (though we will be paying off the costs of the 1980s debt spree for a long time). The only way to contain out-of-control medical costs is to have a coherent, universal system, like every other advanced nation. And the best way to relieve excess tax burdens on wage earners would be to restore greater tax progressivity.

As for Social Security, we need drastic reform both in how it is paid for and what it covers, so that Social Security is financed progressively and serves most working age people as well as retired ones.

Robert Kuttner writes regularly on economic matters. 9

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