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Friday, April 22, 2011


  John Redwood had this on his blog yesterday
Today we see figures for the state of the public finances over the last financial year, 2010-11.

Current public spending is up by 5.1%. Tax revenues are up by 6.9%. Additional Public Sector Net borrowing after financial sector interventions falls from £156.5 billion 2009-10, to £141 billion 2010-11.
  So only a very minor improvement over the last year and virtually all due to tax rises. Actual spending has gone up MORE than the rate of inflation. The effect of tax rises are unsustainable because while they initially raise money they have a negative overall effect on productivity over time. So at best a year wasted.
  By comparison this article comes up with a quite different optimum rate of tax. Personally I think it underestimates the extent to which over large government, by creating regulations so that government employees have something to do (most "environmentalism, health and safety regs and building controls) have a negative effect, 20 times the actual cost of paying such people. I also think it overemphasises the positive role of government - defence and maintaining the rule of law. Defence, as defence rather than threatening other nations, is a function of the conventional military threat from others, which is currently close to zero & things like the invasion of Iraq actually had a negative effect on our security by recruiting people to terrorism.. The rule of law aspect is less clear cut - state action may or may not have encouraged the break down of law and much of the legal system may not be optimally constructed to deter crime. Certainly the growth in lawlessness correlates quite closely with the growth in the state share of GNP and it cannot be assumed this is a coincidence.

    Thus I think the author's optimum should actually be the highest figure. I would make an exception of allowing another 1% of GNP to be devoted to technology X-Prizes but see no sign of that being an option.

    The article deals with America but the laws of economics are not significantly altered by national borders. Some excerpts:
What is this optimal level of government? A reliable econometric model developed for this study finds that:

In order to maximize economic growth, the average rate for federal, state and local taxes combined should be between 21.5 percent and 22.9 percent of gross national product (GNP).....

Real GNP increased at a compound growth rate of 3.5 percent per year from 1949 to 1989. If an average tax rate of 23 percent had been in effect throughout the 40-year period, the growth rate would have been 5.56 percent per year. As a result:
Real GNP would have been $13.6 trillion by 1989.  (by 2011 ie after 62 years GNP, with a 2.06% excess growth would be 3.5 times what it is - Britain has had a lower 2.5% growth rate and could expect to have done better).....

In the 18th century, federal, state and local taxes were less than 5 percent of gross national product, and 95 percent of federal revenue came from tariffs.

In the 19th century, tax revenue as a share of GNP gradually rose, but it never exceeded 10 percent.....
Many excuses and rationalizations for the productivity slowdown have been offered, including inadequate physical and human capital formation, too much regulation (especially environmental regulation), low research and development expenditures and the energy crisis. There is considerable evidence, however, that the underlying cause is the growth in the size of government since World War II and the accompanying increase in taxes.
The underlying cause of our productivity decline is the growth in the size of government.....

When resources are allocated privately, they tend to be allocated to the highest-valued use as entrepreneurs and capitalists seek the highest economic rate of return on their assets. When politicians (or central planners) allocate resources, they seek the highest political return (e.g., votes and campaign contributions).
Additionally, public choice literature shows that collective choice (through government) leads to the overproduction of public goods and the expansion of "rent-seeking" activities....

The optimal size of government is the size that maximizes economic growth.....

The optimal (growth-maximizing) average rate for federal, state and local taxes combined is between 21.5 percent and 22.9 percent of GNP.

The optimal tax rates derived from this model are consistent with previous studies that conclude that an optimal size of government is 19 percent of GNP and that government spending of 20 percent of GNP maximizes productivity. All of these estimates imply that the economic growth rate and hence the level of GNP is far below what would have been achieved had the nation's total tax rate been kept at its 1949 level.....
Why Have Voters Allowed Such Private Wealth Destruction?

One might ask why citizens have allowed this destruction of private wealth through excessive taxation and why politicians have given up $11.6 trillion in real taxes since 1949. There are several explanations. First, and perhaps foremost, people generally are cognizant only of their actual earnings, not their potential earnings. They do not miss the lost 2.1 percent growth in real output because they never had it. Also, many are ignorant of the intimate link between taxation, incentives and economic efficiency. Moreover, because of the compulsory deduction of taxes from wages, many workers are unaware of their actual tax burden. Politicians have been ingenious in hiding taxes. Most people have no idea how much of their total income actually goes to taxes because the taxes are hidden
And as evidence that the government funded BBC takes its role as the propaganda arm of Big Government
very seriously and intends to make sure it keeps the public as ignorant of the intimate link between taxation, incentives and economic efficiency as possible see Redwood's column today.
Yesterday’s news broadcasts usually referred to the 0.2% increase in retail spending in March. I did not hear any BBC news broadcast mention the fact that public spending was 5.1% higher in 2010-11 than the previous year, though that too was announced yesterday.
The BBC is not only an enemy of our national wellbeing it is direct and powerful player on the political scene with undeniable party biases. Its continued overwhelming control of the mainstream media destroys democracy - BBC delenda est

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