In the U.S. (and elsewhere I’m sure), there are constant arguments about little things dealing with the economy. There are arguments over what the marginal tax rate should be for high-income earners. It is typically an argument over 35% vs. 40% (maybe higher for Bernie supporters).
There are arguments over certain budget items. There are arguments over “sequestration” and non-existent cuts to the military. There are arguments over funding Planned Parenthood, which the Republicans aren’t even capable of ending.
It mostly adds up to insignificant amounts, and usually there aren’t any actual cuts anyway. Sometimes it is good to take a step back and look at the big picture. If you wonder why middle class America is feeling poorer these days, this might help answer your question.
Instead of looking at taxation, let’s look at government spending. While taxation itself isn’t unimportant, government spending gives us a better idea of how much capital is being spent by government. When the government spends money, it misallocates resources.
This has to be the case. Unless the government is spending your money exactly the same way you would have spent it if you had been allowed to keep it, then it is a misallocation. It is being spent according to politics and bureaucracy and not according to consumer demand.
When looking at government spending, we can’t just look at the federal government. We have to look at everything. For the United States, the total government spending is approximately $6.7 trillion.
The federal government spends about $4 trillion, but some of it is funneled to state and local spending. If you account for intergovernmental spending, it drops to $3.3 trillion, but then you have to count it at the state and local level. The total state spending is $1.6 trillion and the total local spending is $1.8 trillion. That is a grand total of $6.7 trillion, give or take a hundred billion. That is about 36% of GDP.
By using total government spending, we are accounting for the resources being sucked away from us via debt and inflation. This is the main reason it is more appropriate to use total government spending as opposed to total tax receipts.
In the U.S., there are approximately 125 million households. If you divide $6.7 trillion by 125 million, that comes out to $53,600 per household.
You may not think you pay that much, but that is the average for each household. It is being paid for in some form, whether it is through lower wages, higher product prices, depreciating money, various taxes, etc.
Imagine if all of government stuck to basic functions of infrastructure, defense, a court system, and the police. As a side note, I am not saying that these things can’t be done outside of government, but that is not the point of this piece. It is a big picture piece on the economy.
Imagine if that basic government spent $13,600 per household instead of $53,600. I understand that it would mean no more Social Security, Medicare, Medicaid, state school system, and a lot of other things. (As another side note, we would actually gain even more wealth by not having so many of the alphabet agencies that regulate us.)
Still, what would your family do with an extra $40,000 per year? If there were still any poor people left, don’t you think they could be easily helped by people with so much more disposable income?
The total government spending is approximately equal to the median household income. If you can’t figure out how this is possible, give it some thought. You never see some of the money in the form of income that the government spends (employer taxes, corporate taxes, debt).
You already get by with your income as it is. If the major government programs went away, maybe your expenses would increase for certain things, such as school if you have children. If you have a government pension, then you could initially lose out if all pensions went away. (I understand this is not politically realistic right now.)
Even if your expenses increased by $20,000, you would still have an extra $20,000 remaining, and we aren’t even accounting for the possible windfall from fewer government regulations. If you had this much extra, you could donate generously to charity, save for retirement, and live a better lifestyle. Now imagine 100 million other households doing the same. Imagine this wealth compounding over time.
The reason we are feeling so poor right now (relatively speaking) is because the government is sucking capital away from us. It is hurting savings and capital investment. This makes us poorer than we otherwise would have been.
If the economy can keep chugging along with so much government spending and regulation, imagine how rich we would be if the total size were reduced to a fraction of what it is now. Our living standards would be beyond our current comprehension.