The Price of Civilization_ Reawakening American Virtue and Prosperity - Jeffrey D. Sachs [95]
Figure 11.6: Gross Public Social Spending as a Percentage of GDP, 2010
Source: Data from OECD Social Database.
The main difference in the fiscal ends is a divergence in the vision of government in the United States and Europe. In the United States, the anti-government politics that became the dominant political thrust of the last thirty years blocked an increase in total tax collections as a share of GDP. The United States therefore cut back on public investments in education, science, energy, and infrastructure, and squeezed outlays for the poor, just when they were most urgently needed.
Anti-tax ideologues in the United States claim that Europe pays a heavy price because of its higher taxes. This is hard to swallow, however, given that northern Europe is ahead of the United States on most indicators of material well-being: educational performance, subjective well-being, poverty rates, life expectancy, and so forth. Yes, it’s true that GDP per person is still higher in the United States than in most of Europe (though not higher than in Norway, for example), but that really doesn’t prove much about taxes or even about social well-being. U.S. GDP per person may be higher, but the average living standard of the median citizen is not: much of America’s higher GDP reflects higher health care costs, longer work hours and less leisure time, longer commutes, more military spending, and a high proportion of income at the very top of the income curve.
More important, the higher GDP per person predates any differences in tax systems, stretching back to the late nineteenth century. In 1913, for example, America was 52 percent richer than Western Europe, and in 1998, it was also 52 percent richer than Europe.19 America’s long-standing advantage in GDP per person has been in its geography rather than its economic system. America has vastly more land and natural resources per person than Europe does. This has been the source of its enduring advantage (just as Norway’s high oil and gas earnings account for its higher GDP per person than in the United States). Americans have bigger houses, bigger farms, and bigger cars, not to mention more natural capital per person in the form of oil, gas, and coal. These have been the sources of America’s higher income per person stretching back to the nineteenth century.
The real point for us is that despite America’s vast natural resource advantages, it has actually ended up with a lower average quality of life in many ways than in northern Europe. Yes, America’s GDP per capita is higher, but it is not bringing widespread benefits for the society. To ensure that the benefits reach more of society, the United States will have to invest more in public outlays for education, infrastructure, and the other priorities that I’ve identified.
Budget Choices in a Federal System
Americans will surely need to pay higher taxes to balance the budget and “pay for civilization.” Yet another thought arises: why not allow tax and spend decisions to be made at the state and local level? Areas that would like to provide more public goods could do so, and areas that are averse to public goods could organize their states and cities as they see fit. To some extent, of course, this already happens. The federal government accounts for about 65 percent of total revenues, while state and local governments account for 35 percent.20 There is a huge variation in taxes per citizen across the states. My own state of New York has an income tax that rises to a top rate of 9 percent, and New York City adds another 2.9 percent. The state sales tax rate is 4 percent, plus another 4.875 percent in the city. New Hampshire, by contrast, has neither an income tax nor a sales tax.21
Economists use the concept of “fiscal federalism” to denote the situation in the United States, Canada, China, India, and elsewhere, in which governments