We've Got a Taxing Problem...

The taxing and overall spending data below is from the OECD statistics portal. Military spending data is from the World Bank. Non-defense spending data was provided by the power of subtraction.

The upper table lists each OECD member nations' taxing and spending in rank order. Lower rankings mean lower taxing or spending. The lower table is the raw data relative to GDP.

As it can be plainly seen, the US does not have a spending problem, and certainly not a non-defense spending problem. We DO have a taxing problem and a military-industrial complex problem. With the third lowest taxes and the second highest military spending, it is no wonder we have a large debt. Our overall and non-defense spending are both well below the norm, especially for a nation as rich as ourselves, and are not significant contributors to the gap between our spending and revenues.

 

Spending/Taxation Rank (1 lowest, 34 highest)

 

Country	Tax	Spending	Military	Non-defense
Australia	5	5	24	5
Austria	27	27	5	29
Belgium	32	31	10	31
Canada	12	15	16	16
Chile	2	2	32	1
Czech Republic	19	12	13	14
Denmark	34	34	19	34
Estonia	18	7	23	6
Finland	28	32	20	32
France	29	33	27	33
Germany	22	18	14	17
Greece	11	30	30	27
Hungary	25	24	7	26
Iceland	21	19	1	20
Ireland	8	20	3	22
Israel	17	16	34	10
Italy	31	26	21	23
Japan	7	11	8	11
Korea	4	3	31	3
Luxembourg	23	10	4	12
Mexico	1	1	2	2
Netherlands	26	25	17	25
New Zealand	14	23	11	24
Norway	30	14	22	15
Poland	15	13	25	13
Portugal	13	22	26	21
Slovak Republic	10	6	12	9
Slovenia	24	28	18	28
Spain	16	17	9	18
Sweden	33	29	15	30
Switzerland	9	4	6	4
Turkey	6	8	28	7
United Kingdom	20	21	29	19
United States	3	9	33	8

Spending/Taxation as a fraction of GDP

 

Country	Tax	Spending	Military	Non-defense
Australia	25.6	36.9	1.9	35.0
Austria	42.0	50.5	0.9	49.6
Belgium	43.5	53.3	1.1	52.2
Canada	31.0	44.1	1.4	42.7
Chile	19.6	24.7	3.2	21.5
Czech Republic	34.2	43.0	1.2	41.8
Denmark	47.6	57.6	1.5	56.1
Estonia	34.2	38.3	1.7	36.6
Finland	42.5	55.0	1.5	53.5
France	42.9	56.0	2.2	53.8
Germany	36.1	45.3	1.3	44.0
Greece	30.9	51.8	2.7	49.1
Hungary	37.9	49.6	1.0	48.6
Iceland	35.2	47.3	0.1	47.2
Ireland	27.6	48.1	0.6	47.5
Israel	32.4	44.6	6.8	37.8
Italy	42.9	49.9	1.6	48.3
Japan	27.6	42.0	1.0	41.0
Korea	25.1	30.1	2.8	27.3
Luxembourg	37.1	42.0	0.6	41.4
Mexico	18.8	22.8	0.5	22.3
Netherlands	38.7	49.8	1.4	48.4
New Zealand	31.5	49.5	1.1	48.4
Norway	42.9	43.9	1.6	42.3
Poland	31.7	43.6	1.9	41.7
Portugal	31.3	49.3	2.0	47.3
Slovak Republic	28.3	38.2	1.1	37.1
Slovenia	37.5	50.7	1.4	49.3
Spain	32.3	45.2	1.0	44.2
Sweden	45.5	51.2	1.3	49.9
Switzerland	28.1	33.8	0.9	32.9
Turkey	25.7	39.0	2.3	36.7
United Kingdom	34.9	48.5	2.6	45.9
United States	24.8	41.7	4.7	37.0
OECD Average	33.8	49.5	1.7	47.8

America is not a family

One particular analogy people bring up when talking about the government's budget is a "family" analogy.  They will claim that we are like a family with $40,000 in income each year, but who is spending $70,000 and has $250,000 in debt, or some such figures.  There are multiple reasons, however, that this analogy is flawed and leads to false conclusions.

First, macroeconomics.  A family is tiny relative to the economy.  Regardless of how diligently they save or how wildly they ring up the credit cards, the overall economy does not change meaningfully.  This means that the chances that they will be laid off, hired, or see a big boom in orders at their shop are unaffected by their own spending habits.  The government, however, is not small relative to the economy, making up more than a third of it.  If the government slashes spending...well, there is a lot less spending.  People get laid off.  Tax revenues go down.  People wind up on the dole.  After all is said and done, it is not even clear that the money saved via the reduced spending isn't lost completely due to the reduced revenues and new safety net spending.  Even if the government comes out ahead, it is only marginally so, and at the great cost of millions being laid off.

But won't the private sector pick up the slack?  Not when we are in a liquidity trap.  If you don't know what that is, you simply do not understand what has happened in our economy the last four years.  The mechanism by which the private sector normally "picks up the slack" is by falling interest rates, which stimulate investment.  But when you are in a liquidity trap and risk-free interest rates are already essentially zero, they can't fall any further (since you can hold cash instead, they can't really go negative).  So if the government cuts spending in a liquidity trap, it just adds more slack to the economy, and employment and GDP fall.

A second problem with the family analogy as normally presented is that those who present it seem to think the family income is fixed.  They never pause to consider that one solution might be to work more.  Indeed, a nearly perfect analogy exists between the family members' hours worked and tax rates, as both are essentially proportional to income and more or less voluntary.  Given that we have the third lowest taxes in the OECD, perhaps our "family" problem is that mom and dad only work 25 hours a week each.  Likewise, spending on automobiles for the family and defense for the government are pretty similar in size.  Since our defense spending is second highest in the OECD (per GDP), perhaps the family's problem is that mommy drives a $40,000 SUV and daddy has a BMW.

Yet just about every time someone presents this analogy, they never consider the macro effects, ignore the SUV and beemer, and not only dismiss the idea that mom and dad are lazy and could solve the entire problem if they just worked full time, but actively argue that mom and dad are just so hard-put that if they worked more, their productivity would drop so much that they would earn even less overall!    So instead of addressing these issues, the family must raid Junior's college fund, ignore the leaking roof, and skip their annual check-up.  Clearly, that's a one-way ticket to prosperity.