What are Taxes for?
Americans have always hated taxes. Our revolution began when British colonists in North America revolted against the taxes levied by the Crown to pay for the costs of the Seven Years’ War against the French. During the second half of the nineteenth century a larger and more muscular United States government relied on revenues from tariffs on trade, not taxes on American incomes, to finance infrastructure development at home and military expansion abroad. Since the late 1970s, Americans have similarly supported efforts to lower taxes and reduce the intrusion of “big government” on their personal resources. Political candidates across the country today – Republican and Democrat – must promise “no new taxes” if they want to have a chance at election. Freedom from taxation seems as American as apple pie.
In an era of diminished resources and increased competition, politicians are looking to recapture some elements of the extraordinary American economic growth experienced during the decades after the Second World War. Between 1945 and 1970, Americans from almost all classes and races lived many times better than their predecessors. Incomes rose, health improved, and consumption sky-rocketed. Depression-era citizens who scraped by in the 1930s and sacrificed to defend their country in the 1940s were succeeded by Baby-Boomers who lived in large suburban houses, worked in well-paid professions, and enjoyed fancy family recreations. The Great American Economic Growth of the postwar era was a tide that lifted virtually all boats.
What politicians and voters forget is that America’s postwar economic growth was not inevitable. The United States emerged in 1945 as the strongest economy in the world because of huge and unprecedented investments that the federal government made at home as a central part of the war effort. These government investments included direct spending on factories, research (especially atomic weapons), and training (often on university campuses.) The United States became the workshop of the world, with the best products and the best minds, because the government gave direct financial support for these endeavors.
This story continued, to the great benefit of Americans, after the end of the war. The United States economy “took off” because federal and state governments continued (and often expanded) wartime investments through the GI Bill that subsidized education and home ownership, government sponsorship of scientific research with defense and industry potential, and massive infrastructure projects – particularly the Interstate Highway System created under Republican President Dwight Eisenhower. By the 1960s rural and urban American citizens had access to electricity, decent roads, and educational opportunities unthinkable just three decades earlier. Government investment made new productivity and mass consumption possible.
Where did American federal and state governments get the money to invest in economic growth? Taxes! University of Chicago historian, James Sparrow, has a forthcoming book (“Warfare State”) that shows how Americans who returned from war in 1945 undertook to pay more taxes than any prior generation of citizens. The data is striking. In 1940 just over 10% of Americans in the labor force paid federal personal income taxes. By 1945 more than 60% paid income taxes. In 1940 less than 2% of total personal income in the country was absorbed by federal income taxes. By 1945 more than 11% of personal income was paid in taxes. The 1945 numbers remained consistent until the 1970s when they began to drop.
The massive growth of tax revenue after the Second World War was not always well-managed. Some of it was wasted. Some of it was misused. Nonetheless, one cannot escape the conclusion that tax-financed investments were crucial for American economic growth. The taxes paid for education and home ownership among veterans through the GI Bill; they paid for the research that created atomic weapons, computers, and the Internet; they built the roads and airports that carry our commerce.
The point here is not that all taxes are good, or that taxes should be raised at all in 2011. Those simple judgments are dangerous. The same is true, however, for simple judgments in the opposite direction. All taxes are not bad, and taxes should not be cut at all costs – especially if the costs involve crucial investments in economic growth. How can any leader expect to encourage improved living standards if he or she does not invest in educating the young, supporting creative endeavors, and building high quality infrastructure? Those basic public investments, the source of American economic growth after 1945, need public money.
Americans should cut bloated government and reduce excessive taxes in many areas. This effort will only bring renewed economic growth if citizens simultaneously ask themselves where they really want to spend tax money, and where they really need investments for a bright future. Instead of simple slogans about “no new taxes,” Americans need a broad and informed discussion about the most important places for public investment. Americans then must use taxes to finance those crucial investments.
Freedom requires some government taxes. It requires public financing for necessary public goods that enhance the lives and the economic potential of citizens. We must think, therefore, of taxes as investments: increasing our commitment to those that produce high returns, cutting those that do not perform.
Citizens are investors in their society. They should discuss their financial future in those terms. They should choose leaders who emphasize investment, not simple tax cutting across the board. Wielding the ax to public budgets with little discrimination will impoverish everyone. Targeting investments for future growth and improvement, and then using tax money to pay for those investments, is the best chance Americans have at re-capturing some of their postwar prosperity.