The obituaries of the 95th Congress all carry the same theme: it was the year of the "tax revolt," the year that Congress pampered the "haves" and ignored the "have nots."
Allowing for exaggeration, it's hard to read the results otherwise.
Congress gladly shunned both welfare reform and national health insurance. It riddled (and ridiculed) the White House's tax "reform" proposals and enacted tax cuts favorable to the upper middle class and the wealthy. Only a year earlier, the same Congress had passed an economic "stimulus" package with precisely the opposite tilt, benefiting the poor the most.
To attribute the dramatic shift simply to the "tax revolt," though, is to miss a deeper change. Beyond the immediate pressures lies a new anti-government ideology, formulated by economists and political scientists. Theirs is not only a visceral opposition to "big government," but also a conviction that the size of government - reflected in its taxing and borrowing - represents a dangerous drag on the economy's growth.
The tesis is unproven, but do not dismiss it as irrelevant intellectualizing.
Ideas are among the great engines of history. They give people a sense of purpose and instill them with the self-confidence to act. Increasingly respectable, the new anti-government ideology promises to make future strugles over government spending - including, probably, national halth insurance in 1979 - more contentious than ever.
The new ideology's latest manifestation comes in a lengthy study from the National Planning Association, a Washington research group, on Welfare and Efficiency.
The study examines six economies (Denmark, Germany, the Netherlands, Norway, Sweden and the United Kingdom) and concludes that, with exception of Germany, welfare systems in these countries have become too costly. The unsubtle message is not to let the same thing happen here.
As told, the story is gruesome enough. To finance welfare payments, taxes have been raised too high. This discourages work and - along with generous sick leave and unemployment benefits - encourages leisure. In the Netherlands, the first six months of unemployment benefits amount to 80 percent of previous earnings. In Sweden, some large companies report absenteeism rates around 20 percent. Likewise, high taxes squeeze industrial profits because many firms, depending heavily on exports, cannot easily control prices.
A vicious circle starts. Higher taxes prompt higher wage demands, because workers want to maintain after-tax incomes. This intensifies the profit squeeze or makes product prices increasingly uncompetitive. Government them resort to protectionism or subsidize ailing industries. But the subsidies cause higher taxes or inflationary aggravates the wage-price spiral.
The story, of course, needs to be qualified. As Theodore Geiger, the study's author, says, the United States is still far from the European welfare state. Here, welfare means payments to specific, usually "disadvantaged," groups; the unemployed, the poor, the aged and the disabled. In Europe, the welfare system provides payments not only to these groups, but to everyone for free (or almost free) health services, family allowances and higher education.
Consequently, U.S. government spending and taxes remain well below European levels, as the following table shows. The first column indicates national and local spending as a percentage of national and local payroll and income taxes for a family of for with median manufacturing earnings. Column three gives the marginal (i.e., additional) tax rate applied to the next 10 percent of income for the same family. work and investment - Geiger comtends that top-heavy welfare systems can prtove self-defeating. Growth slows, leaving less wealth for public and private use. And there's no denying that Congress used the same rough logic to squelch new spending and to justify tax cuts on capital gains for the upper middle class. These steps were said to be needed to spur risk taking.
No one can estimate the significance of the new antigovernment ideology, but, like the "tax revolt," it may simply mean s standoff between lower taxes and higher spending. Even the $18.7 billion tax cut will not fully offset the increase in social security taxes scheduled for 1979 or the impact of inflation on average tax rates. Most families will pay more of their income as federal taxes in 1979 than in 1977.
The reasons for the standoff may be more deep eated than is commonly suspended. The late Fred Hirsch - a British economist and journalist - once asked the question: "Why has modern society become so concerned with [income] distribution - with division of the pie - when it is clear that the great majority of people can raise their living standards through production of a larger pie?"
Hirsch had a sobering answer. As people satisfy their material wants, they focus increasingly on relative income - their income in relation to that of others - because they believe higher relative standing entitles them to status symbols once available only to the elite. But this is an illusion. Either the status symbols are genuinely scarce or, if everyone can have them, they are less worth having. Example: the college degree.
But the lure of equality remains. If Hirsch is right, that underlies the drift toward the welfare. He called it the ultimate "frustration machine."