President Obama’s plan to increase the tax rate on those making more than $250,000 has further fueled a national debate about the virtue of raising taxes on the “rich.” But this debate puts the cart before the horse. The real question is not how much we want to tax, but how much we want to spend. After all, the more a government spends, the more it has to tax or borrow.

There is a global trend in government spending as a percentage of gross domestic product, and that is up, up, up. Fifty years ago all governments in the United States — federal, state and local — together spent about 20 percent of the G.D.P. In 2010 that figure could approach 35 percent. This pattern is generally true of Western democracies. Thirty years ago, they typically spent less of their G.D.P. than they spend now. Today Britain exceeds 40 percent. France and Italy border on 50 percent and the Nordic countries spend even more.

So Americans have a choice. We can spend 40 percent of our G.D.P., and provide services like Britain’s national health care. If we spent like the Nordic countries, we could provide government-paid maternity leave, subsidize college tuition and offer a health plan that was close to free for all Americans. But this would leave significantly less money for taxpayers to spend as they want.

Some people might assume that we could afford the maximum amount of government largess and still avoid pain for most taxpayers by simply collecting more taxes from the “rich.” Not a chance. Let’s assume, based on historical patterns and President Obama’s suggested spending, that at some point, the spending of all governments in the United States, federal and local, could add up to 40 percent of G.D.P. Mr. Obama proposes to increase the tax rate on income over $250,000 to 39.6 percent. The billions of dollars a year raised by the higher rate won’t begin to cover the trillion or so a year in increased government spending. Nor would current state and local taxes support their share of that spending. Therefore taxes would have to be raised on Americans making less than $250,000.

One other option would be a national value-added tax on goods. But this would ultimately take its hardest toll on lower- and middle-income consumers.

Even if tax increases are limited to the so-called rich, Mr. Obama’s plan, compounded by state and local taxes, could slow the overall economy. Maybe we have not reached our limit yet. Maybe we can have a tax rate of 50 percent to 60 percent on income above $250,000 and people will still work. But at some stage the law of diminishing returns sets in.

The choice to spend less than 40 percent of G.D.P. on government services is not as easy as it once was, because the federal government has already assumed so much responsibility for shouldering the costs of health care and retirement. Fifty years ago, spending on Social Security, pensions and health care was a relatively small fraction of the total federal budget. Medicare and Medicaid did not even exist until the 1960s. Today, taxpayers are footing the bill for far more government programs. But we simply cannot raise enough money in taxes from the rich to pay for the programs the president wants.

So we basically have two options: raise taxes on the middle class, or demand that federal, state and local governments spend less.

Bob Packwood, a former chairman of the Senate Finance Committee, was a Republican senator from Oregon from 1969 to 1995.

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This article was first published in the New York Times online on 10 May 2009.
 
Articles in the Perspectives series plus a large library of books, studies, speeches, articles and DVDs on a wide range of public policy issues can be found at nzbr.org.nz.

 
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