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The long-term battle between the private and public sectors

Posted: Thursday, January 11, 2001

NEW YORK (AP) -- You seldom hear a good proposal to cut taxes that isn't in some way associated with economic engineering, which in today's economy means tax cuts as a way of stimulating the economy.

It goes like this: If the economy is overheating you raise taxes and take money out of the private sector; if the economy is threatening to fall into recession you lower taxes and put money into circulation.

President-elect George W. Bush has all but declared the latter a good reason to have his proposed tax cuts moved higher on the agenda, the better to spread benefits and lessen the impact of the current slowdown.

But what about a tax cut simply out of fairness to taxpayers? Aspects of that reasoning are contained in Bush's tax goals, but like most such proposals, it is now likely to be sold mainly as an antidote to recession.

Conceding the importance of avoiding inflation and recession, over the longer term it's at least important to watch the changing equation between private and government sectors.

It's been tilting toward government, whereas the productivity gains that raise living standards is very much a consequence of private-sector investing.

Economists Gary and Aldona Robbins, sent 1960s and 1990s tax data through their analytical machine and found there was no contest -- the 1990s (and beyond) took a bigger bite from incomes than in the 1960s.

In the 1960s, taxes consumed less than 35 percent of national income; in the 1990s the percentage had risen to 37.1. Not all the increase was at the federal level; bigger state and local budgets contributed too.

Working at their own Fiscal Associates, the two ex-Treasury economists found federal, state and local taxes in 1997 took 56.4 cents of the dollar value of private business output. In 1991, it was 48.3 cents.

In short, government grows, the private sector shrinks, a situation that hardly coincides with the ideas proposed by the founding fathers, and probably at odds also with the impression held by millions of Americans.

As taxes grow, government benefits of course expand, but inevitably so does the matter of fairness, the marriage penalty, the loss of family businesses important among them. Myriad inequities arise and, privacy advocates insist, the potential for loss of personal freedom also rises.

The Robbins' analysis, published during the summer by the Institute for Policy Innovation, a Lewis, Tex. think-tank, gets merged into the current political discussion over tax cuts to avert recession.

But the Robbins take a longer view too.

Tax burdens, Gary reminds us, cut short the 1960s expansion. Now, he says, they have the potential to discourage saving and investing in the future -- in raising productivity and lifting living standards.

If businesses shy from expanding, he would blame rising marginal tax rates as ''the one factor reducing U.S. attractiveness as a place to invest.''

End Adv PMs Thursday, January 11.



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