High taxes doesn't mean big government. And low taxes doesn't mean small government.

I've never, ever understood the assertion that high taxes = big government:

• It is possible to imagine an economy with high taxes that are used to redistribute income with only a minimal distortion of markets.
• It is possible to imagine an economy with low taxes that are used to pay the salaries of a small number (it wouldn't take very many) of functionaries whose job it is to distort markets as much as is humanly possible.

(This post is provoked/inspired by this one by Mike Moffatt.)

Comments

[Mace]

"It is possible to imagine an economy with high taxes that are used to redistribute income with only a minimal distortion of markets."

Yes, it's always possible to IMAGINE this, but it's also possible to imagine this causing significant changes in incentives.

It is always possible to engage in wishful thinking as well.

[SvN]

big government = market distortion???
small government = efficient markets???

I don't think that these are innocuous assumptions.

Example 1: A century ago, governments had very small economic roles in most western countries (they accounted for something like <10% of GDP in peacetime). However, most of their activities were financed by high taxes on international trade. That seems distortionary to me.

Example 2: Consider a government that moves from a "big brother" style system of industrial subsidies and sectoral investment banks administered by a large, central bureaucracy to a leaner, smaller system in which they decree a cap on legal price increases and that all workers have jobs for life. That also seems distortionary to me.

[Mike Moffatt]

I hope it was more inspired than provoked.

Anyhow, you're absolutely correct - there's a second underlying assumption there (that the 'size' of government is proportional to the amount of money it spends). I'm not sure why I didn't see it, but I should have.

[SvN]

Thinking about this in historical perspective, it is probably more correct (until the late 20th century) to say that
"High taxes = Big Army"

[Adam]

"It is possible to imagine an economy with high taxes that are used to redistribute income with only a minimal distortion of markets."

It's possible to imagine an omnipresent state that watches us day and night and has the power to control every aspect of our lives, but leaves us alone and lets us do whatever we want. It's pretty unlikely. If the government takes in a lot of money, politicians and bureaucrats will use it to enlarge the state.

[piglet]

The terms "big and small government" are purely ideological in nature. There is no consistent definition what makes government "big" or "small". That's why these terms are so effective for propaganda reasons. When people start really thinking about it, most of them will probably agree that it matters what the government does with its money, not just how much it spends. With the same level of taxation, you can either run a police state or, say, provide for a good education system.

And how would you describe a police state with low taxes financed by borrowing? Would that be "small government"? Oh, I see, that's called "the Bush administration". ;-)

[sf]

It is possible to imagine a pig that flies.