In the pre-World War I era, the fiscal burden of government was very modest in North America and Western Europe.
Today, by contrast, every major nation has an onerous income tax and the VAT is ubiquitous. These punitive tax systems exist largely because – on average - the burden of government spending now consumes more than 40 percent of GDP.
To be blunt, fiscal policy has moved dramatically in the wrong direction over the past 100-plus years. And thanks to demographic change and poorly designed entitlement programs, things are going to get much worse according to BIS, OECD, and IMF projections.
While these numbers, both past and future, are a bit depressing, they also present a challenge to advocates of small government. If taxes and spending are bad for growth, why did the United States (and other nations in the Western world) enjoy considerable prosperity all through the 20th Century?
I sometimes get asked this question after speeches or panel discussions on fiscal policy. In some cases, the person making the inquiry is genuinely curious. In other cases, it’s a leftist asking a “gotcha” question.
I’ve generally had two responses.