Macroeconomic Dimensions of Public Finance: Essays in Honour of Vito Tanzi

By Mario I. Blejer; Teresa Ter-Minassian | Go to book overview

19

MANAGING UNSUSTAINABLE TAX BURDENS IN THE US

A historical perspective 1


John H. Makin

INTRODUCTION

Contemporary discussions of government expenditure and the taxes levied to pay for them turn very quickly to analysis of their impacts on the economy. Government spending and the types of taxes levied to pay for it affect human behavior. Perhaps a fundamental principle of public finance is that extraordinary levels of public spending that result in extraordinary tax burdens are ultimately not sustainable. People find ways to avoid paying taxes that become too burdensome by eroding the tax base.

This historical essay explores the reactions of taxpayers to overly burdensome levels of taxation in sixteenth-century Holland, and in America before and after the Revolutionary War. Though neither modern micro economics nor the macro fiscal policy principle that emerged in the 1930s had been articulated or perhaps even imagined when the Dutch rebelled against the oppressive taxation of Phillip II of Spain or when the American colonists rebelled against the efforts of a British parliament to tax them, the responses of these early taxpayers were fully consistent with the principles of modern public finance. Likewise, the struggles of Alexander Hamilton, Thomas Jefferson and their successors to manage the debts incurred in the Revolutionary War and the War of 1812, brought forth much of the rhetoric heard in contemporary discussion of deficits, debt and taxes. A brief recapitulation of these events may help to remind us that our struggles today are not unique. The struggle to constrain government spending and to discover the least obtrusive way to finance it has been with us for centuries and of course will continue to be with us as long as governments exist and need to finance wars, provision of public goods and the whims of public servants.

As a new nation, America confronted the realities of war, debt, and taxes when it had to cope with the massive debts created by the Revolutionary War. In many respects, though, the origins of America itself lay in the relationship between war, debt, and taxes in seventeenth- and eighteenth-century Europe

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