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We don’t agree that government is a luxury good – at this level of income

Summary:
Paul Johnson, of the IFS, is here saying that government is a luxury, or superior, good:Even so, with political will we could, if we wanted, raise the level of tax closer to the European average. We can afford to. One approach would be to raise taxes gradually as incomes rise — slowly enough that people are left with more money in their pockets than before, and quickly enough that the state’s budget rises as a fraction of national income. As we get richer not only can we spend more on public services, we can spend more as a fraction of our income on them.Note what luxury, or superior, means here. It’s a technical term meaning “We spend more of our incomes on this as our incomes rise”. A normal good is something we spend the same portion on, an inferior less. Johnson is indicating that

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Paul Johnson, of the IFS, is here saying that government is a luxury, or superior, good:

Even so, with political will we could, if we wanted, raise the level of tax closer to the European average. We can afford to. One approach would be to raise taxes gradually as incomes rise — slowly enough that people are left with more money in their pockets than before, and quickly enough that the state’s budget rises as a fraction of national income. As we get richer not only can we spend more on public services, we can spend more as a fraction of our income on them.

Note what luxury, or superior, means here. It’s a technical term meaning “We spend more of our incomes on this as our incomes rise”. A normal good is something we spend the same portion on, an inferior less. Johnson is indicating that government is that superior good, something we can - and thus he implies should - spend more of our income on as incomes rise.

We disagree.

A further technical point being that pretty much everything is an inferior, normal or superior good at some level of income. It’s all Maslow’s Hierarchy all over again, what we desire changes as we sate one such and then move on to being able to deal with the next want.

We agree entirely that at a certain level of income then government is indeed that luxury good. We don’t need to get far above mere and simple subsistence to want to pay people to keep the levels of Thugs and general dacoity down. We might well be willing to pass more of yet higher incomes through government to create that system of social insurance. But, as with everything in Maslow’s Pyramid such tastes do get sated at some point. And something will gradually switch from being a superior good to a normal and then invert to an inferior. Where, as we get yet richer again, we spend ever less of our continually rising income on it.

We would, in fact do, argue that this happened some time ago with government. We’ve already more than enough of it. And as incomes rise off into the future - technology does march on - then government should righteously shrink as a portion of GDP. We’ve got enough, we have a social safety net, we’ve got people regulating the things that need to be regulated. Thus we should be spending ever more of our growing incomes on those things which are, at this level of income, luxury or superior goods, reducing our expenditure on those inferiors.

A bit more of that freedom and liberty sounds good to us.

Another way to put this being that we’ve created that rootstock necessary for human flourishing already. Time now for a bit more of that fructifying created by more choice and less government.

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Tim Worstall
Tim Worstall is a British-born writer and Senior Fellow of the Adam Smith Institute. Worstall is a regular contributor to Forbes and the Register. He has also written for the Guardian, the New York Times, PandoDaily, the Daily Telegraph blogs, the Times, and The Wall Street Journal. In 2010 his blog was listed as one of the top 100 UK political blogs by Total Politics.

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