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The Effect of Income Taxes on Economic Growth

Income Taxes - Government Spending on Social Programs

By Mike Moffatt, About.com

In most Western democracies the majority of government spending goes towards social programs. While there are literally thousands of government funded social programs the two largest are generally health care and education. These two do not fall into the category of infrastructure. While it is true that schools and hospitals must be built, it is possible for the private sector to profitably do so. Schools and health care facilities have been built by non-government groups all over the world, even in countries that already have extensive government programs in this area. Since it is possible to cheaply collect funds from those who use the facility and to ensure those who do use the facilities cannot easily evade paying for those services, these do not fall into the category of "infrastructure"

Can these programs still provide a net economic benefit? Being in good health will improve your productivity. A healthy workforce is a productive workforce, so spending on health care is a boon to the economy. However, there is no reason the private sector cannot adequately provide health care or why people will not invest in their own health. It's tough to earn an income when you're too sick to go to work, so individuals will be willing to pay for health insurance that will help them get better if they are ill. Since people would be willing to buy health coverage and the private sector can provide it, there is no market failure here.

To purchase such health insurance you must be able to afford it. We could get into a situation where society would be better off if the poor got proper medical treatment, but they do not because they cannot afford it. Then there would be a benefit to giving health care coverage to the poor. But we can get the same benefit by simply giving the poor cash and letting them spend it on whatever they want, including health care. However, it could be that people, even when they have enough money, will buy an inadequate amount of health care. Many conservatives argue that this is the basis of many social programs; government officials do not believe that citizens buy enough of the "right" things, so government programs are necessary to ensure people get what they need but won't buy. While I doubt this is the motivation behind social programs, if it is the case that people will naturally consume the wrong amount of health care, then having a social program like this could lead to economic growth.

The same situation occurs with educational expenditures. People with more education tend to be on average more productive than people with less education. Society is better off by having a highly educated population. Since people with higher productivity tend to get paid more, if parents care about the future welfare of their children, they will have an incentive to seek an education for their children. There is no technical reasons why private sector companies cannot provide educational services, so those who can afford it will get an adequate amount of education.

As before, there will be low income families who cannot afford a proper education although they (and society as a whole) are better off by having well educated children. It would seem that having programs which focus their energies on poorer families will have a greater economic benefit than those which are universal in nature. There seems to be a benefit to the economy (and society) by providing an education to a family with limited opportunities. There is little point in providing an education or health insurance to a wealthy family, as they will likely buy as much as they need.

On the whole, if you believe that those who can afford it will buy an efficient amount of health care and education, social programs tend to be a deterrent to economic growth. Programs which focus on agents who are unable to afford these items have a greater benefit to the economy than those that are universal in nature.

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