For the last few years the Lithuanian Free Market Institute has calculated Tax Freedom Day-the day in the year when average income earners stop handing over all their income to the government and begin to enjoy the full benefits of their labour. Tax Freedom Day is calculated by comparing a given year’s general government tax revenue with gross national product. The result is then converted to days of the year. In 1998 the estimated Tax Freedom Day came in Lithuania a week later, May 10*, than last year. On average, Lithuanians had to work a total of 129 days-the most since the restoration of independence-to pay off the demands of the state.
Tax Freedom Day shows how many days we work on average for the government. It does not indicate specific days for individual taxpayers: For some it falls in January, for others… maybe as late as at the end of summer. Still, Tax Freedom Day reflects invariably and indisputably the magnitude of the state and its interference in people’s private affairs.
The Free Market readers know that the tax burden entails not only the taxes paid, the cost of tax administration, or the effect of taxes on people’s motivations and market processes. Equally burdensome and insidious is the tax burden imposed on each individual by government spending. We all are aware that the effects produced by public outlays on the poor and needy are altogether different from those triggered by government expenditures used to support some investor or someone’s competitor. In this case, the state itself becomes an unrivalled competitor.
So far, regrettably, not a single law, not a single government programme nor a state leader have specified who and what cannot be financed from the state budget, with taxpayers’ money. The budget structure law was not even designed to spell out and restrict government authority. The functions of the state are defined so that they can justify any public outlays.
Let us look at what that average of 129 days is worked for? What needs are financed with the money turned in to the government? Analysis of the 1998 state budget indicates that every individual works the most-38 days-to support current pensioners and to finance benefits payable to the unemployed and other socially supported groups. This year road building and maintenance will cost us six workdays. Twenty-one workdays will be devoted to municipal governments, which, as we all know, maintain and lighten the streets, pays salaries to teachers, provides social benefits, etc. Fifteen days will go toward financing public expenditures not assigned to major categories of government spending. These, for example, include financing of state-run enterprises, recreational facilities, and others. Ten days will be needed to maintain public order, eight days for education, and almost six days for agriculture, forestry, fishery and veterinary. The remaining 25 days will go toward financing health care, national defence, and other government functions.
In its efforts to explain to the public and decision makers the pressing need for budgetary reform, the Lithuanian Free Market Institute has stressed how spontaneously and inefficiently budget revenues are used. Eventually, these problems “caught the government’s eye”, and a policy-drafting group was set up last December to work out a new budget structure law. A member of the LFMI was invited to contribute to this initiative. The government has already approved the concept of the new law. Hopefully, the new construction of public spending will be firm and orderly. But will it be small and neat?
The centrepiece of the budget reform is a switch to program budgeting. The adoption of program budgeting will require that government agencies define the goals of their activities and assess alternatives of attaining these goals. Program budgeting would lend clarity and transparency to public spending as well as logic to planning procedures. But is this going to tame escalating government expenditures? Is this going to protect taxpayers’ money from being used to serve narrow interests rather than common needs?
The answer is no. If government spending authority is to shrink, the aim should be not to redesign the form of spending but to foster commitment to cutting back on the size of government. When that commitment is lacking, changes may give paradoxical results. They may put the budget in order but at the same time justify outlays that should not be the domain of the state. Not so long ago economic subjects were asked to submit programmes for government funding. To that end, model expenditure indicators were released, a common practice of the past years. This raises doubts as to the outcomes of the projected budgetary changes. Another cause for concern is the government’s epidemic drive to assume more and more authority and to multiply its spending much faster relative to the GDP growth. Obviously, ministries, departments and other government agencies will be falling over themselves to adjust their needs to the model figures. With such arrangements and attitudes, Tax Freedom Day will no doubt keep moving later in the calendar.
The society, through its representatives, must articulate to the government clearly and explicitly what may and what cannot be financed with taxpayers’ money. They must also determine the pace at which the government and its budget should contract. Only with this agenda in place will the number of days, months and years donated to the government shrink.
* A precise Tax Freedom Day may be calculated only when the year is over. Only then is it possible to calculate how much wealth people created and what portion turned into budget revenues instead of reaching people’s houses and pockets. In calculating Tax Freedom Day of the coming year, GDP forecasts, projected budget revenues and other extrapolated figures are used.
How many workdays are on average required to finance government expenditures?
38 workdays – support of pensioners and the unemployed
21 workdays – street lightening, teachers’ salaries, social benefits (municipal budgets)
15 workdays – government expenditures not assigned to major categories of public spending (e.g. state-run enterprises, recreational facilities, etc.)
10 workdays – public order
8 workdays – education
6 workdays – road maintenance and building
6 workdays -agriculture, forestry, fishery and veterinary
25 workdays – other areas