Mr. Colin Clark on the Limits of Taxation

Abstract

THE possibility that there is a limit to the total tax burden which an economy can bear receives considerable public and professional attention from time to time, but few attempts have been made to examine this problem systematically. Presumably, this is a reflection of the fact that economists generally believe there is no single, immutable limit. However, Mr. Colin Clark has developed the bold generalization that there is a critical limit to taxation which is approximately the same for all nontotalitarian countries in time of peace. Although Mr. Clark first presented his thesis over six years ago in an article in the Economic Journal, it did not gain widespread public attention in the United States until late I950 when he summarized his views in a brief popular article published in Harper's.' Mr. Clark recently reaffirmed his views in a letter to the Joint Committee on the Economic Report.2 It is, therefore, timely to examine Mr. Clark's thesis and the statistical evidence which he presents to support it. Mr. Clark's thesis is that inflationary forces come into play when the tax burden (including federal, state, and local taxes) exceeds 25 per cent of the national income.3 This figure was derived from an analysis of data covering several countries for various periods. The limit is acknowledged to be approximate and should certainly be written 24-26 if not 23-27. 4 Beyond 27 per cent, there is a high degree of probability that inflation will materialize. The process may take as much as two or three years to work itself out. In his I945 article, Mr. Clark explained the limit primarily on the basis of the political argument that there is a transfer of allegiances by influential elements of the com munity toward inflation when taxation reaches the 25 per cent level. Since certain items of government expenditures, such as interest on the national debt and Civil Service salaries, are fixed in money terms, government expenditures are likely, during an inflation, to rise less than the general price level and national income Thus, the real burden of government expenditures may be reduced by inflation. As Mr. Clark puts it: