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Who Is the Forgotten Man (and Woman) on the Fiscal Commons?

The image of William Graham Sumner's ([1918] 2015) forgotten man--the citizen who quietly pays a lot to government but receives little--surfaced once again on November 9, 2016, when President-elect Donald Trump celebrated his unexpected victory in a much analyzed but not fully understood contest against Hillary Clinton. Making reference to his broad plan for achieving America's untapped greatness to those who brought him victory, Trump said: "It is going to be a beautiful thing. Every single American will have the opportunity to realize his or her fullest potential. The forgotten men and women of our country will be forgotten no longer" ("Here's the Full Text" 2016). Although political analysts had difficulty explaining Trump's success, there was no doubt about the decisively large turnout of blue-collar Americans he attracted. Many of these supporters hailed from small towns, rural areas, and decaying industrial regions.

This was not the first time a presidential candidate had used the Sumner metaphor. Franklin Roosevelt used it in 1932 when in the depth of the Great Depression he was running for the White House against Herbert Hoover. After referring to the difficult World War I struggle, Roosevelt said: "These unhappy times call for the building of plans that rest upon the forgotten, the unorganized but the indispensable units of economic power for plans like those of 1917 that build from the bottom up and not from the top down, that put their faith once more in the forgotten man at the bottom of the economic pyramid" (Roosevelt 1932). (We note that our use of the term forgotten man applies equally to women and men alike.)

In her history of the Great Depression, Amity Shlaes makes the point that although the Sumner imagery served Roosevelt's purposes, the rhetoric then did not quite square with Sumner's original point (2007, 127-28). When Sumner referred to the forgotten man, he was not referring to unemployed Americans who had somehow missed out on government welfare largesse, economic-development programs, or the benefits of trade policies. He was describing a long-suffering but silent American who worked hard, paid his bills, and voted in elections but never complained. Above all, his forgotten man bore the burden of taxes that were raised to benefit others. As Sumner put it,
   He works, he votes, generally he prays--but he always pays--yes,
   above all, he pays. He does not want an office; his name never gets
   into the newspaper except when he gets married or dies. He keeps
   production going on. He contributes to the strength of parties. He
   is flattered before election. He is strongly patriotic. He is
   wanted, whenever, in his little circle, there is work to be done or
   counsel to be given. He may grumble some occasionally to his wife
   and family, but he does not frequent the grocery or talk politics
   at the tavern. Consequently, he is forgotten. ([1918] 2015, 491)


In an earlier discussion, Sumner explained the special-interest dynamic that causes the forgotten ones to be left picking up the redistribution tab. Sumner described what Gordon Tullock (1971) later called "the charity of the uncharitable," wherein persistent interest groups devise legislation that will tax the forgotten citizen to address the groups' favorite concerns. Sumner pointed out that the forgotten man "is the victim of the reformer, social speculator and philanthropist" and that he "deserves ... notice both for his character and for the many burdens which are laid upon him" ([1918] 2015, 466).

Sumner's definition implicidy assumed a fiscal commons where politicians competed and cooperated in arranging tax-and-spend schemes that rewarded some at the expense of others (Lipford and Yandle 2012). (1) At the time Sumner wrote about the forgotten man, just as now, entry to the commons was rationed by constitutional rules that determined representation and by congressional rules that defined committee membership and leadership prerogatives. And then, just as now, there was no formal balanced-budget constraint that limited the extent to which politicians could expand the fiscal domain while still struggling to determine which sheep would be sheered, if not skinned.

Inspired by Sumner's metaphor and in light of the theory of the fiscal commons, we seek to identify the true forgotten man on the U.S. budgetary commons by examining U.S. fiscal data from the past and projections for the future. We recognize that the use of aggregated data does not enable us to find accurately the counterpart of Sumner's forgotten man, but we believe that we can identify absolute or relative losers in the fiscal-commons competition. Our examination of an intratemporal fiscal commons includes consideration of what happens to the federal deficit during the intervening years. When we shift to an intertemporal fiscal commons, we consider how the identification of the forgotten one changes from the living to the unborn as debt-financed transfers become unconstrained across time. (2) Recognizing that debt can be used to fund investments that promise future prosperity as well as to pay for current consumption with little future payoff, we consider U.S. Office of Management and Budget (OMB) data to determine which path, if either, appears to form the debt-paying forgotten man's future. Unfortunately, current consumption is apparently strongly favored over investment. Last, we consider the effects of shifting tax liability among income groups and how this shift affects the government's tax-raising capacity.

To prepare for this task, we next review briefly the fiscal-commons problem and the systematic tendency of the U.S. governing body to engage in tax-and-transfer programs. Here, we discuss important literature on the matter and emphasize James Buchanan and Richard Wagner's (1977) key point: once moral constraints seem no longer to bind, a society managed by majority rule will tend to engage indefinitely in deficit finance. Putting forth strong public-choice arguments, Buchanan and Wagner point out that political agents, driven by self-interest, seek to maintain their employment by way of redistributive activity. Even formal rules to restrain budget deficits will succumb to die informal expectations endemic to transfer programs (Calcagno and Lopez 2016). The inevitable results are higher spending, lower taxes, deficits and debt accumulation, and possibly default (Henderson and Hummel 2014; Tanner 2015). We apply traditional public-choice concepts to explain why and how some citizen groups may be forgotten or disregarded by political operatives who work the fiscal commons. With the groundwork prepared, we move on to consider the data. We conclude with some brief final thoughts.

Forgotten on the Fiscal Commons

The analysis of struggles on the political commons between recipients of federal largesse and others, the forgotten man and woman who pay the taxes that fund transfers, reaches back at least as far as 1848, when John C. Calhoun wrote about the separation of taxpayers from tax consumers. Though never using the terms fiscal commons and forgotten man, Calhoun ([1848] 1992) obviously appreciated the commons dynamic and what can happen in an unconstrained democracy. Calhoun's concern was not about interest-group politics writ large but about regional differences that might cause, for example, the industrial North to seek tariffs on manufactured goods from abroad while, if successful, imposing high costs on the agricultural South, which sought the benefits of free trade. His concern about the lack of constitutional constraints on resulting regional battles led him to propose unsuccessfully a constitutional concurrent-majority requirement where a majority of states voting separately would be required before a previous nationally approved law could become binding.

More recent fiscal-commons analyses hold true to Calhoun's fundamental concern but bring greater clarity to strategic behavior (Brubaker 1997) and focus on the effects of different constitutional constraints (Crain and Miller 1990; Wagner 1992; Lipford and Yandle 2012, 2014). Empirical analysis shows, for example, that the presence of a governor line-item veto power reduces growth of transfer programs across the fifty states and that higher tax prices for provision of publicly provided goods apparently reduce political demand for those favors. The evidence is also consistent with the notion that higher-income citizens are not like sheep who may offer little resistance to being sheared closer to the skin. Higher income enables greater resistance.

In our other work, we sought evidence that somehow those bearing the burden of funding transfers, Calhoun's taxpayers and Sumner's forgotten man, would limit the tax spenders' ability to pick the payers' purse (Lipford and Yandle 2015). This analysis focused on state economic freedom indexes and the extent to which their variation was positively associated with higher levels of citizen stakeholder presence. We found evidence t hat the possibility of citizen encounters with higher taxes somehow affected redistribution politics that mitigated the resulting burden. In past work, we have also presented traditional public-choice arguments to explain why the forgotten citizens cease to be remembered by those in position of political power. Those forgotten are in a real sense never remembered. As Sumner put it, they do not attempt to communicate with politicians. Maybe they attempt to do so, but their voices are drowned out by more organized and better-funded interest groups.

In our fiscal-commons analysis, we rely on the work of Bruce Bueno des Mesquita and Alastair Smith (2011), who emphasize that politicians who seek, win, and hold power view most citizens as interchangeable. The Bueno des Mesquita and Smith analysis implicitly assumes high agency costs between ordinary citizens and their elected representatives charged with implementing their desires. Generally speaking, ordinary voters cannot be well informed about what actually takes place in the halls of government; they ultimately acquiesce. Yes, the numbers are needed, but one of the rank and file is as good as another; none has meaningful power or influence. The interchangeables are contrasted with the essentials, whose allegiance is necessary for the successful politician to obtain and keep, and with the influential, who matter less than the essentials but much more than the interchangeables. As we see it, the forgotten ones are never even remembered and do not matter enough individually to affect political outcomes. Having said this, we hasten to point out that in a representative democracy even the never-remembered interchangeables can become organized and inspired to raise their voices to the point that they are heard. Obviously, the unborn cannot do so, even though members of the current generation may speak for them. We emphasize that Bueno des Mesquita and Smith direcdy omit the unborn from their analysis, but the dynamic process they model supports the notion that those who struggle on the fiscal commons will always favor lower taxes for the living while seeking to redistribute income from the higher-income to lower-income citizen groups. Thus, "undertaxation" tends to accompany "over-redistribution."

In all of the fiscal-commons literature we have read, we find to be compelling the fundamental work by Buchanan and Wagner (1977) that explores the tendency of democracies to become unconstrained through time and therefore to become increasingly engaged in transferring resources from those called "forgotten" to other happy recipients of increased government largesse. "Functional finance" displaces "sound finance," a trend aided and abetted by the Keynesian Revolution (Wagner 2012). The loss of what might be termed a moral constraint on promise keeping, bill paying, and passing along debt to the next generation becomes the nub of the issue we are exploring. We note here that we are not implying that there is some deliberate "let's get the unborn to pay" political strategy at play in the political process but rather that a lack of political voice causes unborn taxpayers to bear the burden of paying for an earlier generation's government-provided largess.

Cutting to the heart of our analysis, we conclude that relaxation of the deficit and debt constraints redefines Sumner's forgotten man. The forgotten one is no longer a hardworking, bill- and tax-paying member of society who somehow suffers quietly while funding benefits to others. The forgotten one is the unborn future generation that will face the challenge of paying for the high level of consumption enjoyed by prior tax spenders, whose pleasure was funded with public debt.

We now present a brief theoretical model before turning to our analysis of federal taxing, spending, and deficit data. In doing so, we note that congressional rules cause decisions on the tax code to be made in a distinct process that is not a part of spending decisions. Because of this process, it is possible for groups to appear to be forgotten when it comes to taxation but not when it comes to spending.

Life on the Intratemporal and Intertemporal Fiscal Commons

The Intratemporal Fiscal Commons

First, we consider life on the intratemporal fiscal commons, where policy makers may discriminate across current taxpayers but may not defer tax liability into the future. In other words, the budget must be balanced. In this world, where politicians are constrained by a balanced-budget rule, greater spending or lower taxes for one group must be offset by lower spending or higher taxes on another group. The Bueno des Mesquita and Smith analysis suggests that the essentials will benefit at the expense of the interchangeables. But even here there are likely limits, political and economic.

The interchangeables have some voice, especially in a democracy where large numbers matter to electoral outcomes. And as Arthur Laffer demonstrated years ago, higher marginal tax rates diminish the tax base, so that government revenues reach a limited maximum. The interchangeables may have low incomes and accordingly not benefit from municipal bond investments or the home-mortgage-interest deduction, but they can work less or shift effort into black-market activities. The upshot is that on the intratemporal fiscal commons, redistributive spending and taxing surely occur, but tax collections are at some point limited by political and economic realities.

The Intertemporal Fiscal Commons

When we move to the intertemporal fiscal commons, the budgetary difficulty is relieved. Budgets need not be balanced in a given time period. The budgetary constraint is relaxed with the addition of future taxpayers, whom the government will ask to pay for current government expenditures so that deficit finance becomes feasible.

However, deficit finance is not only economically feasible or necessary to maintain or raise spending for some group or to cut taxes for another group but also politically appealing. The political influence of future taxpayers is less than that of current interchangeables because future taxpayers have no direct voice in current political debates on spending and taxing. They can exert no pressure on those managing die intertemporal fiscal commons, nor can they bring about any political repercussions for future taxes they will be obligated to pay. These future taxpayers are truly the forgotten men, the contingent taxpayers to whom future tax liabilities are shifted without their representation or consent. The political path of least resistance is to tax them simply because they are neither present nor visible.

Prospects and Consequences for the Forgotten Man on the Fiscal Commons

In this section, we examine three empirical trends that add to and exacerbate the fiscal plight of the forgotten man on the intertemporal fiscal commons. The burden of the forgotten future taxpayers will be especially great because of the combination of spending unimpeded by formal rules or moral restraints, the composition of spending that favors redistribution over investment, and the concentration of tax liability on taxpayers who are well positioned to avoid paying a higher share of their income as taxes.

Future Expenditure Obligations and the Forgotten Man

Might spending restraint come to the aid of the forgotten man, lessening his contingent tax liability? The answer is an unequivocal "no." Social Security, Medicare, Medicaid, and other means-tested entitlement programs are swept along by demographic trends that make relentless demands on future spending. Although rhetorical speeches and token efforts to restrain spending may generate applause from fiscal conservatives, genuine political will to slow the growth of spending, far less to cut it, is overwhelmed by Bueno des Mesquita and Smith's essentials and influentials, who not only benefit from spending but also have the political clout to demand program continuance and benefit enhancement. Further, higher interest rates and debt will compound the entitlement problem with greater interest payments.

The Congressional Budget Office's (CBO) (2017b) ten-year projections point to rising deficits and debt. After a slight dip in 2018, the CBO projects the deficit will rise to 5.2 percent of gross domestic product (GDP) by 2027. Debt held by the public will rise to 91.2 percent of GDP, and the gross-debt/GDP ratio will exceed 100 percent over the next decade, reaching almost 110 percent by 2027.

The CBO's (2017a) long-run projections indicate even greater fiscal distress. The CBO projects a deficit/GDP ratio--carried along by the same unholy trinity of politically popular entitlement programs, an aging population, and rising interest costs--of nearly 10 percent and a net-public-debt/GDP ratio of 150 percent by 2047, the latter being unprecedented in U.S. history. (3) Figure 1 displays the gradual, steady rise in the net-public-debt/GDP ratio. As Sumner noted so well, the forgotten man always pays--if not in the present, then in the future.

The Composition of Government Expenditures and the Forgotten Man

As we have argued, the true forgotten man on the intertemporal commons is a proxy for the unborn generations who will have to pay for the accumulated debt of the current essentials and influentials. This debt burden might be mitigated if the accumulated debt is used to pay for assets that will yield higher productivity growth--and commensurately higher tax revenues--in the future. Our analysis of future expenditures suggests this is not the case because these obligations are largely for transfer payments instead of for investments that pay off over the long term.

Figure 2 provides evidence to this effect. The OMB divides federal expenditures into the broad categories "discretionary" and "mandatory" plus net interest. Mandatory spending has risen continuously, if unevenly, throughout the period of our analysis, and OMB projections are for continued increase through the forecast year of 2022, when mandatory spending will approach two-thirds of total spending. The path of net interest has risen and fallen over the years but is on an upward trajectory as escalating debt and higher interest rates follow recovery from the Great Recession. By the end of the forecast period, mandatory spending and net-interest payments are projected to consume three-fourths of total spending. And the forgotten man will be called upon to pick up the tab. We note that although the OMB forecasts continued deficits and a gross-debt/GDP ratio around 100 percent throughout the forecast period, there can be interventions that alter outcomes. (4) Additional analysis of federal spending shows die flip side of this fiscal coin. Figure 3 shows the share of federal, nondefense spending on physical capital, research and development, and education and training--all expenditures that might increase future economic growth. (5) We draw two conclusions from the data. First, die share of federal, nondefense spending allocated to investment purposes is strikingly low, fluctuating between 8 and 10 percent over most of the period of analysis. Second, this share has dropped significantly since the late 1970s and early 1980s and is forecast to reach a low of 7 percent in 2018. The OMB data do not consider depreciation, but if that factor is considered, net public investment is even lower. Further, we implicitly give public investment every benefit of the doubt by ignoring the influence that rent seeking and short political time horizons have on the allocation and productive potential of these expenditures.

The plight of the forgotten man on the intertemporal commons is then doubly bad. With the federal government spending a greater share of its revenues on entitlements and only a small and likely decreasing share of its revenues in ways that may enhance future production, the forgotten man will receive little benefit from the debt he will be asked to pay.

Tax Liability and the Forgotten Man

If assessing taxes on future generations is fiscally necessary to support current spending and politically appealing because the unborn mount no resistance, what happens to the tax liability of the forgotten man once the moral constraints against deficit spending are broken? We examine this question using CBO data on taxes paid by income quintile for the period 1979-2013. (6)

First, we examine the trends in tax liability as a share of total tax receipts by income quintile. (7) The most evident trend, shown in figure 4, is the rising share of taxes paid by the highest income quintile. Taxpayers in the highest income quintile have seen their tax liability rise from around 55 percent in the late 1970s and early 1980s to about 70 percent over the years 2008 to 2013. Over the same period, all other income quintiles have seen their share of the tax liability fall, with the fourth (or second-highest) income quintile now paying less than 20 percent of taxes, the middle income quintile now paying less than 10 percent of taxes, and the second and lowest income quintiles paying, respectively, around 3 percent and virtually none of the taxes.

Our second analysis is in terms of shares of market income paid as taxes. (8) In effect, we take Hauser's Law, which says that the share of GDP the government can take is limited to about 19.5 percent (see Hauser 2010)--irrespective of changes in tax rates and the tax code--and decompose it by income quindle. These trends are shown in figure 5 and make a striking point.

Although the top income quintile pays the highest share of its income in taxes, we draw attention to a second trend: the variability of taxes paid as a share of income. Calculations of the standard deviations and coefficients of variation for taxes as a share of income show that the highest income earners exhibit the least variance. Further, with each step down the income-ranking ladder, the variability of taxes as a share of income rises. (9) Taxpayers at the top of the income distribution evidently adjust their behavior, through tax avoidance and tax evasion, along with their work effort so that they pay about the same share of income as taxes regardless of current tax policy. (10)

The implications for the forgotten man are clear. U.S. tax collections are heavily dependent on a minority of taxpayers who are able to effectively resist higher average tax rates. In effect, if the tax authorities practice tax discrimination by taking less from some taxpayers and yet find it impossible to take more from other taxpayers, deficits are the inevitable result. The political path of least resistance is future taxation on those forgotten. On the whole, these data are consistent with the theme Sumner developed: the forgotten man is always asked to pay whenever others do not. The prospects for the forgotten man are not hopeful, just as Sumner surmised.

Concluding Thoughts

In this paper, we have drawn upon William Sumner's essay on the forgotten man to ask just who the forgotten man is and what his obligations are on an intertemporal fiscal commons where the taxing authorities practice tax discrimination. We have argued that the unborn, the future generations, are the true forgotten men. Unable to mount any political opposition to the obligations they will be asked to pay, they are "forgotten" in the current political environment, where current taxpayers and program beneficiaries are the essentials and influentials who drive the taxing authorities' decisions. The forgotten men have become the "contingent taxpayers" who will be called to pay the debt accumulated to the benefit of current generations.

This debt burden might be ameliorated if moral constraints or fiscal rules were revised to keep spending in check, if the debt were used to increase long-run productivity and taxing capacity, or if the tax liability were to become more broadly spread, but our analysis suggests that political forces run roughshod over attempts to alter trends in order to bring about fiscal responsibility. William Sumner's original assessment of the forgotten man, that "he always pays--yes, above all, he pays," is on sound footing in the present but will be even more so in the future.

Jody Lipford is professor of economics at Presbyterian College. Bruce Yandle is dean emeritus of the College of Business and Behavioral Science and Alumni Distinguished Professor of Economics Emeritus at Clemson University.

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(1.) The term fiscal commons draws on Garret Hardin's (1968) seminal work, which focuses on the "tragedy" that can occur when entry to or use of limited resources is not rationed.

(2.) On the argument of future generations' fiscal burden, see Buchanan [1958] 1999, Templeton 2007, and Lomasky 2016. We note that Ricardian equivalence argues that present generations tend to equate future debt with current taxes and therefore "protect" future generations from facing a heavy debt burden. We are more inclined to support the Buchanan position. On Ricardian equivalence, see Barro 1974 and 1989.

(3.) These CBO projections are based on the continuance of current spending and taxing policies and CBO assumptions about economic growth, the unemployment rate, and interest rates. We fully recognize that government policies toward spending and taxes are likely to change and that long-run economic projections will almost surely not be realized. Nonetheless, quantitative differences between CBO projections (which the CBO itself acknowledges as "uncertain") and actual fiscal outcomes do not alter the overriding qualitative trends in higher deficit/GDP and debt/GDP ratios.

(4.) These forecasts are taken from the U.S. OMB n.d., tables 1.2 and 7.1.

(5.) For a full listing of the components of federal, nondefense expenditures on physical capital, research and development, and education and training, see U.S. OMB n.d., table 9.5 for direct physical capital investment, table 9.6 for grants for physical capital investment, table 9.8 for research and development expenditures, and table 9.9 for education and training expenditures.

(6.) The tax payments included in the CBO data on income quintiles are the individual income tax, the corporate income tax, social insurance taxes, and excise taxes. CBO data omit estate and gift taxes, customs duties and fees, Federal Reserve System deposits, and other miscellaneous receipts, which averaged 4.8 percent of total receipts over the 1979-2013 period.

(7.) We note that our concern is limited to taxation across income quintiles. For a detailed analysis of government benefits received as well as taxes paid by income quintile, see Rector and Kim 2008. Using 2004 data, Robert Rector and Christine Kim find that in net terms the bottom three income quintiles benefit at the expense of the top two quintiles.

(8.) Market income consists of labor income, business income, capital gains, capital income, and other income. Market income excludes government transfer payments. See CBO 2016, supplemental data, contents and notes, for complete details.

(9.) The standard deviations and coefficients of variation of taxes as a share of income are 1.5 percent and 5.5 percent for the top income quintile, 1.8 percent and 8.2 percent for the fourth income quintile, 2.3 percent and 12.0 percent for the middle income quintile, 3.4 percent and 23.7 percent for the second income quintile, and 5.3 percent and 52.4 percent for the lowest income quintile.

(10.) We readily acknowledge that our model is static, not taking into account the possibility of higher incomes for any or all income quintiles that would generate more tax revenues at given tax rates.

Caption: Figure 1 Net-Public-Debt/GDP Ratio

Caption: Figure 2 Mandatory and Net-Interest Spending as a Share of Total Federal Government Outlays

Caption: Figure 3 Public Expenditures to Increase Long-Run Productivity

Caption: Figure 4 Shares of Federal Taxes by Income Quintile

Caption: Figure 5 Federal Taxes as a Share of Market Income by Income Quintile
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Date:Mar 22, 2018
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