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Bright Promises, Dismal Performance: An Economist's Protest
by Milton Friedman
Parkinson Revisited - July 12, 1976

Two decades ago, C. Northcote Parkinson formulated his famous first law: “Work expands so as to fill the time available for its completion.” Later, he added the corollary: “Expenditure rises to meet income.”

The just-published “Comparative Study of the Fiscal Systems of New Hampshire and Vermont, 1940-1974,” by Professor Cohn Campbell of Dartmouth College and his wife, Rosemary, provides a striking modern illustration. It would be hard to find a better pair of states for a comparative analysis.

Vermont and New Hampshire differ in one important fiscal respect. Vermont has both a state general income tax and state general sales tax. New Hampshire has neither—indeed, it is the only state in the country with neither.

Expenditures vs. Services

The result: as Parkinson said, Vermont’s expenditures have risen to meet its income. In 1974, state and local expenditures were 50 percent higher in Vermont than in New Hampshire as a percentage of the personal income of its residents. Vermont was the third most heavily taxed state in the Union; New Hampshire, the 47th.

Do Vermont citizens get proportionately more or better governmental services? The authors doubt it, on the basis of a careful examination of each category of expenditures.

In 1974, education absorbed 9.6 percent of personal income in Vermont vs. 6.6 percent in New Hampshire. Yet, teachers’ salaries are higher in New Hampshire, years of school completed are roughly the same in the two states, and so are mean Scholastic Aptitude Test scores of high-school graduates. There is no sign of any significant difference in the quality of education, let alone a 50 percent higher quality in Vermont.

Welfare absorbed 3.1 percent of personal income in Vermont vs. 2 percent in New Hampshire, and according to the Campbells, “a principal reason ... appears to be greater leniency in administration rather than higher welfare payments.”

And so it goes, category after category: Vermont spends more; Vermont relies more on the state relative to the local community; and Vermont has little to show in return.

Taxes Are Habit-forming

Does Vermont’s use of broad-based taxes reduce the burden of property taxes? Not at all. In 1974, property taxes averaged 6.6 percent of personal income in Vermont, 6.2 percent in New Hampshire—though in most earlier years there is a minor difference in the opposite direction.

Does the use of broad-based taxes mean that Vermont relies less on handouts from Washington? Quite the contrary. Vermont gets federal aid equal to 7.2 percent of its personal income; New Hampshire, 3.6 percent.

Does the use of broad-based taxes reduce the pressure on Vermont to borrow? Quite the contrary. The state and local debt is more than twice as large a percentage of personal in-come as in New Hampshire.

Apparently, extra income and sales taxes only whet the ap-petite of the ambitious public servant. In the private market, you generally get what you pay for—or you don’t buy. The same force is present in local units of government. It is fairly easy to move out of a small community that is taxing much and returning little in services. However, the larger the governmental unit, the less the competitive pressure. That is why we get less for our tax money from the state than from the local government, and even less from the federal government.

The only way to cut government waste and extravagance is to cut government income.