Why Your Taxes Will Always Grow

And Why That Is Not a Proble

Photo by Marek Studzinski on Unsplash

What I discuss in this article is very important because it fundamentally alters your perspective on government spending and taxation. What I’m presenting here is not my own idea or theory. I’m simply drawing attention to well-established economic principles that, for some reason, are not widely known.

Specifically, this is about something called the Baumol effect. Why is it important for you to learn about it?

Because, as we've seen with Elon Musk’s DOGE antics, there’s a right-wing narrative that government taxation and spending are totally out of control—and that we need some kind of wild revolution to rein it in. It’s easy to sell that idea when people can clearly see that, all over the world, government spending and taxation tend to grow over time.

The right wants to convince you that this growth is purely due to bloat, inefficiency, and waste. But the real reason is the Baumol effect. Let me explain. Cars, phones, flatscreen TVs, food, metals from mines—these things are produced with less and less manpower due to increasing automation. Large-scale production today is almost entirely handled by robots. So the average human labor required to make “stuff” has dropped like a stone.

But not everything in the economy works like that. A teacher today cannot teach more students than a teacher could 100 years ago. A nurse can’t treat many more patients than one could a century ago. The same goes for police officers, firefighters, and lawyers—jobs where automation has had minimal impact.

This fact leads to a situation where the price of “stuff” falls rapidly, while the price of human services rises. What you’re seeing is a relative cost increase. You can see in the chart below how hospital services and college tuition have skyrocketed in price.

Now, libertarians and pro-market economists should know about this effect—but they usually downplay or ignore it to push their pro-business, anti-government agenda. They’ll highlight government services affected by the Baumol effect, compare them to private-sector industries that benefit from automation, and then cry, “Look how wasteful government is!”

Another way they misuse this effect is by dismissing the real impact of rising income inequality in America since the 1980s. To give the impression that the poor are better off, they’ll show stats about how many more low-income people have phones, microwaves, TVs, and cars. What they don’tshow are stats about access to medical care, dental services, eye care, or college education.

Those stats would quickly reveal just how bad the situation is for working-class Americans. Another trick is comparing the income of America’s lower class to that in many European countries. Since the U.S. is a wealthy nation, the poor may seem better off in absolute terms. But such comparisons often ignore that childcare, college, and healthcare are much cheaper in European countries.

That’s due to the Baumol effect as well. As countries get richer, it’s mostly stuff that gets cheaper. Meanwhile, the wages of medical professionals, educators, and other service providers go up. That hasn't happened to the same extent in less affluent European countries. So when comparing countries, you can’t just look at dollar amounts.

Someone might object and say we can use Purchasing Power Parities (PPP) to adjust for this. But PPP is tricky, because the relative cost of goods and services isn’t consistent between societies—and the consumption mix differs across income brackets.

Why Taxes Will Rise Even if Government Stays the Same Size

In my native Norway, the government pays for college and most healthcare. Even if our government didn’t hire any more police officers, firefighters, teachers, nurses, professors, or doctors, the cost would still rise every year. That’s the Baumol effect. Simply maintaining the current level of government services requires taxes to increase over time. There’s no escaping that—so stop fretting about it.

So Are We Doomed to Get Poorer?

Even though taxes will continue to rise, you won’t actually get poorer. Why? Because the Baumol effect is driven by economic growth. If you wanted taxation levels to freeze, you'd have to freeze the economy itself—and that’s clearly not desirable.

Want 1920s-level taxation? Then prepare for 1920s-level poverty. Do you really think people were better off back then just because they paid less in taxes? Of course not.

Your salary grows over time. Let’s say you earn $10 per hour and pay 20% in taxes, leaving you with $8. Now automation doubles your salary to $20. Even if your tax rate doubles to 40%, you’re still better off—you take home $12. And taxes rarely double like that. A more realistic rate might be 30%, which still gives you $14 take-home pay.

Leftists, Learn This and Spread It!

I want left-wingers to understand this. Because here’s an uncomfortable truth: too many leftists are poorly educated in economics, and that allows capitalism fanboys to steamroll them in debates.

Years ago, when I started reading economics, I became a libertarian. I read Milton Friedman, Adam Smith, David Ricardo, and so on.

What I learned from that period is that arguing for right-wing, pro-capitalist positions requires only a shallow understanding of economics. If all you know are basic concepts like supply and demand curves, you’ll likely adopt a very pro-capitalist outlook. I know—because that’s what happened to me.

It’s only when you dive deeper—into topics like information asymmetry, the tragedy of the commons, planned obsolescence, natural monopolies, financialization, Veblen goods, and more—that you start to see the flaws in capitalism. You also begin to see that government is not as bad or inefficient as many claim.

In fact, for many services—prisons, healthcare, policing, the military, firefighting, education, public transit, nuclear energy—governments often do a better job.

Governments are generally bad at creating things that require rapid adaptation or customization. But when long-term planning is needed—like with railways, subways, nuclear plants, or a national healthcare system—it helps to have an organization that can think beyond the next quarter.

Much of my writing comes from the perspective of a Nordic social democrat or democratic socialist. I want to explain the practical, rational, and technical reasons why our systems work.

In my youth, I turned away from the left because I found its arguments too emotional—and I come from a background rooted in math and natural sciences.

But as I got older, I realized that right-wing politics is no different. It’s just driven by different emotions.

Think about Trump voters. How many of them made a rational analysis of his policies? I suspect very few. Their support was emotional—but not emotions of empathy, love, or solidarity. These were negative emotions. Trump became a channel for their anger and resentment. When he fires people, strips away rights, or deports immigrants, the emotion isn't love—it's a kind of sadistic glee that “the bad people” are getting what they "deserve."

But let’s not make politics about emotion alone. Make sure you can defend left-wing ideas with rational, evidence-based arguments—not just feelings.