Monday, May 15, 2006

A low-tax strawman.

There's nothing more amazing to me than the anti-tax movement in the States. One of its warriors, John McIntyre, railing against higher U.S. taxes on the RealClearPolitics blog today, says:

Why have the U.S. and Britain shown tremendous growth since Reagan and Thatcher while Continental Europe with their pseudo-socialism putters along with chronic double-digit unemployment? Go around the world these last 25 years and compare nations with high tax rates to countries with low tax rates, you'll find a pattern.

Absolutely you will. There is such thing as the equity-efficiency tradeoff, and it's at the heart of the democratic economic decision. I believe that Sweden pays for the high rate of social insurance it provides its citizens with some measure of long-run growth and economic dynamism. Making that tradeoff between growth and publicly guaranteed economic equality is something that majorities in Sweden have traditionally accepted and that majorities of Americans have rejected.

To further underscore McIntyre's point, from the Fraser Institute's latest TaxFacts, here are the major Western countries ranked by the share of their GDP that goes to taxes. With the possible exception of Mexico, the countries at the top of the list are the fastest-growing, and those at the bottom are the most redistributive:

Mexico: 19%
Korea 25.3%
Japan 25.3%
United States: 25.6%
Switzerland: 29.5%
Ireland: 29.7%
Slovak Republic: 31.1%
Australia: 31.6%
Turkey: 32.8%
Canada: 33.8%
Poland: 34.2%
Spain: 34.9%
New Zealand: 34.9%
Germany: 35.5%
United Kingdom: 35.6%
Greece: 35.7%
Portugal: 37.1%
Czech Republic: 37.7%
Hungary: 38.5%
Netherlands: 38.8%
Iceland: 39.8%
Luxembourg: 41.3%
Austria: 43.1%
Italy: 43.1%
France: 43.4%
Norway: 43.4%
Finland: 44.8%
Belgium: 45.4%
Denmark: 48.3%
Sweden: 50.6%

The list also shows the big flaw in McIntyre's argument: the differences in growth and economic insurance take place over a massive range in national tax shares -- 30% of a country's GDP. But, for better or worse, very few North American liberals are actually advocating the kind of economic upheaval that would reroute 50% of GDP through the government. US liberals don't argue for the US to adopt overall tax rates comparable to those found in Sweden or even France. McIntyre's traget, Sabastian Mallaby, certainly doesn't. Few of the bloggers or pundits I read have Denmark in mind when they complain about tax giveaways to corporations or to the rich or to the amazing shelf-life of long-discredited supply side nostrums.

A more relevant way to approach the issue is to examine the sort of highly developed, low-union-density, limited-regulation, free-market economies that are actually comparable to the US... like Canada. From the list above, Canada and the UK (since McIntyre brought it up) have, respectively, gross tax rates of 8.2% and 10% higher than the current gross US rate. At least as between Canada and the US, the ratio has been fairly stable since 1994, though federal rates at least have fallen since then in both countries. From the US Department of Labor's statistics (Table 1), the US GDP per capita grew 24.0% between 1994 and 2004. Canada's grew by 25.9%. The UK's grew by 28.0%.

Raise the US tax take to Sweden's 51% share and I'm in full agreement that, in the long run, Americans will pay a massive price in terms of GDP growth and entrepreneurial dynamism. It's not something I would vote for. Raise the tax share to Canada's modest 34% or the UK's 35% -- rates that could wipe out the budget deficit and cover a pretty nice universal public health care plan to boot -- and the international evidence that the US would pay much of a price in terms of long-run growth gets a lot weaker. That's a risk I'd be willing to take.

Update: Update: For the record, a commenter at LWC points out that Sweden's growth isn't too shabby -- and using the numbers from the same BoL table, Sweden has actually outgrown the US in % terms since 1994. So even if nobody is arguing for turning the US into Sweden, it's still not the best country to pick on right now. There's always France...

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