JONATHAN COHN MAY 23, 2011
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The official Republican Party line on taxes remains more or less what Grover Norquist wants it to be. Taxes must not go up, in any way or for any reason. And that's a big problem, because without higher taxes future generations will be left with a miserable choice: Cope with much higher deficits or enact massive cuts to essential government programs, starting with Medicare and Social Security.
The classic Republican (and conservative) response is that higher taxes would extract a different, even more onerous cost: They would stifle the economy. The argument has intuitive appeal: Don't taxes on income discourage people from working? Don't taxes on goods would discourage people from buying things? But, as a number of scholars and policy analysts (myself included) have said before, the data from abroad seems to confound this thesis. The Scandinavian countries, in particular, raise proportionally more in taxes than we do, without obvious ill effects on their economies.
Is that data misleading? A new blog post from Lane Kenworthy suggests that it is not.
Kenworthy, a political scientist and sociologist with a blog (appropriately) called "Consider the Evidence," notes that taxation levels in the U.S., Denmark, and Sweden were actually very similar as late as the 1960s, when tax collections amounted to about a quarter of GDP in all of the countries. Afterwards, they diverged, with U.S. levels staying roughly level and the Scandinavian levels peaking at around 50 percent of GDP in the 1980s:
Kenworthy then proceeds to compare economic performance among the three countries, according to a variety of leading indicators. If the Danes and Swedes are suffocating under their tax burden, the data don't seem to show it:
Begin with GDP per capita. America’s is higher than Denmark’s or Sweden’s. But that’s a legacy of the distant past. Growth of per capita GDP in the three countries has been virtually identical, both in the five decades since 1960 when the divergence in tax levels began and in the three decades since the 1970s (shown in the chart) when the tax difference has been most pronounced. ...
Each year since 2001 the World Economic Forum has scored most of the world’s countries on a “competitiveness” index. The index aims to assess the quality of twelve components of a nation’s economy: institutions, infrastructure, macroeconomic stability, health and primary education, higher education and training, goods market efficiency, labor market efficiency, financial market sophistication, technological readiness, market size, business sophistication, and innovation. In 2007 Denmark and Sweden were judged to be virtually identical to the United States in competitiveness. That was true throughout the decade. It also was true for the “innovation” components of the index in particular.
Kenworthy goes on to note that neither Denmark nor Sweden have allowed the ratio of debt-to-GDP to rise as high as it has in the U.S. In addition, life expectancy and professed satisfaction with life in Denmark and Sweden are as high, or a bit higher, than in the U.S.
The Scandinavian countries have flatter income distributions, which means the poor do better than their American counterparts, the rich do (much) worse, and the middle class does slightly worse or roughly the same--depending on how you account for the more comprehensive public services available in Scandinavia. Although many conservatives may be inclined to scream "socialism" and fret about liberty, they should consult the Heritage Foundation-Wall Street Journal "index of freedom" -- which, Kenworthy says, gives all three countries roughly the same grade for overall economic liberty.
21 comments
Someone should take this blog post and keep hitting seattleeng over the head with it until he sees sense.
- zardoz67
May 23, 2011 at 11:02am
The Swedes are more accepting of higher taxes because of the much higher return (to the taxpayers) on the investment. The biggest item in the US budget (next to non-discretionary Medicare and SS) is defense spending, in an amount that dwarfs not only the rest of the US discretionary spending but the entire budgets of countries like Sweden. If American taxes were used to provide more public services, like an efficient public transportation system, US views about higher taxes would be vastly different. [The "fragmented" government structure in the US, clung to like a lifeline, is another of the confounding features that make higher taxes so abhorent in the US.]
- rayward
May 23, 2011 at 11:44am
Gee, do you think seattleeng is reading this? Shoots his latest these rather full of holes. Don't worry, seattle. I am getting to your claim that whether one uses the Atlas measure or the ppp measure of income makes all the difference in how one understands the performance of Sweden relative to the US. My a priori bet is that you are wrong again as I have yet to find any economic claim you make to be supported by the facts. Eyeballing the chart above, it looks like Sweden's greatest economic period, during which it surpassed the US, was coincident with its highest tax rates, also shooting your libertarian voodoo economics to shreds.
- roidubouloi
May 23, 2011 at 11:50am
I don't think that tax rates effect economic opportunity as much as discriminatory taxation does. If you lower capital gains and dividend rates to 15%, you will move the economy in the direction of passive stock investment, for instance. This makes only a change in the type and not quantity of economic activity. Tax subsidies of this sort alter the free market and, according to me,will alter it in ways that diminish job growth as taxpayers move toward passive stock investments and away from active business type income, the latter of which may be taxed at 35%.
- Nusholtz
May 23, 2011 at 12:13pm
oops, affect.
- Nusholtz
May 23, 2011 at 12:13pm
I've heard your argument before from friends who've emigrated from Europe, Ray. They say that while taxes are lower in the US than Europe they don't get the 'bang for the buck' they did in Europe (health care, education at the college level and public transport being the biggest items). But, try to cut the defense budget significantly; it's like trying to cut Medicare and or SS. While I'd like to see the DoD budget slashed I don't think I'll see it any time soon. You'll get massive push-back from GOP/conservatives that it "slashes jobs". They don't have a problem with 'goverment jobs' as long as it's for war making.
- tmmats
May 23, 2011 at 12:41pm
Our health care costs are actually a much bigger problem for us than the military. Defense is 5% of GDP. Healthcare is 17.5% and rising. In France, they have universal coverage and medical outcomes as good as ours with only 11% of a smaller GDP. If we had the French system, we could potentially save more than the entire cost of defense. That would, however, requirement abandonment of our free market absolutism.
- roidubouloi
May 23, 2011 at 1:19pm
Our health care costs are actually a much bigger problem for us than the military. Defense is 5% of GDP. Healthcare is 17.5% and rising. In France, they have universal coverage and medical outcomes as good as ours with only 11% of a smaller GDP. If we had the French system, we could potentially save more than the entire cost of defense. That would, however, requirement abandonment of our free market absolutism.
- roidubouloi
May 23, 2011 at 1:19pm
I do look forward to hearing the usual rebuttal from the usual suspects. It tends to go something along the lines that the US subsidizes everyone else's productivity, originally by lending money, and now by being a net importer. Because of this, we can't raise taxes/rationalise our health care system/whatever without threatening not only our prosperity, but that of the world! It is a beautiful argument, as it might be true, but is also very difficult to empirically test. Unlike say the normal arguments about GDP and other metrics that are at best tangential to the topic at hand, which this article nicely demonstrates.
- Nari224
May 23, 2011 at 5:29pm
I bet if Seattle or Rat were to spout off something it would boil down to obtaining more luxury goods or something. Of course, they tend to remain hidden whenever a blog post resounding destroys one of their pet theories; if they didn't comment on the article, they can pretend it never happend.
- GSpinks
May 23, 2011 at 7:00pm
When I was young, liberals did not want their taxes to pay for weapons. They wanted to tell destructive people to play nice. They did want their taxes to help pay for helping people. When I was young, conservatives did not want their taxes to pay for welfare cheats. They wanted the welfare cheats to go to church and get charity. They did want their taxes to go help pay for blowing up destructive people. So we all wanted an ala carte system of taxes. I just want to pay taxes for what I approve of.. Now, I guess, we all got what we wanted. Now we are all broke and can't afford to help people and can't afford to blow people up, either.
- skahn
May 23, 2011 at 8:14pm
Okay, got around to looking up another aspect of seattle's theory about Sweden. His claim is that income growth there is stifled by high taxes, at least when you use "purchasing power parity" as the method of comparison. The World Bank data on this, at least as far as I can find it without a lot of searching, starts at 1980. At no time since then did Sweden's per capita GNI (gross national income) as measured this way, exceed that of the US. Maybe it did at some point in the 1970s, but I rather doubt it, at least not for any extended period. In 1980, Sweden was 14% behind the US, 10,640 v 12,130. In 2008, before the recession which hit Sweden harder than the US, Sweden was 15.1% behind the US. 40,920 v 47,100. For Sweden to have been at the same 14% below the US in 2008, it would have needed 396 international units more of GNI per capita. But, here's the interesting part. Sweden was keeping up with us pretty well until 1990, and then from 1990 to 1993 it suffered a pretty sharp relative decline compared to the US so that by 1993 it was 33% behind, 18,860 v 25,050. But, if you look at Chait's tax charts above, those were the very years that Sweden was coming off of its tax highs. So, the sharp relative decline of Sweden was associated with declining taxes, not increasing taxes. Since 1993, Sweden has largely made up the loss of the period 1990-1993. It has grown at a 5.3% annual rate compared to 4.3% in the US. It sustained this higher growth rate despite taxes approximately 60% higher than those in the US. Contra seattle, it is impossible, at least on this basis, to concoct a theory that high taxes in Sweden relative to the those in the US are stifling growth there. It would be interesting to hear an explanation of the productivity gap as measured by ppp, but it would not in any case validate seattle's theory. The highest relative growth for Sweden has been in a high tax environment.
- roidubouloi
May 23, 2011 at 9:16pm
Here's the link to the World Bank data and graph: http://data.worldbank.org/indicator/NY.GNP.PCAP.PP.CD/countries/SE-US?display=graph
- roidubouloi
May 23, 2011 at 10:14pm
seattleeng is all about drive-by shooting and isn't interested in an intellectually honest argument, so why try? It is fun to drag his (or her) reputation through the mud though.
- jet
May 24, 2011 at 6:17am
seattle, his views, and his reputation are not important. I don't expect to persuade him and I am not trying. What matters to me is that he litters this place with ideologically motivated misinformation. I think it is important to clean up the mess and make clear to those who may be reading that the entire right-wing libertarian economic line is based on falsehoods, repeated endlessly as if they were true, without even the barest attempt to square them with reality.
- roidubouloi
May 24, 2011 at 7:29am
And roi, speaking for myself, I greatly appreciate your valiant efforts in uprooting those noxious weeds. Evidently, you are the most economical astute poster on TNR.
- zardoz67
May 24, 2011 at 10:29am
*correction* ...the most economically astute poster on TNR.
- zardoz67
May 24, 2011 at 11:15am
I appreciate the compliment, zardoz, although I am not sure it is true. I have read some pretty astute comments here and only my bad memory for names prevents me from naming a few. It helps that I am currently studying for a doctorate in economics. It is the difference between knowing some and thinking about it a good part of the day every day. On the other hand, a lot of these things are answered just by looking up easily available data. We are accustomed to thinking that when people make claims of fact that are relatively easily checked their factual claims at least are likely to be true. That is all too often not the case.
- roidubouloi
May 24, 2011 at 12:01pm
I also thank you for the extra information and effort, Roi. I agree, it is unfortunate that we have to continually clean up after trash like Rat and Seattle. But, it's worth it both to have the actual facts on the table and for learning something I didn't know before.
- GSpinks
May 24, 2011 at 4:05pm
"index of freedom"? What a peculiar notion.
- IggyPop
May 24, 2011 at 4:18pm
My pleasure, GS. I always appreciate your comments here.
- roidubouloi
May 24, 2011 at 9:14pm