Taxes and outcomes:Nordic vs Anglo-American
The CCPA released today a study by Osgoode Hall tax professor Neil Brooks and York’s Thaddeus Hwong called The Social Benefits and Economic Costs of Taxation: A Comparison of High and Low-tax Countries. The study compares 50 indicators of social and economic performance. The full study is available here and a condensed summary follows:
Tax levels in Canada have always been substantially below those in most other industrialized countries, and they have been significantly reduced over the past few years, yet the crusade against them continues unabated. In 1998, all taxes collected in Canada amounted to 36.7% of the gross domestic product (GDP). Due in part to tax cuts, this percentage fell almost 3 percentage points to 33.5% by 2004.
Tax levels in the average industrialized country that belongs to the Organization for Economic Cooperation and Development (OECD) was over 2 percentage points higher than in Canada in 2004, 35.9% of GDP, and in the average European country it was almost 5 percentage points higher, 38.3% of GDP. Yet the federal governmentâ€™s major priority, as reflected in its first budget tabled last spring, and in statements made following the tabling of its Annual Financial Report for the Fiscal Year 2005â€“06 this fall, in which the government committed a $13.2 billion surplus to debt reduction, is more tax cuts.
It is often difficult to know precisely what taxcutters hope to achieve through more tax cuts and what evidence they think supports their claims. Their contention that Canadians would be better off if taxes were reduced is usually asserted as an article of faith. However, one way of attempting to answer the question of whether the Canadian government should be cutting taxes even more is to look across countries and compare the social and economic outcomes in high-taxed countries with the social and economic outcomes in low- taxed countries. Is it really the case, as assumed by those who think taxes need to be further reduced in Canada, that the quality of life of the average citizen is higher in low-taxed countries than high-taxed countries?
That is the question we undertake to answer in this study. We compare high- and low-tax countries on a wide range of social and economic indicators. As representative of low-tax countries, we study all six Anglo-American countries: the United Kingdom, the United States, Canada, Ireland, Australia, and New Zealand. As representative of high-tax countries, we study the four Nordic countries: Sweden, Norway, Denmark, and Finland.
If the story about taxes and the welfare state told by tax-cutters has any credibility, the results should be evident in comparisons between industrialized countries with low taxes and those with high taxes. Indeed, if the story is even remotely true, one would expect those countries with even marginally higher tax levels than Canada to be modern-day economic basket cases and to be no better off in terms of social outcomes or of the quality of the lives enjoyed by their citizens.
â€¦ Findings from this study show that high-tax countries have been more successful in achieving their social objectives than low-tax countries. Interestingly, they have done so with no economic penalty. On the majority of social measures we examine, high-tax countries rank significantly above low-tax countries. On a number of the economic indicators we examine, low-tax countries rank above high-tax countries, but the difference is almost never significant.
We examine 50 indicators that are commonly used to measure a countryâ€™s social progress. On over half of these indicators (29), the outcomes in high-tax Nordic countries are significantly better than those in low-tax Anglo-American countries, and on most of the remaining indicators (13), social outcomes are somewhat better in Nordic countries. In short:
â€¢ Nordic countries have significantly lower rates of poverty across almost all social groups;
â€¢ as an indicator of how well a country protects the vulnerable, the elderly have significantly higher pension income replacement rates in Nordic countries and the income received by those with disabilities relative to the population is much higher;
â€¢ income is distributed significantly more equally in Nordic countries;
â€¢ on every measure we examine there is significantly more gender equality in Nordic countries;
â€¢ Nordic workers have significantly more economic security;
â€¢ in terms of health outcomes, infant mortality rates are significantly lower and life expectancy is longer in Nordic countries;
â€¢ in terms of educational outcomes, a greater percentage of the population completed secondary school and university in Nordic countries and 15-year old students score higher on math tests;
â€¢ as a measure of personal physical security, homicide rates are lower in Nordic countries;
â€¢ as indicators of the degree of community and social solidarity in a country and general happiness and life satisfaction, there is significantly more trust among individuals and for public institutions in Nordic countries;
â€¢ there is significantly less drug use in Nordic countries; individuals have significantly more leisure time; individuals have more freedom, according to a widely referred to index of economic freedom; individuals report more life satisfaction; and they are more likely to discuss politics with friends;
â€¢ Nordic countries rank much higher on an index of environmental performance, and the Nordic countries give significantly more in foreign aid than Anglo-American countries.
Low-tax Anglo-American countries rank higher than Nordic countries on only seven out of the 50 social indicators. In each case, it is a trivial difference that could be easily due to chance: a slightly higher percentage of the 25â€“64 age group completed either college or university; 15-year-olds did slightly better on reading and science tests; a slightly greater percentage of people report a greater sense of freedom; there are on average a lower number of suicides; and a slightly greater percentage of individuals report they are very happy.
With respect to the pursuit of economic goals, the indicators we examine suggest hightax countries have achieved their social success with no economic penalty. Over the past 15 years, the low-taxed Anglo-American countries have experienced slightly greater economic growth than the high-taxed Nordic countries, but it would appear that the Nordic countries have positioned themselves for greater growth in the future. Of the 33 economic indicators examined, the Nordic countries lead on 19 indicators and the Anglo-American countries on 14.
The high-tax Nordic countries have:
â€¢ a marginally higher GDP per capita;
â€¢ a higher GDP per hour worked;
â€¢ significantly lower unit labour costs and significantly lower rates of inflation;
â€¢ higher budget and current account surpluses;
â€¢ a higher total labour participation rate, and a higher female labour participation rate;
â€¢ much higher rates of household saving and net national saving;
â€¢ a higher ranking on indexes measuring innovation;
â€¢ a higher percentage of GDP spent on research and development and a higher percentage of their workers working as research and development researchers;
â€¢ a higher level of network readiness;
â€¢ a higher percentage of broadband subscribers;
â€¢ a significantly higher ranking on their growth competitiveness by the World Economic Forum; and
â€¢ a higher ranking on Richard Floridaâ€™s global creativity index. Anglo-American countries have:
â€¢ a higher rate of growth in GDP per capita between 1990 and 2004;
â€¢ a higher rate of growth in GDP per hour worked from 1995 to 2004;
â€¢ a higher rate of growth in multi-factor productivity from 1995 to 2002;
â€¢ a lower national debt;
â€¢ a significantly higher growth in employment from 1992 to 2002 (this is the only measure on which Anglo-American countries exceed Nordic countries in a way that is statistically significant);
â€¢ a lower rate of general unemployment, a marginally lower rate of long-term unemployment, a marginally higher rate of male labour participation rates;
â€¢ a greater change in fixed capital formation; and
â€¢ greater inward foreign direct investment and inward foreign direct investment performance.
In making their case for lower taxes, taxcutters in Canada frequently point to the United States, which has one of the lowest tax levels of the industrialized countries in the world, and suggest that Canadian society should strive to become more like American society. So, in addition to comparing social and economic outcomes broadly between low- and high-tax countries, we highlight the social and economic outcomes in the United States and ask: should Canadians really want their country to become more like the United States? To provide some basis for comparison, we compare the outcomes in the United States with those of another country Canada might wish to emulate: Finland.
Our findings show Americans bear incredibly severe social costs for living in one of the lowesttaxed countries in the world. For a strikingly large number of social indicators, the United States ranks not only near the bottom of the 19 industrialized countries, but it ranks as the most dysfunctional country by a considerable margin:
â€¢ Poverty is widespread. A greater percentage of Americans, and in particular children and the elderly, live in poverty in the United States than in any other industrialized country in the world.
â€¢ The income of vulnerable citizens, such as the elderly and those with disabilities, is much lower compared to others in the United States than almost all other industrialized countries.
â€¢ Living conditions are shockingly unequal. By any measure, income is distributed more unequally in the United States than in every other industrialized country. In 2004, Americaâ€™s richest 1% held more of the nationâ€™s wealth than the bottom 90% (34.7% versus 29.9%).
â€¢ Ordinary workers in the United States have less economic security than workers in any other industrialized country (as shown by a comprehensive index of economic security developed by the International Labour Organization).
â€¢ As an indication of gender inequality, women in the United States still hold a relatively small percentage of positions in the professions, legislative bodies, and senior civil service. In contrast to the United States, Finland ranks near the top of the industrialized world on each of the following social indicators:
â€¢ The percentage of the population living below the poverty line is very low (for example, only 3.4% of children).
â€¢ The elderly and those with disabilities have incomes that are close to those of the rest of the population.
â€¢ Income is distributed relatively equally.
â€¢ Women hold about 50% of the positions in legislative bodies and senior civil service.
â€¢ Workers in Finland enjoy one of the highest levels of economic security among workers in the industrialized world.
It is well known that there are profound problems with the United Statesâ€™ health and education system â€” where values such as selectivity, diversity, and choice predominate and a large percentage of the spending is done through the pri vate sector. The United States spends over twice as much of its GDP on health care than Finland (15% versus 7.4%), and yet U.S. health care outcomes remain far worse â€” indeed, worse than most other industrialized countries. For example, the percentage of children who die at birth in the United States is the highest among industrialized countries. Finns live longer than Americans, and the rate of infant mortality in Finland is less than one-half the American rate.
The United States spends a greater percentage of its GDP on education than Finland spends, yet the Finnish education system â€” which is a comprehensive public system based on equity and the professionalism and training of teachers â€” achieves much better outcomes. American 15-year-olds rank near the bottom of OECD countries when it comes to science and math skills. By contrast, Finnish 15-year-olds rank first in the world in science and math skills. American students also rank relatively low on reading skills, while the Finnish students come first in the world in this area as well.
This pattern, with the United States ranking about the lowest among industrialized countries and Finland near the top, is evident on most of the remaining social indicators we examine â€” relating to social goals such as personal security, community and social solidarity, self-realization, democratic rights, and environmental governance. We will not review them all here, except to note that, although Canadaâ€™s Conservatives appear ready to adopt aspects of the United Statesâ€™ justice system, such as mandatory criminal sentencing, the United States is by a wide margin the most violent industrialized country in the world (measured by the murder rate). Americans themselves express the third lowest measure of confidence in their justice system, in a tie with Belgium. Italians and Australians have slightly less confidence in their justice systems.
This brief review of how well industrialized countries have achieved their social goals shows the United States ranks lower than most countries on a wide range of social indicators, suggesting that the form of social organization used to accommodate contemporary life in the United States has gone profoundly amiss. Some commentators dismiss the miserable social outcomes achieved by the American social contract by noting that it is nevertheless one of the wealthiest countries in the world. GDP per capita is higher in the United States than in most other industrialized countries. The results of this study, however, suggest a trade-off does not have to be made between material prosperity and social equity.
In addition, there are countless problems with using GDP per capita as a measure of economic well-being. It takes no account of how the wealth that is produced in a country is distributed. For example, even though the United States experienced strong economic growth in recent years, between 1998 and 2004 the income of the typical (median) American family fell by 3.8%. Moreover, per capita GDP is high in the United States primarily because Americans work many hours more than citizens of other countries. Low-income Americans often have to work at two or three jobs just to survive.
Recent economic growth in the United States has also come at high long-term economic costs. The federal government budget is on an unsustainable path: the U.S. has the largest deficit in relation to its GDP of any industrialized nation; its trade deficit is the largest in the world, a staggering $805 billion last year; and, the U.S. also has one of the lowest savings rates of the industrialized countries. Moreover, even with its wealth, flexible economy and low taxes, the United States is not the most competitive country in the world. From 2001 to 2005, in its comprehensive survey of world economies, the business- dominated private World Economic Forum has determined that the most competitive country in the world was Finland. In 2005â€“06, Finland was ranked as the second most competitive country after Switzerland.
As I’ve said before, there’s almost no reason to believe that high taxes have anything to do with economic growth or welfare. The issue is the tax mix: some forms of taxes have negative effects on economic growth, and some have neutral effects. To reproduce Nordic outcomes, we’d have to reproduce their tax mix: higher consumption tax rates, and lower rates on investment income.
I have made similar points on tax mix myself. Higher consumption taxes as a part of a social bargain may be required to get to the levels of GDP seen over there. But this does not mean there is no scope for a more progressive income tax system either, especially since we are seeking to counter inequality that has grown largely due to changes in market incomes. More detail available here: http://www.policyalternatives.ca/documents/National_Office_Pubs/btn6_4.pdf
I’m open to lowering corporate tax rates but if we went that route I’d like to see that offset by, say, inheritance or wealth taxes applied above a certain threshold. But I’m not convinced that our corporate taxes are that out of line by standard measures. The larger differences in corporate tax rates seem to be driven by comparisons based on METRs, which have some major shortcomings as a measure (as I have pointed out on this site: http://progecon.wordpress.com/2006/10/13/the-skinny-on-metrs/)
Why not a progressive consumption tax? Take savings out of taxation, and tax the difference between income and savings at progressive rates with a exemption for low income people? Combine this with lower taxation on capital investment.
Sweden also has a huge real unemployment rate. Even their former minister of employment Hans Karlsson admitted it was around 20%. They hid their real numbers with early retirement, students who recieve income from the government to continue to study and not enter the job market, sick leave, those on social assistance etc…. I believe high tax and high benefit countries have their down sides. Sorry Marc about my comment earlier.
Taxes alone are not going (mix or no mix) are not going to provide nordic style outcomes in Canada. The whole idea of emulation is flawed to my mind. Besides the tax rate and mix is the social and political mix which drives spending and distribution in a particular direction. The one sans the other is likely to lead to perverse outcomes.
The paper is important beecause it adds to already existing literature which finds no correlation between a) levels of taxation and b) the size of the welfare state.
Molson is right in that we should idealize the Nordic countries as some sort of utopia that we in Canada should cut and paste onto our own systems. I’d be interested in some more detailed evidence outlining those downsides.
But what they show us is that it is possible to be competitive and inclusive at the same time, and they are real-world examples that should be flagged every time a conservative argues that higher (lower) taxes will hurt (spur) economic growth or productivity growth.
As for progressive consumption taxes, we already do this to a large extent through the income tax system. Because of RRSP deductions (ie saving) the system is more based on consumption. Although the amount that can be deducted is capped, only very high income people are pushing up against that threshold.
Having more early retirement and students while maintaining a similar standard of living should be a good thing, not a bad thing. The purpose of the economy is to allow people to live, not necessarily work.
Besides the report said nordic counties have “a higher total labour participation rate”
Well not Sweden in particular, but in other countries such as Germany, they will have a tough time with their pension system due to demographic changes. We are talking large tax increases on their workers. I disagree with the idea that the idea of the economy is to allow people to live and not work to some extent. Those programs are dependant on people actually working. Also, my point was the fact that they fudged their unemployment numbers. Their goal for my years was to have full employment, but it appears they were unable to do this.
McKinsey Global Institute found that the unemployment figures were around 15% in Sweden. They basically looked at the figures and added those who wanted to be in the labour market, and those who actually were. I’m asking a question, might there be a correlation to high pay roll taxes, and lower job creation in Sweden? This is one possible conclusion. This is a downside I see, and relying on offical government data while not taking into account their labour market programs can lead to a misleading conclusion. I’m kinda hard pressed for evidence except from outside sources, and those may be viewed as baised.
Back when unemployment was higher in Canada than recently, it was common to point out that unemployment rates may have appeared artificially low because of discouraged workers, who have left the labour force and so are not counted in the official stats, and underemployed workers. These measures, if I recall correctly roughly doubled the official unemployment rate.
With regard to Sweden, we can only make apples to apples comparisons based on official data. That 15% McKinsey number may well be true but unless they were to do the same for Canada and other countries it does not give us much basis for comparison.