29 January 2008

Posner On Taxes And Economic Growth

There are striking differences in tax burdens across nations, as explained in a recent report by the Organisation for Economic Co-Operation and Development. Measuring the tax burden in 2006 as the percentage of gross domestic product that is collected in taxes, the report arrays 20 countries from top to bottom. At the top is Sweden, with a tax burden of 50.1 percent; at the bottom is South Korea, with a tax burden of 26.8 percent. . . . The curious thing about the OECD data is that prosperity, economic growth, and other measures of economic well-being do not seem closely correlated with the tax burden.

Via the TaxProf Blog.

Posner's blog partner Becker argues that this has a lot to do with the long term incidence of taxation on capital.

I suspect that the explanation is probably simpler. In high tax countries a great deal of the tax burden is attributable to social insurance taxes that fund retirement spending, higher education and health care spending from the public sector. In low tax countries, I suspect that economic and social custom constrains families and most economically important firms to provide services and social welfare benefits that aren't formalistically considered to be government spending, but are provided by government in high tax countries. Indeed, in countries like Japan, economically important firms also provide a private sector equivalent of unemployment insurance as well, with the lifetime employment system.

To a great extent, what economically unimportant firms in the small business sector in countries with weak social safety nets like Japan and the United States do, doesn't matter for purposes of macro-economic trends of economic growth and prosperity.

Also, good measures of prosperity factor in notions like the fact that the United States has a large underclass that has a standard of living measured by things like health care outcomes, access to education, leisure and economic security that is below that of people in comparable percentiles of affluence in almost all of its first world peers. In Japan that underclass is much smaller largely because the country is far more homogeneous and economically equal than in the United States.

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