Saturday, July 9, 2011

Taxes and the Economy

[[This post is not about computer games]]

Reading US media and the lovely comments sections, there's something I don't get. About half of you people seem to think that raising taxes has a bad effect on the economy. Laffer curves and things like that. Now, I agree that 100% taxes is bad for the economy.

But for realistic tax rates, there's really not much of a relationship.
Want proof? Just have a look outside the US.

A Swedish web site or Wikipedia

Let's take Denmark as an example. They lead most lists by 'stealing' about 50% of their citizens' income a year. And here's the 2010 GDP: $56,147 per capita.

The US 'steal' 24% of their citizens' income each year. Their 2010 GDP: $47,284 per capita.

You can compare GDP in PPP terms to get less extreme results. But the truth is: I have a sister in the US and their standard of living is just the same we have in Germany. But here the taxes are a lot higher. I payed 50% in taxes and social security contributions last year.

Yet Germany's economy soars, matching annualized 6% last quarter. Unemployment has never been lower in re-united Germany than today.


  1. Well, how about your neighbor France? They are closer in size, population, and tax policy to Germany than the US. They even share the same currency. By your examples, we should assume their economy is booming and their unemployment is at an all time low as well.

    And if we want to get ugly, we could talk about Spain. Again, closer to Germany than US in those factors.

    I do not think that your model of "we do these few things in Germany" captures enough of the picture to allow you to apply it to other countries.

  2. Wilhelm, you are assuming that I said that raising taxes makes your economy boom.

    I didn't say that and it would be stupid.

  3. Sweden has a lot of things covered like much better healthcare (and overall cheaper), a much better school system, things like childcare is much cheaper, and there is a lot of support for thing like unemployment and retirement. Basically a lot is provided for that can often be expensive (and of poorer quality) here.

  4. Especially notable since the US is only attempting to raise taxes on the top 1% of the population. Middle class taxes are actually lower than they've ever been.

    It's unfortunate that the ultra rich have so much political clout in the US...

  5. @Kevin: Why shouldn't they? It only seems fair that hard-working people who drive the economy would have more influence than the lazy unwashed swine. Ideally the poor wouldn't even have voting rights, as an incentive to increase their economic worth. It's sort of a twist on democracy that uses a smaller, elite group rather than everyone.

  6. @Kleps:

    Because it's a false meritocracy that arbitrarily denotes the rich as hard-working when, in fact (at least in the UK) there is little to suggest that's actually the case. Notwithstanding the fact that it would also create (for all intents and purposes) the equivalent to the aristocracy, where wealth and power wouldn't go to the worthy but to the lucky who were born to the right parents.

    Feel free to apply your logic when there is actual equality of opportunity in your nation, but until such a time there is very little merit to a false meritocracy.

    Also: I'd personally rather have the unwashed swine who produce actual goods for me to buy have the vote than suits who get paid to frolic in a false economy of their own devising.

  7. @Wilhelm: The point is there is no connection at all between overall tax rate and any of the following: standard of living, take home pay, health of economy as a whole.

    Your facts just support that argument. Of course when you look at actual data, the leading country that showed that a very low overall tax rate could result in great economic performance was Ireland. So it's actually possible that, once you remove that phantom data point, that a tax rate of 50% *is* better for the economy overall than one of 30%.

  8. I wouldn't exactly say that there is no connection. But (in the long term!) the connection cannot be very strong if a country with two times the taxes performs just as well as the US (and arguably better).

    And this is average GDP. Looking at the Gini coefficient, Europa as a whole and especially Scandinavia and Denmark, outperform US by magnitudes. Of course, this motivates the question, whether a low Gini coefficient is desireable in the first place.

  9. It's especially silly because the proposed tax "increases" are just the removal of tax breaks enjoyed by corporations and oil companies.

    The "that will slow down the economy!" folks seem to think that a corporation having to pay an extra $50,000 (arbitrary made-up number) in taxes on their corporate jet will result in the company not hiring a worker that would have cost $50,000.

    Never mind that U.S. corporations are sitting on billions of dollars in profits and STILL aren't hiring.

  10. On top of that observation, many (most?) people in America don't really understand what taxes do; they think it's just the government taking their money to no end. For that reason, people gripe about a 1% sales tax increase that's directly tied to educational improvements (I'm a teacher, so obviously that's my priority, though I can understand others might not like it). Frankly, when I tell kids in my English class - not government or history or any social studies class - how taxes are used and how paying taxes can benefit people, they're shocked. It's simply not something that's "tested" in America, so it's no something that's taught by mediocre teachers.

  11. I think no connection is a fair claim as long as you are within some reasonable middle ground. The data just don't show any relationship between overall taxation and take home pay, which sounds odd, but it's a fact. Of course the number of data points available is pretty small, and there is almost certainly a relationship, we just don't have any actual evidence as to what that relationship is. It's almost certainly terrible to have 0% tax rate and it is quite certainly terrible to have 100%, what the ideal number in the middle is probably depends on a very large number of factors.