Sunday, November 6, 2011

How Smart is a Super-Lean Federal Tax Structure?

   It is Republican silly season, in which Republican presidential contenders seek to establish their appeal as economic conservatives.  In particular, contenders such as Rick Perry and Herman Cain are seeking to re-invent methods and are falling over themselves trying to advocate a lower tax base than the others. 

     The basic model is assumes that the private sector is much more efficient than the government sector, so taking money out of the private sector (i.e., via taxation) weakens the economy and stunts economic growth.  Hence, to make the economy grow again, you need to decrease taxes, especially on corporations and rich people in order to allow them maximum ability to lead the economy forward (how am I doing so far, Rush?). 
     However, any model is only good as its ability to explain the data.  If the low tax model is correct, we would expect to be able to go back in the historical records and show that the US has had good growth in times with low taxation, and poor growth when the taxation was high.  Similarly, if we look at the records of other countries, we could expact that foreign countries with low taxation should be prospering, while countries with high taxation should be stagnant. 

     So here are some real countries from among the G-20 nattions (names to be revealed later).  GDP is the gross domestic product per capita, or the amount of bucks that the average person has, including government services.  The personal income tax rate is the average percentage that a person has to pay in income taxes.  The Deficit is the percentage of the countries GDP that is borrowed, or surplus if the goverment takes in more than it spends.

Country A:  GDP per capita:  $84,000  Total tax rate:  38%  Growth: 1%   Deficit/surplus:  11% SURPLUS

Country B:  GDP per capita:  $47,000  Total tax rate:  15%  Growth: 1.5%  Deficit: 10% DEFICIT

Country C:  GDP per capita:  $4500   Total tax rate:  32% Growth: 10%  Deficit:  2% DEFICIT

Country D:  GDP per capita:  $49,000  Total Tax rate: 48%  Growth:  5.5%  Deficit: 1% SURPLUS 

Now of course there are a large number of countries, and one can't make a generalization based on four countries and I invite others to do an expanded study including more countries.  Nevertheless the basic economic model should have something to do with the data.

Each of these countries looks like it has something going for it.  Country A has the highest GDP per capita, despite a high tax structure.  It also has a surplus, as the budget is balanced.  Look at it this way, after a family of four pays its tax of $108,000, then they still have $328,000 left to spend on whatever they want.  And possibly they actually get something for their tax dollars, like public transportation, medical care and that sort of thing.  That doesn't sound so bad does it?

Country B has the largest deficit and the smallest tax burden, but also shows some moderate growth and a moderately high per capita GDP. 

Country C might be the least desirable to live in, based on per capita GDP.  However, the growth rate is the highest of the four countries.  Is this because of a super-low tax structure.  Not really.  The tax rate is a rather hefty 32%, which is a lot for people to pay, when they are below the poverty line. 

Country D also has a surplus, and a very high GDP per capita.  Their tax is an extremely high 48% which covers free medical care and all kinds of swell stuff. It's the second highest GDP of the four case studies.  This might be puzzling to the neoconservative economist who is convinced that high taxes destroy the GDP and growth. But it still looks rather livable for the average Joe.

OK, now are you ready to guess which country is which?  Country A, by far the richest country, is Norway.  Country B is the US.  Not a disaster area by any means, but clearly behind Norway.  Country C is China, which has the best growth but still has a very low GDP per capita.  Country D is Sweden, which has a higher GDP than the US and the highest tax.  They also have a balanced budget.  None of the data is remotely consistent with the current economic tripe being espoused by the Republican candidates.  The notion that low taxes creates jobs is just not true.  The US has the highest unemployment rate.  Individual taxes probably curbs the individual's spending power, but not the need for employment. 

What was so wrong with Bubbanomics?  In the 2000-2001 time frame,the US had a small surplus, plus a decent growth rate, and Federal spending in the range of 18% of GDP.  My view is that this formula was reached because of having a Republican House (led by Newt Gingrich) and a Democratic President (Bill Clinton).  Under this power-sharing arrangement, the government was able to avoid the excesses of either party and cut things down to the essentials.  

Money spent by the Federal government is not a complete waste.  I like having the strongest military in the world, and the Interstate Highway system is not so bad, and Social Security is a good thing.  I don't see how we can have these things without paying for them.
In order to win my vote next year the Republicans are going to have to show how they will move the economy back to the formula used by the Gingrich/Clinton compromises of the late 1990's.  Certainly the Conservatives are correct that the Government role in the economy has accelerated during the Bush and Obama administrations.  We need to go back and cut out the lower priorities in our budget.  But at the same time I don't think we need to embark on a dangerous experiment to attempt to minimize government taxation to a historic new low.  That is not going to improve economic growth or help unemployment, and in fact it is far more likely to have the opposite effect. 

1.  Taxation in Norway
2.  Taxation Doubles in China,
3..  Tax rates around the world,
4.  GDP per Capita,

1 comment:

  1. I think that Australia does is a place to look for a model. They restrict welfare to poor more that we do. Singapore also has a good model.

    Here is my post on the subject: