These are the slides I prepared for the session on 'Taxation and Social Democracy', organised by the Progressive Economics Forum at the Canadian Economics Association meetings; the invitation was based on my blog posts on the nordic model.
One of the things that distinguishes blogging from research is that although academia frowns on recycling ideas, the blogosphere seems to thrive on it. So nothing here is really new: it's in the textbooks, several blogs, and described in great detail in Peter Lindert's Growing Public. But since I took the time to prepare the presentation, I'm going to post it here.
Update: Marc Lee reprises his role as discussant. Here's hoping that more and more presenters will find a way to post their seminar slides (which are generally easier to follow than the papers they're based upon), and that more and more discussants will post their comments (which are generally an easier way to understand what the paper is really saying).
These are countries whose per-capita incomes are greater than the OECD average. The point here is that there's no trade-off between high levels of national income and high levels of social spending. [Update for those of you who are visiting by way of The Economist. The empirical growth literature has not found much of a link between government size and economic growth rates; see, for example, this paper by Xavier Sala-i-Martin.]
It's not the level of taxes, it's the tax mix that really matters.
The Nordic countries are not defying economic conventional wisdom; they're applying it.
That's what the textbooks say. Let's look at how well policy-makers have learned this lesson. The US doesn't have a broad-based consumption tax, so it's not in this graph. For Canada, I used the Quebec rate, because I live in Quebec.
Countries with high levels of social spending have high levels of consumption taxes.
As far as I know, the GST credit is the only broad-based program of direct transfers to low-income households. It can be used as the foundation of something bigger.
Again, standard textbook material. Material that the Nordic countries have taken to heart; here are the statutory corporate tax rates:
Even after the tax cuts since 2000, Canada's rates are much higher than in the Nordic countries. You see the same pattern if you look at the average effective and the marginal effective tax rates:
The Nordic countries have much lower corporate tax rates than Canada. There are several countries that appear to be trying to use corporate taxes to finance social spending, but since Italy, France and Germany all have chronic budget deficits (the Nordics are generally in surplus these days), they really don't set an attractive example to follow.
This repeats material from this post. Corporations don't pay corporate taxes; people do. And those people are most likely to be workers and consumers. And even if you could engineer a hit on owners of capital, it's not going to bother the people at the top of the income distribution.
The Saez-Veall paper is the one I discussed here.
There's another feature of Nordic tax regimes: the rate at which personal income is taxed depends on the factor used to generate it.
There are obvious difficulties in implementing this sort of distinction, especially for people who are self-employed. But it shows the extent to which the Nordic countries are willing to apply the textbook principle of taxing the inelastic factor.
The top income tax rates in the Nordic countries are higher than in Canada; you get the same story if you look at the tax wedges between what the employer pays and what the employee brings home:
So it would appear that there's room for increasing personal income tax rates. However, there are reasons to want to proceed prudently here:
For example, it's worth noting that English-speaking countries all have low tax rates. That said, the increase in the top income shares is reason enough to start looking at tax increases for the top 1% or so of the income distribution.
Finally, a tax agenda:
I'm painfully aware that the calculus of electoral politics means that no political party in Canada will adopt any more than one element from that list. I wonder what it's like to live in a country governed by grown-ups.