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.
People who think that higher social spending is a good thing are presumably concerned about the distributional effects of taxes as well:
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.
What about the distributive effects on corporate taxes?
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.
A Nordic tax agenda for Canada...
Reduce corporate tax rates
This would be fine as long as Canadian corporations also adopted the Nordic model as well. Nordic nations are highly unionized--80% in Sweden--which means that most workers in these countries earn a living wage that grows as their corporations get more tax breaks. The same isn't true in countries like Canada. All corporate tax cuts do here is add to the already overflowing corporate profits. The workers get no benefits from it and worse yet, are forced to carry a heavier tax load burden themselves.
Posted by: Robert McClelland | June 26, 2007 at 10:13 PM
Stephen,
there is a valid question raised about this on Mark Thoma's blog - what is the source of the data shown (particularly when is it from).
http://economistsview.typepad.com/economistsview/2007/06/social-spending.html#c74125216
Posted by: reason | June 27, 2007 at 09:45 AM
The data are all from the OECD. The graph that Mark posted was from 2002.
Posted by: Stephen Gordon | June 27, 2007 at 10:36 AM
Please, would you date the data for us to give a better understanding of what we are seeing?
Posted by: anne | June 27, 2007 at 03:31 PM
Ah, done already. Thank you, Stephen. Now to think through the relationships and how they might have been changing. Thank you and Reason.
Posted by: anne | June 27, 2007 at 03:33 PM
I find your presentation very interesting. Do you have any information about tax regimes and social spending in developing countries?
Posted by: Gisela Osorio | June 27, 2007 at 05:21 PM
That's a much more difficult problem. The stories we see in textbooks generally presume the existence of properly-functioning markets and all the infrastructure that requires. I'm pretty comfortable using these models for rich OECD countries; much less so for countries without those preconditions.
Posted by: Stephen Gordon | June 27, 2007 at 06:15 PM
You're welcome to write your own textbook.
Posted by: Stephen Gordon | June 28, 2007 at 09:52 PM
Is this data available somewhere?
Posted by: TW Andrews | June 29, 2007 at 01:16 PM
The OECD.
Posted by: Stephen Gordon | June 29, 2007 at 05:34 PM
My observation is that large countries (developed ones anyway, some others too perhaps, such as India) have had a tendency to think of themselves as closed economies, at least until recently, to some degree they still do. USA, Germany, France, Italy, Japan all tedn to at least aprtially think of themselves this way, noting that Japan probably has less elasticity than the others for cultural reasons.
This explains why they have gotten away with, at least until recently, having punitively high rates of corporate taxation. The other shoe has been dropping though, thanks in part to a higher return on capital in China than "the world rate of return".
It also may be my imagination, but I also think that international labor mobility has been increasing. To the extent that people are willing to overcome cultural friction this doesn't bode well for those who choose to have high rates of tax for income taxes/payroll taxes, especially for the highest earners. This may also explain why income tax rates are lower in the UK< Ireland, US, Canada, Australia and New Zealand as a rule, because if push comes to shove it is more conceivable that such citizens will simply move from one English speaking country to another.
Nice presentation though. I really wish more people would manage to grasp the incidence of corporate taxation (and capital gains and dividends) in an open economy and we could all dump such self destructive behaviour.
Posted by: happyjuggler0 | July 01, 2007 at 01:22 AM
By the way, I am pretty sure Ireland's headline corporate tax rate is 12.5%. Do they have some sort of surtax I don't know about?
Posted by: happyjuggler0 | July 01, 2007 at 01:23 AM
Consumption taxes do in fact have a negative effect on growth, because they create a tax wedge between consumers and producers similar in principle to income taxes and payroll taxes.
Posted by: Stefan Karlsson | July 22, 2007 at 12:30 PM
Thanks for pointing me here, Stephen. I have neither fully read nor (nearly) fully understood this, but I promise to struggle with it.
Posted by: unionist | October 13, 2007 at 12:17 AM
For international social democracy the document concluded in 2003 at the .... Revenue improvements are possible in the field of income taxation.
Posted by: James J | December 29, 2007 at 10:54 PM