Nordic vs American exceptionalism

Megan McArdle ponders the Nordic model, and gets pretty much everything wrong.

• She indulges in the oft-repeated and almost-never-substantiated claim that "things that work in small homogeneous countries don't work in big, heterogeneous ones". The Nordics are applying standard textbook rules of taxation. There's nothing exceptional about that.
• Germany is cited  as evidence for the above point. Germany's problem is inflexible labour markets, not heterogeneity. Flexible labour markets are part of the Nordic model.
• The US really is exceptional when it comes to tax policy: it's the only OECD country that doesn't have a broad-based consumption tax. Alone among rich countries, discussions about US tax policy are framed as higher taxes = slower growth.

Comments

[Ian]

A groundswell grassroots movement is aiming to replace the U.S.'s income tax system by the FairTax - a "no exception" consumption tax - that will be progressive (i.e., untax the necessities of life). According to Prof. Laurence Kotlikoff,

"...the FairTax imposes much lower average taxes on working-age households than does the current system. The FairTax broadens the tax base from what is now primarily a system of labor income taxation to a system that taxes, albeit indirectly, both labor income and existing wealth. By including existing wealth in the effective tax base, much of which is owned by rich and middle-class elderly households, the FairTax is able to tax labor income at a lower effective rate and, thereby, lower the average lifetime tax rates facing working-age Americans.

"Consider, as an example, a single household age 30 earning $50,000. The household’s average tax rate under the current system is 21.1 percent. It’s 13.5 percent under the FairTax. Since the FairTax would preserve the purchasing power of Social Security benefits and also provide a tax rebate, older low-income workers who will live primarily or exclusively on Social Security would be better off. As an example, the average remaining lifetime tax rate for an age 60 married couple with $20,000 of earnings falls from its current value of 7.2 percent to -11.0 percent under the FairTax. As another example, compare the current 24.0 percent remaining lifetime average tax rate of a married age 45 couple with $100,000 in earnings to the 14.7 percent rate that arises under the FairTax."

[german_reader]

Germany's problem is not its inflexible labour market. That's the standard mantra of the employer's side to cut back employee's rights. Germany's problems are the after-effects of the re-unification, with exceptional high unemployment in EastGermany, an incompetent economic policy by our government, which has slowed down the economy for years, and the decrease of public investments and public employment to finance tax cuts for corporations and top-earners.

Unemployment according to ILO standards in former WestGermany is not higher than in the United Kingdom, Canada or the United States. Especially, if adjusted for external effects like excess imprisonment in the US or the very high number of the so called longterm sick in the UK. Our national unemployment rate is higher, because we count unemployment different. Unemployment in the UK or the US actually stands at 7-8% by German national standards, the same as in WestGermany. In 2006 there were 33.27 million people employed ( civilian employment only ) in former WestGermany and Berlin ( 48.15% of the total population - 69.1 million ) compared to 144.4 million in the US ( 48.2% of the population, 299.4 million ) and 28.9 million in the UK ( includes military, 47.8% of the population, 60.5 million).

Part-time employment is higher than in Canada or the US, but comparable to countries such as Australia or the UK. Most part-timers are women, male fulltime employment ( WestGermany) is very close to US levels. Public employment including all "labour market measures" ( temporary government employment ) is much lower than in the US, Canada or the United Kingdom and most other industrialized countries. And the share of the working age population ( 66.2% ) is smaller than in the US ( 67.2% ) and Canada ( 69% ).

Germany's "real" unemployment - if adjusted for differences in the economic cycle and the extraordinary situation in EastGermany - is not higher than in Anglo-American countries. The opposite is true, many other countries massively understate their "true" unemployment using extremely limited definitions of unemployment.

The "inflexible" German labour market is a myth, promoted by employer's associations and supply-side economists. It is not covered by the facts. And the "reforms" of the last decade are more damaging than improving the labour market. Full-time paid employment is currently nearly 1.5 million lower than during the last economic recovery and most of the nineties. More and more people are working in "precarious" employment. Really a great success of our "reformers".