International comparisons can be illuminating and help in distinguishing which things make the most difference. Here I present a comparison of total tax burdens.
This chart is from statistics published by the rich nations club, the Organisation for Economic Cooperation and Development (OECD). It shows the total burden of taxes as percentage of GDP for a number of nations in 1992, after the end of the Cold War, and 15 years later in 2007, the latest year for which reasonably comprehensive statistics are available. It also shows the gross percentage of per capita GDP growth, in constant price terms, over this period. For instance, over this period the income of the average American increased 36.3% (an annual average of about 2.1%), while that of the average Briton rose by 46.7% and in France the average increase was 24.3%.
Clearly, the tax burden in the United States is unusually low, as compared to other nations of comparable wealth and development. Two reasons seem most often to be given for minimizing taxes by pushing as many responsibilities as possible from the public to private sector. The first is that Americans are said to place especially great value on personal freedom in economic decisions, and there is little doubt that low-tax/small-government policies favor this.
The other is that some economic theories popular among economists and lay persons alike predict that low taxes promote economic growth and that high taxes retard it. It is as a very crude and limited test of such theories that I have plotted the growth in constant-price per-capita growth for each nation. Since the nations are listed in ascending order of tax burden in 2007, we would expect to see a pattern of low growth for the nations toward the bottom of the list, increasing toward the top. No such pattern is apparent, and thus this very limited test does not provide any clear support for the theory that low taxes are especially good for economic growth.
15 Nov 2010