Why Are Tax Burdens So Different in Different Developed Countries?--Posner
There are striking differences in tax burdens across nations, as explained in a recent report by the Organisation for Economic Co-Operation and Development. Measuring the tax burden in 2006 as the percentage of gross domestic product that is collected in taxes, the report arrays 20 countries from top to bottom. At the top is Sweden, with a tax burden of 50.1 percent; at the bottom is South Korea, with a tax burden of 26.8 percent. The United States is near the bottom, with 28.2 percent, and between it and South Korea are Greece and Japan, each with 27.4 percent. Next below Sweden is Denmark, with 49 percent, France,with 44.5 percent, and Norway, with 43.6 percent. The middle range is illustrated by Britain with 37.4 percent, Spain with 36.7 percent, and Germany with 35.7 percent.
In all 20 countries except the Netherlands, the tax burden has increased since 1975, though in some countries, such as the United States, the increase has been slight--only 2.6 percent. In others, however--Denmark Greece, Italy, Portugal, South Korea, Spain, and Turkey--it has exceeded 10 percent. Spain's increase has been the greatest, at 18.3 percent, followed by Italy's at 17.3 percent and Turkey's at 16.5 percent.
The OECD report explains that the increase in tax burden is due to increased revenues from "direct" taxes--income (including payroll) and corporate taxes--rather than from "indirect" taxes such as VAT, sales taxes, and other excise taxes. Even though most countries, including the United States, have cut income and corporate tax rates, the cuts have been more than offset by increases in income and corporate profits; of course the cuts may have helped generate those increases. The OECD favors indirect taxes because they tax only consumption, whereas direct taxes tax income that is saved, and thus discourage investment.
The increase in the tax base for direct taxes explains the mechanism by which the tax burden has grown but not why it has grown--why in other words the demand for government spending has grown. The OECD speculates that the cause is increased demand for social services such as pensions and health care.
The curious thing about the OECD data is that prosperity, economic growth, and other measures of economic well-being do not seem closely correlated with the tax burden. The variance across countries in tax burden is very great, yet one finds troubled economies, such as those of Japan and Greece, near the bottom of the tax-burden distribution--of course Japan is a very wealthy country, as Greece is not, but Japan's economic performance has been disappointing in recent decades. And one finds some high-performing economies, such as those of Sweden, Norway, and Finland at the top of the distribution, or (as in the case of the Netherlands, Spain, and the United Kingdom) in the middle. However, there is some negative correlation between economic performance and the tax burden; for Ireland, Switzerland, and the United States are low on the distribution, while typically low-performing Western European countries cluster in the upper half.
One would think that the tax burden, especially but not only when it is created mainly by direct taxes, would have a strong negative effect on economic well-being. (Perhaps it does, when other factors affecting economic well-being are adjusted for, which I have not attempted to do.) If government is less efficient than private enterprise, the more economic activity that is performed by government rather than by the private sector the less productive the economy as a whole should be; and the higher the tax burden, the greater the amount of economic activity performed by government. To the extent, moreover, that variance in tax burden across countries reflects variance in marginal rates of taxing income and corporate profits, we would expect the high tax-burden countries to be less productive, because the higher the tax on income, the greater the incentive to substitute leisure (which is untaxed) for work and to expend resources (and create economic distortions) in an effort to reduce the tax bite.
But there is an important difference between the actual production of economic goods and services by government, on the one hand, and transfer payments on the other. The effect of taxes on the behavior of the taxed entity is the same, but the effect on the efficiency of production is different. In the United Kingdom (which nevertheless has a high-performing economy), the government produces medical services; the National Health Service is the employer of the vast majority of doctors and other health professionals and owns most of the hospitals and other health care facilities in the U.K.; only about 8 percent of the U.K.‚Äôs population is served by private health providers. In contrast, the U.S. Medicare and Medicaid programs transfer vast amounts of public money to health care providers, but the providers are mostly private. The transfers come with strings attached, of course, and some of those strings induce inefficient behavior by the recipients. Nevertheless, a U.S. National Health Service on the English model would undoubtedly be highly inefficient compared to our admittedly highly imperfect private provision of health care. Transfer socialism is not as inefficient as means-of-production socialism.
To the extent that the growth in government spending is a growth in transfers rather than in government ownership of producers, the impact on economic growth and prosperity may be small, especially since the growth in transfers has coincided with the deregulation movement, which has resulted in privatization of significant areas of traditional public ownership, less regulation of the economy, and, as I mentioned, lower direct-tax rates. There thus appears to be a kind of balance, in which the efficiency-reducing effects of greater government spending are contained by reductions in direct-tax rates, by increased privatization and deregulation, and by channeling increased tax revenues mainly into transfer programs rather than into government production of goods and services.