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Tuesday, March 20, 2007

A comparison of tax rates in the OECD

Globalisation has meant an increase in taxation and spending. Expect such trends to continue.

by StFerdIII

A critical component for the elite of the current nation state is the statist and populist desire to control the resources of production and to manage the distribution of wealth and to a lesser extent consumption. This has meant that in the West we have seen an increase in the practice of private property (income streams) and capital (taxation, regulation, foreign investment controls, regulation and control of key industry sectors, FDI limitations), expropriation by the state. These ‘borrowed’ monies are then redistributed in various guises to the working classes, the old, those below certain income ranges, people in certain regions, state sponsored industry sectors, health and welfare programs, and state building programs of all sizes and shapes.

The degree and measure of state control and management of resources varies across nation states. The trend is however clear – increasing state ownership of the economy. Governments in the EU control on average 47% or more of the economy. This is a remarkable progression from the turn of the 20th century when its share was less than 10 percent. The impact of such a system on democracy, political processes, individual freedoms, and liberties is a source of great debate. Not even Marx would have envisioned such a system of egalitarian re-distribution and sharing and concern for marxian class dogma.

Government Tax Revenue as a % of GDP - 2005

OECD Average 39%
United States 29%
Britain 37.4%
Australia 31.5%

Japan 28%
Germany 38.4%
France 45.4%
Netherlands 43%
Sweden 53.2%
Denmark 49%
Norway 41.9%
Canada 37.2%
EU Average 43.6%

Real Government ownership of the economy - % of GDP

OECD Average 45%
United States 32%
Britain 45%
Australia 34%

Japan 31%
Germany 46%
France 49%
Netherlands 48%
Sweden 56%
Denmark 53%
Norway 46%
Canada 43%
EU Average 47%

The second table takes the OECD ‘statutory’ tax rates [first table] and factors in government income taken from indirect taxation – namely regulations that would accrue an additional 8-12 % of GNP on average to the government’s revenue base. This number also captures the power embedded in government ministries that monitor, manage or regulate vast monopolies in the energy, resource, health care, telecommunications, agricultural and utility sectors, as well as government ‘businesses’ that are government organs but not formally included in government revenue.

In essence the ‘statutory’ tax rate is a sham.

Such statist interference in economic matters is incompatible with the principles of globalization and international liberalism that is commonly and erroneously viewed as being underwritten exclusively by the United States. It is commonly accepted that the maximum size of government should not exceed about 30 % of GDP. Only the Anglo Saxon powers, Japan and Canada are close to this level. Again it must be kept in mind that the stated tax rates are below actual tax rates, so Canada’s 43% of GDP taken by government for instance, is quite a bit above the optimized level of 30%.

One study has explored tax rates, revenues and economic growth for 103 countries and found that economic rates of growth are maximized when government takes no more than 19 % of GDP. Others found that government consumption had no direct effect on private productivity but lowered savings and growth and found a negative correlation between government consumption and GDP growth. Another study found that for each 10 % increase in government expenditure there is a .7 % drop in GDP. It has also been suggested that 80 % of government expenditure in rich countries is spent on programs that do not have any positive effects on economic growth. Increasing debt and taxation levels and the continuance of economic growth and productivity to pay liabilities pose unique challenges for many nation states.

Besides the increasing levels of taxation the mix of taxation and its components is slowly changing as well. These changes reflect a general tendency towards ‘hidden’ taxation or taxes on consumer consumption taxes on retail items, social security taxes and corporate taxes. As well user fees, which are not accounted for in this chart, are used by governments as alternative revenue sources, though they do not ‘technically’ count as taxes.

Tax Structures in the OECD Areas – Average and Percentage Breakdown 2005 - % of total:

Personal Income Tax 26
Corporate Income Tax 10
Social Security Contributions 25
Payroll Taxes 1
Property Taxes 5
General Consumption Taxes 18
Specific Consumption Taxes 12
Other Taxes 3
Total 100

Personal and Corporate income taxes remain the most important source of revenues for most nations and in five countries – Canada, the US, Australia, Denmark, and New Zealand – the share of income taxes in the tax mix exceeds 45 %. Importantly in the past 25 years there has been a marked shift in most nations in the growing importance of Social Security Contributions due to higher unemployment, ageing, and health care spending. Only Australia and New Zealand have no revenue from social security contributions while in Germany and the Netherlands it makes up 40 % of Government revenue.

Social Security Contributions 2005 - % Of Government revenue:

United States 23.3%
Britain 16.4%
Australia 0%
Ireland 13.6%

Japan 36.5%
Germany 39.0%
France 36.1%
Netherlands 38.9%
Sweden 28.1%
Denmark 4.6%
Norway 22.5%
Canada 14.3%

In general the Anglo countries [and Korea] finance a much greater part of social benefits from general government revenues and the scope of their social security programmers is smaller. Social security contributions represent a major share of total tax revenue in most EU countries. Only in Denmark and the Netherlands does the employee pay the majority of such costs, in the rest of the OECD the employer typically pay 66% or more of such costs.

A reliance on social security to fund government revenues has of course has a huge impact on the economy. By ramping up social security taxation, the costs of labor is markedly increased, business competitiveness is reduced, and the rigidity of labor flow through ossified labor laws is enhanced further distorting the wage [or price] of labor in the market. None of these inefficiencies is conducive to create a dynamic and flexible economy.

'Competitiveness', whilst on the lips and in the speeches of every prominent populist politician is however a secondary and rather minor consideration. The first priority of politicians is to get elected and use tax payer money to win over voters. Any reforms to improve 'competitiveness' would in general, derange the implementation of this primary concern.

It is difficult to understand the widespread mis-belief cited as a fact by most media outlets, and supported by academics with theoretical frameworks (such as Harvard’s Rodrik), that globalization is destroying welfare regimes across the West. In Sweden for example tax revenue accounts for 57 % of the GDP, in Canada it has increased 25 % in the past 10 years, and in Denmark the percentage is now at 53 % up from below 50 % 10 years ago. Interestingly these 3 countries are some of the most open, and trade dependent in the world. The theory that national welfare regimes are under attack through globalize trade is unsubstantiated.

Clearly in the West, government ownership and re-disbursement of incomes and regulatory costs are intimidating. It is not fathomable to conclude that globalization will compel nation state institutions to reduce their control over their domestic economies. Witness EU states - supposedly all flocking together in 1992 to force market liberalisation to improve their economic futures by reducing statist control. Almost the opposite has happened.

There are two reasons why nation ‘statism’ and its statist structure will persist in power even in the face of globalization. First, there is a limited nature to globalization and secondly there are well defined interests in each country which will reject or at the least reform globalization's impact on nationalism, so-called 'national values', local structures and cultural institutions. In this regard we should expect that tax rates and spending increases will only escalate, not decline. The only real debate on the tax increase is from where will it come? Will it be from general taxation; consumption taxes; personal or corporate taxation or via social security payments?

Some sources:
OECD Accounts 2002-2005
See the Fraser Institute, 2002 study of regulatory and tax costs in Canada and the OECD
Study by Fraser Institute H. Grubel and J. Chao 1998
G Scully 1991
On the optimal size of government see R. Barro in 1991 and S. Folster and M. Henrekson 2001
OECD Accounts 2002 and 2003, p. 21