benefits and costs of taxation

8/14/2019 Benefits and Costs of Taxation

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isbn 0-88627-514-8

This report is available ree o charge rom

the CCPA website at www.policyalternatives.ca.

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About the Authors

Neil Brooks teaches tax law and policy at OsgoodeHall Law School. Thaddeus Hwong teaches taxlaw and policy at Atkinson Faculty o Liberal andProessional Studies, York University.
http://www.policyalternatives.ca/http://www.policyalternatives.ca/http://www.policyalternatives.ca/http://www.policyalternatives.ca/http://www.policyalternatives.ca/


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5 Taxes: Are They Really All Bad?

7 Summary

11 Ranking Countries by Tax Level

13 Comparing Social and Economic

Outcomes in Low- and High-Tax Countries

35 To What Kind o Country Do

Canadians Aspire?

37 Appendix


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5/55

the social benefits and economic costs of taxation

believe all taxes are bad. tephen Harper

made this remark during the ederal election

last year in announcing he would reduce the

oods and ervices ax rom 7% to 5% i elect-

ed rime Minister.

axes are the price citizens o a country pay

or the goods and services they collectively pro-

vide or themselves and or each other. o it is

dicult to know exactly what Harper meant

when he said he believes all taxes are bad. Was

he saying that all actions taken collectively by

citizens through democratically elected insti-

tutions are bad?

lthough almost everyone other than

rime Minister Harper recognizes the need

or some taxes, over the past 25 years public

policy debates in every nglo-merican coun-

try, including anada, have been dominated by

a campaign against taxes.

ax levels in anada have always been sub-

stantially below those in most other industrial-

ized countries, and they have been signicantly

reduced over the past ew years, yet the crusade

against them continues unabated. n 1998, all

taxes collected in anada amounted to 36.7% o

the gross domestic product (GDP). ue in part to

tax cuts, this percentage ell almost 3 percent-

age points to 33.5% by 2004.

ax levels in the average industrialized coun-

try that belongs to the rganization or conom-

ic ooperation and evelopment (OECD) was

over 2 percentage points higher than in anada

in 2004, 35.9% o GDP, and in the average uro-

pean country it was almost 5 percentage points

higher, 38.3% o GDP. Yet the ederal governments

major priority, as reected in its rst budget ta-

bled last spring, and in statements made ollow-

ing the tabling o its nnual Financial Report or

the iscal Year 200506 this all, in which the

government committed a $13.2 billion surplus

to debt reduction, is more tax cuts.

t is oten dicult to know precisely what tax-

cutters hope to achieve through more tax cuts and

what evidence they think supports their claims.

Teir contention that anadians would be better

of i taxes were reduced is usually asserted as an

article o a ith. However, one way o attempting

to answer the question o whether the anadian

government should be cutting taxes even more is

to look across countries and compare the social

and economic outcomes in high-taxed countries

with the social and economic outcomes in low-

Taxes: Are They Really All Bad?


6/55

canadian centre for policy alternatives

taxed countries. s it really the case, as assumed

by those who think taxes need to be urther re-

duced in anada, that the quality o lie o the

average citizen is higher in low-taxed countries

than high-taxed countries?

Tat is the question we undertake to answer in

this study. We compare high- and low-tax coun-

tries on a wide range o social and economic in-

dicators. s representative o low-tax countries,

we study all six nglo-merican countries: the

nited Kingdom, the nited tates, anada,

reland, ustralia, and ew Zealand. s rep-

resentative o high-tax countries, we study the

our ordic countries: weden, orway, en-

mark, and inland.

the story about taxes and the welare state

told by tax-cutters has any credibility, the results

should be evident in comparisons between in-

dustrialized countries with low taxes and those

with high taxes. ndeed, i the story is even re-

motely true, one would expect those countries

with even marginally higher tax levels than an-

ada to be modern-day economic basket cases

and to be no better of in terms o social out-

comes or o the quality o the lives enjoyed by

their citizens.


7/55


ax cuts are disastrous or the well-being o a

nations citizens.

Findings rom this study show that high-tax

countries have been more successul in achiev-

ing their social objectives than low-tax coun-

tries. nterestingly, they have done so with no

economic penalty.

n the majority o social measures we exam-

ine, high-tax countries rank signicantly above

low-tax countries. n a number o the econom-

ic indicators we examine, low-tax countries rank

above high-tax countries, but the diference is

almost never signicant.

We examine 50 indicators that are commonly

used to measure a countrys social progress. n

over hal o these indicators (29), the outcomes

in high-tax ordic countries are signicantly

better than those in low-tax nglo-merican

countries, and on most o the remaining indi-

cators (13), social outcomes are somewhat bet-

ter in ordic countries. n short:

ordic countries have signicantly lower

rates o poverty across almost all social

groups;

as an indicator o how well a country

protects the vulnerable, the elderly have

signicantly higher pension income

replacement rates in ordic countries

and the income received by those with

disabilities relative to the population is

much higher;

income is distributed signicantly more

equally in ordic countries;

on every measure we examine there issignicantly more gender equality in

ordic countries;

ordic workers have signicantly more

economic security;

in terms o health outcomes, inant

mortality rates are signicantly lower

and lie expectancy is longer in ordic

countries;

in terms o educational outcomes, a greater

percentage o the population completedsecondary school and university in ordic

countries and 15-year old students score

higher on math tests;

Summary


8/55

canadian centre for policy alternatives

as a measure o personal physical security,

homicide rates are lower in ordic

countries;

as indicators o the degree o community

and social solidarity in a country and

general happiness and lie satisaction,

there is signicantly more trust among

individuals and or public institutions in

ordic countries;

there is signicantly less drug use in

ordic countries; individuals have

signicantly more leisure time; individuals

have more reedom, according to a widely

reerred to index o economic reedom;

individuals report more lie satisaction;

and they are more likely to discuss politics

with riends; ordic countries rank much higher on

an index o environmental perormance,

and the ordic countries give signicantly

more in oreign aid than nglo-merican

countries.

ow-tax nglo-merican countries rank high-

er than ordic countries on only seven out o the

50 social indicators. n each case, it is a trivial di-

erence that could be easily due to chance: a slight-

ly higher percentage o the 2564 age group com-pleted either college or university; 15-year-olds did

slightly better on reading and science tests; a slightly

greater percentage o people report a greater sense

o reedom; there are on average a lower number

o suicides; and a slightly greater percentage o in-

dividuals report they are very happy.

With respect to the pursuit o economic

goals, the indicators we examine suggest high-

tax countries have achieved their social suc-

cess with no economic penalty. ver the past

15 years, the low-taxed nglo-merican coun-tries have experienced slightly greater econom-

ic growth than the high-taxed ordic countries,

but it would appear that the ordic countries

have positioned themselves or greater growth

in the uture. the 33 economic indicators ex-

amined, the ordic countries lead on 19 indica-

tors and the nglo-merican countries on 14.

e high-tax ordic countries have:

a marginally higher GDP per capita;

a higher GDP per hour worked;

signicantly lower unit labour costs and

signicantly lower rates o ination;

higher budget and current account

surpluses;

a higher total labour participation rate, and

a higher emale labour participation rate;

much higher rates o household saving and

net national saving;

a higher ranking on indexes measuring

innovation;

a higher percentage o GDP spent on

research and development and a higher

percentage o their workers working as

research and development researchers;

a higher level o network readiness;

a higher percentage o broadband

subscribers;

a signicantly higher ranking on their

growth competitiveness by the World

conomic orum; and

a higher ranking on Richard loridas

global creativity index.

nglo-merican countries have:

a higher rate o growth in GDP per capita

between 1990 and 2004;

a higher rate o growth in GDP per hour

worked rom 1995 to 2004;

a higher rate o growth in multi-actor

productivity rom 1995 to 2002;

a lower national debt;

a signicantly higher growth in

employment rom 1992 to 2002 (this is the


9/55


only measure on which nglo-merican

countries exceed ordic countries in a way

that is statistically signicant);

a lower rate o general unemployment,

a marginally lower rate o long-term

unemployment, a marginally higher rate o

male labour participation rates;

a greater change in xed capital ormation;

and

greater inward oreign direct investment

and inward oreign direct investment

perormance.

n making their case or lower taxes, tax-

cutters in anada requently point to the nit-

ed tates, which has one o the lowest tax levels

o the industrialized countries in the world, and

suggest that anadian society should strive to

become more like merican society. o, in addi-

tion to comparing social and economic outcomes

broadly between low- and high-tax countries, we

highlight the social and economic outcomes in

the nited tates and ask: should anadians re-

ally want their country to become more like the

nited tates? o provide some basis or com-

parison, we compare the outcomes in the nit-

ed tates with those o another country ana-

da might wish to emulate: inland.ur ndings show mericans bear incredibly

severe social costs or living in one o the lowest-

taxed countries in the world. For a strikingly large

number o social indicators, the nited tates

ranks not only near the bottom o the 19 indus-

trialized countries, but it ranks as the most dys-

unctional country by a considerable margin:

overty is widespread. greater

percentage o mericans, and in particular

children and the elderly, live in poverty

in the nited tates than in any other

industrialized country in the world.

e income o vulnerable citizens, such

as the elderly and those with disabilities,

is much lower compared to others in

the nited tates than almost all other

industrialized countries.

iving conditions are shockingly unequal.

By any measure, income is distributed

more unequally in the nited tates than

in every other industrialized country. n

2004, mericas richest 1% held more o the

nations wealth than the bottom 90% (34.7%

versus 29.9%).

rdinary workers in the nited tates have

less economic security than workers in any

other industrialized country (as shown by a

comprehensive index o economic security

developed by the nternational abour

rganization).

s an indication o gender inequality,

women in the nited tates still hold arelatively small percentage o positions

in the proessions, legislative bodies, and

senior civil service.

n contrast to the nited tates, Finland ranks

near the top o the industria lized world on each

o the ollowing social indicators:

e percentage o the population living

below the poverty line is very low (or

example, only 3.4% o children).

e elderly and those with disabilities have

incomes that are close to those o the rest

o the population.

ncome is distributed relatively equally.

Women hold about 50% o the positions in

legislative bodies and senior civil service.

Workers in inland enjoy one o the

highest levels o economic security among

workers in the industrialized world.

t is well known that there are proound prob-lems with the nited tates health and educa-

tion system where values such as selectivity,

diversity, and choice predominate and a large per-

centage o the spending is done through the pri-


10/55

canadian centre for policy alternatives10

vate sector. Te nited tates spends over twice

as much o its GDP on health care than inland

(15% versus 7.4%), and yet .. health care out-

comes remain ar worse indeed, worse than

most other industrialized countries. or exam-

ple, the percentage o children who die at birth

in the nited tates is the highest among indus-

trialized countries. Finns live longer than mer-

icans, and the rate o inant mortality in Finland

is less than one-hal the merican rate.

e nited tates spends a greater percent-

age o its GDP on education than Finland spends,

yet the innish education system which is a

comprehensive public system based on equity

and the proessionalism and training o teach-

ers achieves much better outcomes. meri-

can 15-year-olds rank near the bottom o OECD

countries when it comes to science and math

skills. By contrast, Finnish 15-year-olds rank rst

in the world in science and math skills. mer-

ican students also rank relatively low on read-

ing skills, while the innish students come rst

in the world in this area as well.

Tis pattern, with the nited tates ranking

about the lowest among industrialized countries

and inland near the top, is evident on most o

the remaining social indicators we examine re-

lating to social goals such as personal security,

community and social solidarity, sel-realization,

democratic rights, and environmental govern-

ance. We will not review them all here, except to

note that, although anadas onservatives ap-

pear ready to adopt aspects o the nited tates

justice system, such as mandatory criminal sen-

tencing, the nited tates is by a wide margin

the most violent industrialized country in the

world (measured by the murder rate). mericans

themselves express the third lowest measure o

condence in their justice system, in a tie with

Belgium. talians and ustralians have slightly

less condence in their justice systems.

is brie review o how well industrial-

ized countries have achieved their social goals

shows the nited tates ranks lower than most

countries on a wide range o social indicators,

suggesting that the orm o social organization

used to accommodate contemporary lie in the

nited tates has gone prooundly amiss. ome

commentators dismiss the miserable social out-

comes achieved by the merican social con-

tract by noting that it is nevertheless one o the

wealthiest countries in the world. GDP per cap-

ita is higher in the nited tates than in most

other industrialized countries. e results o

this study, however, suggest a trade-of does

not have to be made between material prosper-

ity and social equity.

n addition, there are countless problems with

using GDP per capita as a measure o economic

well-being. t takes no account o how the wealth

that is produced in a country is distributed. or

example, even though the nited tates experi-

enced strong economic growth in recent years,

between 1998 and 2004 the income o the typical

(median) merican amily ell by 3.8%. Moreo-

ver, per capita GDP is high in the nited tates

primarily because mericans work many hours

more than citizens o other countries. ow-in-

come mericans oten have to work at two or

three jobs just to survive.

Recent economic growth in the nited tates

has also come at high long-term economic costs.

e ederal government budget is on an unsus-

tainable path: the .. has the largest decit

in relation to its GDP o any industrialized na-

tion; its trade decit is the largest in the world,

a staggering $805 billion last year; and, the ..

also has one o the lowest savings rates o the

industrialized countries. Moreover, even with

its wealth, exible economy and low taxes, the

nited tates is not the most competitive coun-

try in the world. rom 2001 to 2005, in its com-

prehensive survey o world economies, the busi-

ness-dominated private World conomic Forum

has determined that the most competitive coun-

try in the world was inland. n 200506, in-

land was ranked as the second most competi-

tive country ater witzerland.


11/55

the social benefits and economic costs of taxation 11

ndustrialized countries are divided into our

categories in able 1, based upon their level o

taxes: low-tax countries, low-intermediate tax

countries, high-intermediate tax countries, and

high-tax countries. ax levels vary at least slight-

ly rom year to year; thereore a 12-year average

rom 1990 to 2002 was used. Tis period imme-

diately precedes the year or years in which most

o the social and economic indicators that we

examine apply.

ven taking the average tax level over a 12-

year period, there are large diferences between

countries. weden, the highest tax country, col-

lects almost twice as much tax as a percentage

o its GDP (50.5%) as the lowest taxed country in

the group, Japan (26.8%). Te average or the ve

low-tax countries is about 29%; the average or

the ve high-tax countries is 47%, almost 60%

greater than the low-tax countries.

iven these large diferences in tax levels, i

high-taxed countries were not achieving their ob-

jectives or i they were doing so at substantial

economic cost this result should be revealed

in aggregate data relating to a number o social

and economic variables.

olitical economists who study welare state

development traditionally divide modern indus-

trialized countries into our categories: 1) lib-

eral welare states exemplied by the nglo-

merican countries, in which the emphasis is

on individual liberty and markets are the pri-

mary orm o social organization; 2) corporat-

ist welare states exemplied by most Western

uropean countries, in which the emphasis is

on social solidarity and occupational insurance

plans play a large role in reducing social risks;

3) Mediterranean welare states such as ortu-

gal, pain, reece, and to a limited extent taly,

in which pensions are generous but otherwise

state systems o support are less and in which

the amily and church play a large role in meet-

ing the needs o citizens; and 4) social demo-

cratic welare states, basically the candinavian

countries, in which the emphasis is on equali-

ty and state-provided universal programs usurp

the role o markets and the amily in ensuring

that the needs o individuals are met.

lthough they rely upon a more sophisticat-

ed measure o the welare state, there is obvious-

ly a relatively close correspondence between the

categorization o countries based simply on tax

Ranking Countries by Tax Level


12/55


levels and one based upon notions o the com-

modication o labour and related concepts

used by political economists to classiy welare

states. iberal or nglo-merican countries are

clustered in the low-tax column; Mediterrane-

an countries are clustered in the low-interme-

diate column; continental uropean countries

are clustered in the high-intermediate column;

and the candinavian countries are clustered

in the high-tax column. ereore, in compar-

ing low- and high-tax countries in this study,

we compare the social and economic outcomes

in the six nglo-merican countries (nited

tates, ustralia, reland, ew Zealand, ana-

da, and the nited Kingdom) all o which are

relatively low-tax countries with those in the

our ordic countries (orway, inland, en-

mark, and weden) all o which are relative-

ly high-tax countries. ocial and economic in-

dicators o all countries in the our groups are

provided in the appendix.

table 1 Annual Average Tax Revenue as Percent

o GDP o High-Income OECD Countries, 19902002

low-tax

Japan 2.

United States 2.0

Switzerland 2.0

Australia 2.

Ireland 32.

lowintermediate

Spain 33.0

Portugal 33.

New Zealand 3 .4

Canada 3.

Greece 34.0

United Kingdom 3.

highintermediate

Germany 3.

Netherlands 42.2

Norway 41.

Italy 42.1

Austria 42.3

high-tax

France 43.4

Belgium 44.

Finland 4.2

Denmark 4.0

Sweden 0.


13/55


ur comparison o low- and high-tax countries

is straightorward. or each major and widely

agreed-upon social and economic objective o

modern societies, we use one or more indicators

that would suggest how successul a country has

been in achieving these goals. We calculate the

average score or the nglo-merican countries

and compare it with ordic countries.

Social Goals

Relie o Poverty

Relie o poverty is an important goal in every

society. social contract should be struck that

minimizes the number o those who are exclud-

ed rom the lie o the community because o a

lack o economic resources to purchase neces-

sities. e number o children living in poverty

is o particular concern. e ordic countries

have signicantly lower rates o poverty across

almost all social groups than nglo-merican

countries. Four indicators are shown, as illustrat-

ed in able 2. Te number in parentheses beside

each indicator reers to the column number o

the indicator in the ppendix: omparing o-

cial and conomic utcomes in ow- and High-

ax ountries.

n low-tax nglo-merican countries, on av-

erage, 12.6% o the population lives below 50% o

the countrys median income; in ordic coun-

tries, less than one-hal that percentage (only

5.6%) o the population is living below the pov-

erty line.

n average, in the low-taxed nglo-mer-

ican countries, 15.9% o children live in pover-

ty, while in the ordic countries the percent-

age o children living in poverty is less than

one-quarter o the nglo-merican average,

less than 3.3%.

n the average nglo-merican country 45.2%

o children in single-parent amilies live in pov-

erty. n ordic countries only 9.2% o children

in single-parent amilies live in poverty.

ere is no signicant diference between

low- and high-taxed countries with respect to

the percentage o elderly who live in poverty (in

large part because the low rate o poverty among

the elderly in anada brings down the average or

low-tax countries); nevertheless, a much lower

percentage o the elderly live in poverty in or-

Comparing Socialand Economic Outcomesin Low- and High-Tax Countries


14/55


dic countries (9.2%) than in nglo-merican

countries (13.5%).

e nited tates has the highest rates o

poverty in the industrialized world. n low-taxed

nited tates, over 17% o individuals live below

50% o the countrys median income; almost 22%

o all children live in poverty; a shocking almost

49% o children in single amilies live in poverty;

and over 24% o the elderly live in poverty. n Fin-

land, by contrast, the percentage o people living

in poverty in each o these groups is small: 6.4%,

3.4%, 10.5%, and 10.4%, respectively.

lso, on most o these measures o the inci-

dence o poverty, although anada ranks ar be-

low the ordic countries, it has a better record

than the nited tates. n particular, while 21.7%

o children live in poverty in the nited tates,

in anada a substantially lower percentage live

in poverty: 13.6%. While 24.6% o the elderly live

in poverty in the nited tates, in anada only

4.3% o the elderly live in poverty. Te percentage

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

22%

USA NZL GBR IRL ITA PRT CAN AUT DEU GRC AUS NLD FRA SWE NOR FIN DNK

Selected OECD Countries

Child

Poverty

Rate

figure 1 Child Poverty in Selected OECD Countries

source OECD,SocietyataGlance:OECDSocialIndicators,2005,p.57.Childpovertydatasourcedfrom1999,2000,and2001.Onlyhigh-incomeOECDcountrieswithsuchdataareincluded.Dashedlinereferstothecountryaverage.

table 2 Relie rom Poverty and Social Exclusion

anglo-

american nordic canada u.s. finland

Relative poverty [] 12. . 10.3 1.1 .4

Child poverty [] 1. 3.3 13. 21. 3.4

Child poverty single parent [] 4.2 .2 42.1 4. 10.

Elderly poverty [10] 13. .2 4.3 24. 10.


15/55


o elderly living below the poverty line in an-

ada is, in act, lower than in any o the ordic

countries. t would appear the mericans have

a good deal to learn rom anadians.

ne social good that citizens buy with their

taxes is a dramatically smaller percentage o

their ellow citizens living in poverty.

lthough we concentrate in this study solely

on a comparison between the low-taxed nglo-

merican countries and the high-taxed ordic

countries, or most o the social indicators we

examine, the social indicators are closely cor-

related with tax levels across all industrialized

countries. igures 1 and 2 illustrate this corre-

lation with respect to child poverty. igure 1 is

a bar graph that shows the rates o child pover-

ty across 19 industrialized countries. igure 2

is a chart that reveals how closely rates o child

poverty are related with tax levels. enerally, the

higher a countrys tax level, the lower its rate o

child poverty.

Protection o the Vulnerable

very just society must protect the vulnerable:

children, the elderly, and those with disabilities.

ne measure o whether the elderly are ully in-

tegrated into society is the extent to which pen-

sions or the elderly are able to replace the sala-

ries they earned while working.

n the ordic countries, pensions replace

66.6% o the salaries o pensioners, while in n-

glo-merican countries the pension replacement

rate is only 47.4%. anada is on the high end o

the nglo-merican countries with a replace-

ment rate o 57.1%. n the nited tates, the pen-

sion replacement rate is only 51%, while in in-

land it is 78.8%.

ne way o measuring how well a society ac-

commodates those with disabilities is to compare

26 28 30 32 34 36 38 40 42 44 46 48 50 522%

4%

6%

8%

10%

12%

14%

16%

18%

20%

22%US A

NZ L GB RIRL ITAPR T

CA NAU T

DE UGR C

AUS

NL D

FR A

SW ENO R FI N

DN K

Average Annual Tax Revenue as Percent of GDP, 19902002

Child

Poverty

Rate

figure 2 Child Poverty v. Tax Revenue o High-Income OECD Countries

source CalculationbasedonOECDRevenueStatisticsdatabase.Childpovertydatasourcedfrom1999,2000,and2001.Onlyhigh-incomeOECDcountrieswithsuchdataareincluded.


16/55


the income o persons with disabilities relative to

that o the general population. n nglo-mer-

ican countries, the income o those with disa-

bilities is 67% o the general population, where-

as in ordic countries the income o those with

disabilities is around 86% o the general popula-

tion. e relative income o those with disabil i-

ties in anada is almost equal to the relative in-

come o those in the ordic countries at 84.6%.

nce again, the nited tates is at the low end

o even the nglo-merican countries. n that

country the income o those with disabilities is

only 58.7% that o the general population; in Fin-

land it is 83%.

Economic Equality

ne o the pressing issues acing every democ-

racy is how economic resources should be dis-

tributed. arge economic inequalities hold ad-

verse consequences or the personal well-being

o the citizens o a country: nequalities erode

social cohesion; they lead to worse health and

personal security outcomes; they lead to the

withdrawal o the haves rom the lie o the

community and the exclusion o the have-nots;

and, generally, inequality diminishes the rich-

ness and ourishing o a society. Moreover, ex-

treme levels o inequality have been shown to

have a negative impact on economic growth by

distorting the allocation o resources and tal-

ents. ncome inequality has also been shown to

destabilize political and social values, since dis-

proportionate economic power invariably leads

to increased inuence over political and other

societal decisions.

ne o the strongest associations between the

variables examined in this study is between tax

levels and a more equal distribution o econom-

ic resources. n all three indices o inequality re-

ported in able 4, there are statistically signi-

cant diferences between the nglo-merican

and ordic countries. or example, in nglo-

merican countries, on average the richest 10%

receive about 12.4 times the poorest 10%, while

in the average ordic country the richest 10% re-

ceive only 6.5 times that o the poorest 10%.

n the nited tates, where income is dis-

tributed more unequally than in any other in-

dustrialized country, the richest 10% o amilies

receive almost 16 times as much o national in-

come as the poorest 10%. n Finland, by contrast,

the richest 10% receive only 5.6 times as much o

the national income as the poorest 10%, about

one-third the merican multiple. nce again,

anada nds itsel on this indicator in between

the nited tates and the ordic countries. n

anada, the richest 10% receive 10.1 times that

o the poorest 10%.

ne o the most important social benets

that citizens buy with their taxes is a society in

table 3 Protection o the Vulnerable

anglo-


Net old-age pension replacement rate [11] 4.4 . .1 1 .

Relative income o disabled persons [12] 4. . 3

table 4 Economic Equality: Income

anglo-


GINI coecient [13] 32.1 24. 30.1 3. 2.1

Income share o richest 10%/poorest 10% [14] 12.4 . 10.1 1. .

0th percentile/10th percentile [1] 4. 2. 4 . 2.


17/55


which economic resources are distributed much

more equally.

Gender Equality

very Western country is committed to equali-

ty or women. lthough progress has been slow,

countries with higher taxes have had much great-

er success in achieving this social goal. ne ex-

planation or this is that a considerable amount

o the care-giving work that is borne by women

in low-tax nglo-merican societies is paid or

and nanced by taxes in high-taxed countries.

Tus, not only is the cost o these services spread

more equitably across the entire population in

high-tax countries, but women are also ree to

take a greater part in market, civil, and politi-

cal lie. n average, the level o gender equality

in the ordic countries is signicantly higher

than that in the nglo-merican countries, as

measured by the indicators in able 5.

e World conomic orum, which boasts

the worlds 1,000 leading companies as its mem-

bers, measures the extent to which women have

achieved ull equality with men in economic par-

ticipation, economic opportunity, political em-

powerment, educational attainment, and health

and well-being, and reports the results as the

ender ap ndex, with a higher index reect-

ing a narrower gender gap. Te ordic countries

score an average o 5.35, which is higher than the

average o 4.65 o the nglo-merican countries.

anada scores 4.87, which is higher than the 4.4

or the .. but lower than inlands 5.19.

n its annualHuman evelopment Report, the

nited ations evelopment rogram computes

a comprehensive index o gender equality: the

gender empowerment measure. n this meas-

ure, ordic countries score an average o 0.868

while nglo-merican countries score only an

average o 0.773. anada scores 0.807, which was

higher than the nited tates at 0.793, but low-

er than inland at 0.833.

simple measure o gender equality is the

percentage o women who participate in the

paid labour orce and the percentage o wom-

en who hold inuential jobs. n nglo-meri-

can countries, 69% o women participate in the

labour orce: in ordic countries 75% o women

participate in the labour orce. n nglo-mer-

ican countries, on average, about 32% o doctors

are emales, 21% o members o arliament are

emales, and 22% o senior civil servants are e-

males. By contrast, in ordic countries, about

43% o doctors are emales, 40% o members o

arliament are emales, and 44% o senior civil

servants are emales.

nce again, on all o these measures o gender

equality, the ordic countries are signicantly

better of than the nglo-merican countries.

nce again, on every measure, anada does bet-

ter than the nited tates.

table 5 Social Equality: Gender

anglo-


Gender gap index [1] 4. .3 4. 4.4 .1

Gender empowerment [1] 0.3 0. 0.0 0.3 0.33

Female labour orce participation [1] . 3.1 .2 2.

Female doctors [1] 31. 42. 33.1 23.4 3.2

Female % in parliament [20] 21.4 3. 24. 14. 3.

Female % in senior civil service [21] 21. 44.3 23.1 14.3 4.1

% o population who avour men

over women over scarce jobs [22] 1 1. .


18/55


lso, as an indication o how these diferences

afect public attitudes (or are afected by them),

in nglo-merican countries 17% o the popula-

tion reported in a survey that men should have a

priority in ll ing jobs, while in ordic countries

only 8% o the population held this view.

Economic Security

ndividuals and amilies need work-related secu-

rity in order to make long-range plans, to our-

ish, and to develop. n 2004, the nternational

abour ce published a major report on eco-

nomic security as part o its socio-economic se-

curity program,conomic ecurity for a Better

World. at program examined how countries

organized work and how their organization o

work connected to broad social goals.

Te IL O identied seven orms o work-relat-

ed security: 1) labour market security (adequate

employment opportunities); 2) employment secu-

rity (protection against arbitrary dismissal and

so on); 3) job security (the possession o a niche

in work, allowing some control over the content

o a job, what the worker actually does and the

opportunity he or she has o building a career);

4) work security (protection against accidents

and illness at work); 5) skill reproduction secu-

rity (widespread opportunities to gain and re-

tain ski lls); 6) income security (protection o in-

come through minimum wage machinery, wage

indexation, and comprehensive social security;

and 7) representation security (protection o col-

lective voice in the labour market, etc). t devel-

oped an index or each o these orms o secu-

rity and then combined them into one overall

index: an conomic ecurity ndex.

ccording to the ILOs conomic ecurity

ndex, which measures the economic security

provided in a country relative to other countries,

the ordic countries ofer signicantly more eco-

nomic security than the nglo-merican coun-

tries. high economic security index indicates

that country is providing more security than a

country with a lower score. e average score

or nglo-merican countries is 0.70; the aver-

age score or ordic countries is 0.94.

e nited tates ties with ew Zealand in

providing workers with the lowest level o eco-

nomic security among industrialized countries:

0.61. Finnish workers have one o the highest lev-

els o economic security: 0.95. anadas score is

above the nglo-merican average at 0.79.

axes enable a country to buy services and

social insurance programs that provide workers

with a higher degree o economic security.

Access to Essential Services

Health

enerally, people are able to live long and healthy

lives in all high-income industrialized countries,certainly relative to poorer countries. Tereore

it is hard to nd an index that distinguishes be-

tween health outcomes in industrialized coun-

tries. common measure is lie expectancy at

birth. By this measure there is little diference

between ordic and nglo-merican coun-

tries: on average, males live 76.2 years in both

low- and high-taxed countries; emales, on av-

erage, live a little longer in high-taxed countries

(81.4 years versus 81.2 years). nce again, how-

ever, on this index o social progress the nitedtates is below the average o low-tax countries.

n act, among industrialized countries, mer-

icans have one o the lowest lie expectancies at

birth. Te lie expectancy o men and women in

table 6 Economic Security

anglo-


Economic security index [23] 0.0 0.4 0. 0.1 0.


19/55


20/55


who completed college or university. lthough

Finland has a lower percentage o students com-

pleting secondary school and university than

the nited tates, its 15-year-old students score

much higher than merican students on read-

ing, science, and math. ndeed, in all three o

these subjects, its students score higher than any

other high-income industrialized country. a-

nadian students also score higher than meri-

can students, although not as high as the inn-

ish students.

Physical Security

global index o physical security is dicult to

imagine. ne statistic requently reerred to in

discussions o the physical security o citizens is

the number o homicides in a country per pop-

ulation o 100,000. n this index, although it is

not statistically signicant, there are ewer hom-

icides in ordic countries (1.4 per 100,000) than

nglo-merican countries (2.2 per 100,000).

lmost needless to say, the murder rate in

the nited tates is ar above that o every oth-

er industrialized country: 7.1 per 100,000. an-

ada is close to the ordic average, and inland

is above the ordic average.

Community and Social Solidarity

n the late 1990s, the concept o social capi-

tal (usually dened as networks together with

shared norms, values and understanding that

acilitate cooperation within or among groups)

gained widespread interest among researchers and

policy-makers. e interest developed because

o research results that suggested social capital

was important, not only in acilitating produc-

tive organization and economic development,

but also in enriching many aspects o social lie

and ostering social engagement and democra-

cy. nortunately, the concept o social capital

is dicult to operationalize, but, rom the so-

cial indicators we examine, it would appear that

citizens o high-tax countries are likely to have

higher degrees o trust in one another and more

condence in public institutions. ne could say

they live in societies with more social capital than

those living in low-tax countries.

ince 1981, the World Values urvey has con-

ducted our waves o surveys o peoples attitudes

toward socio-cultural and political change. n

nglo-merican countries, only about 38% o

survey respondents agree with the statement

that people can be trusted, whereas 64% o sur-

vey respondents in ordic countries agree with

that statement. More citizens in ordic countries

have condence in arliament (52.7% in ordic

table 9 Physical Security

anglo-


Homicides per 100,000 [40] 2.2 1.4 1. .1 2.

table

10

Community and Social Solidarityanglo-


People can be trusted [41] 3. 3. 3 3.3 .4

Condence in parliament [42] 32.1 2. 3. 3 42.3

Condence in corporation [43] 1 1. . 3. 42.

Condence in justice system [44] 4. . 4 3. .

Union density [4] 23. 1. 2.1 12. .2


21/55


countries versus only 32.1% in nglo-merican

countries) and in the justice system (68.9% in

ordic countries versus 45.8% in nglo-mer-

ican countries). bout the same percentage o

citizens in both groups o countries report hav-

ing condence in the civil service (about 48%)

and major companies (about 51%).

Many sociologists investigating the nature

o social capital and the role it plays in society

have suggested that trade unions are one o the

most important organizations in society or the

creation o social capital. nions are organiza-

tions where people develop skills essential in a

thriving democracy such as tolerance, will-

ingness to compromise, and respect or other

viewpoints. ey also stimulate political par-

ticipation, increase peoples political skills, and

promote an appreciation o both the rights and

obligations o citizenship. Furthermore, they are

organizations that oster collegiality. ot surpris-

ingly, the average union density in ordic coun-

tries is much higher than that o nglo-meri-

can countries. bout 24% o the work orce, on

average, is unionized in nglo-merican coun-

tries, whereas over 71% is unionized in ordic

countries. anadas union density o about 28%

is higher than that o the .., where only 13% o

the work orce is unionized, but much lower than

the over 76% union density in inland.

Sel-Realization Goals

t is dicult to know which indicators might be

examined to iner whether people are generally

achieving their personal goals and satised with

their lives; however, we have selected a ew com-

monly used indicators.

ersonal Freedom and utonomy

ince 1995, the Heritage Foundation and the Wall

Street Journalhave jointly produced an index o

economic reedom. ey claim that countries

with the most economic reedom also have high-

er rates o long-term economic growth and are

more prosperous than are those with less eco-

nomic reedom. omewhat surprisingly, even

though high taxes are taken as an indication o

the lack o economic reedom in the compila-

tion o the index, the average score o the or-

dic countries on the overall economic reedom

index is only slightly higher than that o the n-

glo-merican countries. Te average ranking or

nglo-merican countries is 1.78; the average

ranking or ordic countries is slightly higher

at 1.97. lso, survey evidence suggests that the

sense o reedom o citizens in ordic countries

is almost as high as it is in the average nglo-

merican country (82.7% versus 84.4%).

rug Use and Rate of uicides

Te inerence to be drawn rom the rate o drug

use in a society is uncertain: s drug use indica-

tive o people who are living lives o quiet desper-

ation, or is it indicative o people who are simply

less inhibited in the pursuit o happiness? What-

ever inerence might be drawn rom it, on aver-

age a signicant lower percentage o people in

ordic countries are cannabis users than peo-

ple in nglo-merican countries. n average o

11.6% o the population between the ages o 15

and 64 report using cannabis in the past year in

nglo-merican countries, but two-thirds less,

or only 3.8%, report doing so in ordic countries.

annabis use is about the same in anada and

the nited tates, at about 11%, but only about

table 11 Sel-Realization Goals: Freedom

anglo-


Index o economic reedom [4] 1. 1. 1. 1.4 1.

Sense o reedom [4] 4.4 2. .4 .


22/55


3% o the population between the ages o 15 to

64 report using cannabis in inland.

high rate o suicide might suggest the citi-

zens o a country are dissatised with their lives.

n nglo-merican countries, the suicide rate is

lower than in ordic countries (11 per 100,000

versus 15 per 100,000), and the diference is sta-

tistically signicant but there is no strong asso-

ciation between tax level and suicide rates. Ja-

pan has the highest rate o suicide, but inland

is among those countries with the highest rates

with 21 suicides per 100,000, over twice the

merican rate.

Leisure

n the assumption that most people preer lei-

sure to work, one indirect measure o the quality

o lie in a country might be the amount o lei-

sure that individuals are able to enjoy. n average,

people in the ordic countries work signicantly

ewer hours than those in the nglo-merican

countries. n nglo-merican countries, the av-

erage person works 1,752 hours a year, while in

the ordic countries the average person works

only 1,550 hours a year (over 200 hours less than

in nglo-merican countries).

mericans enjoy signicantly less leisure

than citizens o most other countries. n av-

erage, they work 1,824 hours a year. is is 274

hours more than the ordic average and 88 hours

a year more than anadians. mong the ordic

countries, the inns enjoy less leisure than av-

erage candinavians. Tey work about the same

number o hours a year as anadians.

course, whether working ewer hours a

year results in a higher degree o welare or cit-

izens o ordic countries depends upon what

accounts or the increased leisure enjoyed by

people in high-tax countries. oes it reect a

liestyle choice that contributes to the quali-

ty o their lives or do high taxes cause them to

substitute leisure or work and thus diminish

their well-being?

ttempting to determine the reason or the

diference between the number o hours worked

by uropeans and mericans has generated a

good deal o research. ome studies conclude

that the higher marginal tax rates in uropean

countries account or the reduced number o

hours worked in those countries. this is the

case, the increased leisure enjoyed by citizens

in high-tax countries would not indicate that

these citizens are better of. ndeed, it would

indicate that they are worse of since, in the ab-

sence o taxes, or i they aced lower tax rates,

they would preer to work longer hours. ther

researchers have ound that the diferences in

hours worked reects diferences in taste. u-

ropeans, they argue, simply value their leisure

more than mericans.

ne o the most recent studies on this is-

sue ound the diference in the number o hours

worked between uropeans and mericans is

largely explained by uropean labour market

table 12 Sel-Realization Goals: Drug Use and Suicide Rate

anglo-


Drug users (% 14) [4] 11. 3. 10. 11 2.

Suicides [0] 11.1 1.2 11. 10.4 21

table 13 Sel-Realization Goals: Hours Worked

anglo-


Average hours worked per year [4] 1,2 1,0 1,3 1,24 1,3


23/55


regulations. ter the rst oil shock in 1973, u-

ropean unions pushed hard or a shorter work

week and longer vacations. n addition to their

collective bargaining eforts, unions also lob-

bied or the adoption o government-mandated

vacation time and a generous number o holi-

days. this is the correct explanation or the

diferences, then the efect on workers well-be-

ing is ambiguous.

these labour market regulations orce work-

ers to take time of when they would preer to

work, then presumably the regulations reduce

their well-being. However, the authors o this

recent study conclude that, instead o reducing

worker well-being, these regulations actually

increase worker well-being by helping to solve

a collective action problem. ndividual workers

oten work longer hours than they would pre-

er because their co-workers are working long-

er hours. n order to keep up with the relative

income o their co-workers and to compete or

promotions, they must work equally as hard.

is gives rise to the equivalence o an arms

race. ach worker works harder and harder, but

each would preer not to. Regulation helps them

solve this coordination problem. Te authors o

this study suggest that this latter explanation is

the correct one. Tey note that uropeans seem

to be happy to work less and less.

Happiness and Life atisfaction

ltimately, at least according to one widely held

personal philosophy, what lie on the planet is

all about is happiness and satisaction with ones

lie. s set out so eloquently in the merican

eclaration o ndependence, everyone has an

unalienable right to lie, liberty, and the pur-

suit o happiness. iven the enormous diversi-

ty o individual preerences and tastes, it is hard

to imagine indicators that could measure di-

rectly whether individuals are happy and satis-

ed with their lives. However, the World Values

urvey has included questions relating to the re-

spondents perceived happiness and overall sat-

isaction with lie.

Based upon the most recent survey data, there

are no statistically signicant diferences in re-

ported happiness or lie satisaction between

high- and low-tax countries. n average, the

percentage o citizens in low-tax nglo-meri-

can countries who report they are very happy is

slightly higher than the percentage in high-tax

ordic countries (39.5% versus 34.1%), but the

number who report they are satised with their

lives is slightly lower (86.7% versus 88%). anadi-

ans report they are among the happiest citizens

o industrialized countries. lso, on these kinds

o surveys the utch (etherlanders) consistent-

ly report being the happiest people and the most

satised with their lives, and yet the etherlands

is, o course, a relatively high-tax country.

Opportunities to Participate

in Collective Decision-Making

umerous indicators might be used as meas-

ures o the vibrancy o democratic institutions

in a country. We report on two here. irst, citi-

zens are more likely to participate in collective

decision-making i they eel their government is

honest. itizens in the ordic countries, on av-

erage, eel that their countries are less corrupt

than their counterparts in the nglo-meri-

can countries, and the diference is statistical-

ly signicant.

table 14 Sel-Realization Goals: Happiness

anglo-


Happiness [1] 3. 34.1 4.2 3. 24.

Lie satisaction [2] . . .2 .


24/55


nglo-merican countries score an average

o 8.4 on a perception o government corruption

scale (rom 0 [most corrupt] to 10 [least corrupt]),

whereas ordic countries score 9.3.

econd, engaged citizens in a democracy pre-

sumably deliberate about political issues with

their riends and colleagues. n nglo-mer-

ican countries, on average, about 13% o peo-

ple report they had requent discussions o pol-

itics with riends, while in ordic countries

about 18% report requent discussions o poli-

tics with riends.

Environmental Sustainability

onstructing composite environmental indica-

tors has become a growth industry, but a coun-

trys rank on them is oten determined by geog-

raphy or other characteristics beyond the control

o the countrys government, by the method used

to aggregate individual indicators, by the com-

parability o the data, and by the purpose o the

evaluation.

Te composite index in able 16 is taken rom

a anadian study that used OECD data to rank

the environmental perormance o countries. n

average, the ordic countries rank signicant-

ly higher than the nglo-merican countries:

on average, the ordic countries rank 13th (even

though orway ranks 25th, considerably pulling

down the ordic countries average rank); while

the nglo-merican countries rank 24th. e

nited tates ranks lowest among the high-in-

come industrialized countries (in 30th place).

Inter-Nation Equity

Te inequalities between individuals around the

world are staggering. e richest 5% o people

receive one-third o total global income, more

than the poorest 80%. High-income countries

should care about the development o low-in-

come countries, or a number o reasons. irst,

as a matter o their own sel-interest, in a glo-

balized world high-income countries cannot

insulate themselves rom the insecurity, public

health crises, violence, and economic volatili-

ty that constantly threaten low-income coun-

tries. econd, as a matter o basic airness, no

person should be denied the chance to live ree

o poverty and have access to services such as

health and education that are essential to hu-

table 16 Environmental Sustainability

anglo-


Environmental perormance ranking [] 24 13 2 30 1

table 17 Inter-Nation Equity

anglo-


Ocial development assistance (% GNI) [] 0.2 0.1 0.2 0.1 0.3

Commitment to development index [] .3 .1 .3 .4

table 15 Opportunities to Participate in Collective Decision-making

anglo-


Corruption perceptions index [3] .4 .3 .4 . .

Political discussion with riends [4] 13.3 1.2 11 1.3 .


25/55


man development. ird, high-income coun-

tries should promote the same social and eco-

nomic values they pursue in their own nations,

such as human dignity and basic levels o mate-

rial well-being, throughout the world. For these

and other reasons, citizens o wealthy countries

have recognized a responsibility to assist those

in poor countries.

e most straightorward index o a coun-

trys development efort is its total oreign aid as

a percentage o the donor countrys GDP. oun-

tries with higher taxes are presumably better

able to provide assistance to low-income coun-

tries. ne might also suppose that more caring

countries domestically are likely to be more car-

ing globally. e evidence bears out these intu-

itions. n average, high-tax ordic countries

provide more oreign aid than low-tax nglo-

merican countries. Te nglo-merican coun-

tries give on average only 0.28% o their gross

national income (GNI) or ocial development

assistance; the ordic countries give an aver-

age 0.71% o their GNI , more than double that o

the nglo-merican countries. the high-in-

come industrialized countries, the nited tates

gave the least development assistance as a per-

cent o its GNI .

much more sophisticated measure o a

countrys commitment to development would

take account o its oreign aid as well as the ull

range o its policies towards low-income coun-

tries: including trade, investment, migration, en-

vironment, security, and technology. e en-

tre or lobal evelopment ranks the 21 richest

nations or each o these policy areas and then

combines the results into a ommitment to e-

velopment ndex. ven on this index, the or-

dic countries score signicantly higher than the

nglo-merican countries (an average o 6.1

versus an average o 5.2). anada scores high-

er than the .. and is in line with inland. n

the 2005 index, enmark tops all countries with

a score o 6.7.

Economic Goals

Equity versus Efciency

ne o the undamental tenets o classical eco-

nomics is that there is a trade-of between equity

and eciency. e pursuit o social goals must

come, to some extent, at the expense o eco-

nomic goals. lthough some studies purport to

show that government spending hampers eco-

nomic growth, in recent years a growing body

o literature has concluded that there is no nec-

essary trade-of to be made between economic

eciency and equity.

olicies urthering social justice are like-

ly to contribute to eciency and growth, or a

number o reasons: spending on education and

health care contributes to a better educated and

healthier work orce; the increased economic

security o workers enhances their capacity to

adjust to change, bear more risk, acquire more

specialized skil ls, and pursue investment oppor-

tunities; social justice policies can channel and

mitigate industrial conict in periods o struc-

tural adjustment and oster political stability and

social cohesion; a smaller range o wage disper-

sion encourages structural change and thus pro-

ductivity growth; and a more equal society bears

ewer o the costs o social stratication such as

increased health costs, crime control costs, and

the cost o inner city decay.

e above review o social indicators sug-

gests that high-tax countries have been better

able to achieve their social objectives than low-

tax countries. Te ollowing review o economic

indicators suggests that high-tax ordic coun-

tries have not sufered any signicant econom-

ic costs in the pursuit o a more just and equi-

table society.

High Standard o Material Living

e most common way o measuring the mate-

rial well-being o citizens o a country is simply

by dividing the countrys gross domestic prod-

uct (GDP) by its population. ountries can then


26/55


be compared by converting their GDP per cap-

ita to .. dollars on the basis o their purchas-

ing power parity.

By this measure, uxembourg is the wealth-

iest country in the world with an astonishing

2004 GDP per capita o US$57,500. t is worth

noting that the wealthiest country in the world,

by ar, also has a tax level much higher than the

OECD average. axes in uxembourg are about

42% o GDP.

lthough the diference is not statistically

signicant, the high-tax ordic countries have

a higher GDP per capita than the low-tax nglo-

merican countries. n the ordic countries, the

GDP per capita is $32,825; in nglo-merican

countries it is slightly less at $32,083.

ext to uxembourg, the nited tates is the

wealthiest country in the world; its GDP per cap-

ita is $39,700. anadas GDP per capita is $31,500,

marginally below the ordic and even the n-

glo-merican average. lthough the nited

tates is both a low-tax and wealthy country, it

is important to note that across the high-income

OECD countries there is no association between

tax levels and material well-being.

lthough GDP per capita is the most re-

quently used measure o well-being, there are

many problems with this measure.

First, GDP measures the market values o ac-

tivities carried on in the country without regard

to whether they contribute to material well-be-

ing. n the nited tates, or example, to the ex-

tent its GDP is measuring the value o activities

such as the cost o incarcerating prisoners, o

police and private security guards, and o ine-

ciently delivered health care services, it is not

necessarily a good measure o the material well-

being o mericans.

econd, a countrys GDP is a unction not

only o the productivity o workers, but also o

how many hours they work. Workers in ordic

countries have been able to produce goods and

services per capita that slightly exceed the value

o the goods and services per capita produced by

workers in nglo-merican countries, yet this

seriously understates how much better of they

are since they are able to produce these goods

and services while working over 200 hours less

a year. s mentioned earlier, on average mer-

ican workers work 274 more hours a year than

workers in ordic countries.

Tird, and most importantly, the simple meas-

ure o GDP per capita reveals nothing about how

income in the country is distributed, and there-

ore who is beneting rom the wealth produced

in the economy. t is an average gure that is

arrived at simply by taking the total wealth o

the country and dividing it by the total popu-

lation. t would remain the same whether all o

the wealth in a country was distributed to one

person or equally across all persons. resuma-

bly, in judging the economic success o a coun-

try, what matters is the material wealth o the

typical or median amily (a real amily), not the

average amily (a statistical construct). ne rea-

son why the average GDP per capita is so high

in the .. is that the .. has a relatively small

number o extremely high-income individuals.

us the .. GDP per capita is an unreliable

measure o the material well-being o the typi-

cal (median) merican amily.

High Rates o Economic Growth

ver the past 15 years, the merican economy

has grown aster than most others (as measured

by GDP per capita). Yet it has not been the astest

table 18 Material Standard o Living

anglo-


GDP per capita (US$) [] 32,03 32,2 31,00 3,00 30,00


27/55


growing economy in the world; that honour goes

to another nglo-merican country, reland.

rom 1990 to 2004, the rish economy has

grown at a staggering rate o 6.6% a year. reland

has always been a relatively low-tax country, but

rom 1994 to 2003 its tax level declined even ur-

ther, rom about 35% to about 30% o GDP. re-

lands low general tax level, along with its low

corporate tax rate o 10% on the manuacturing

prots o oreign multinationals, has led tax-cut-

ters in nglo-merican countries to urge their

governments to ollow the rish tax model.

However, there is little reason to suppose

that tax cuts had much to do with the rish eco-

nomic miracle. reland reaped the advantages

o huge uropean nion subsidies, particularly

in the late 1970s and in the 1980s (reaching 6%

o GDP), and even in the early 1990s. reland in-

vested those subsidies in inrastructure, includ-

ing ree higher education. t had an nglish-

speaking, well-educated, under-utilized labour

orce. t aggressively courted oreign investment

through industrial development agencies. t was

perectly poised to take advantage o the mer-

ican boom in inormation technology at a time

when merican multinationals were looking or

places to invest overseas or export to the uro-

pean market. nce it had attracted a number o

inormation technology rms, there was a well-

known agglomeration efect o industrial con-

centrations that contributed to spin-of growths

and attracted more rms.

Furthermore, reland is not really a good ex-

emplar o the nglo-merican model. n the late

1980s and throughout the 1990s, it had high lev-

els o employment protection and a highly coor-

dinated system o wage-setting that kept wages

down. t seems reasonably clear that the rish

miracle is due to a unique set o circumstanc-

es that cannot be duplicated in other countries

simply by trying to imitate its beggar-thy-neigh-

bour corporate tax rate strategy. ven i such a

strategy worked, it would only work or a very

small number o other countries.

From 1990 to 2004, the average annual growth

rate o GDP per capita was 3.6% in nglo-mer-

ican countries and only 2.3% in the ordic coun-

tries. Tis is one o the most requently reerred-

to acts in arguing that uropean countries are

going to have to adopt the nglo-merican eco-

nomic model i they hope to increase the pros-

perity o their nations. e act that the ..

growth rate over this period has been 3.1% and

anadas has only been 2.8% is also requently

reerred to in urging that anada must reduce

its tax level to .. levels. Yet there is a lack o

evidence linking lower taxes in nglo-merican

countries to higher rates o economic growth.

n act, there are many reasons why these com-

parisons do not lead to the conclusion that high-

tax countries should ollow the example o low-

tax countries in order to oster higher rates o

economic growth.

irst, the diference in economic growth

rates over this period between ordic and n-

glo-merican countries is not statistically sig-

nicant: it is likely to be a chance occurrence.

n addition, the association between higher eco-

nomic growth and lower tax levels is weak.

table 19 Rate o Economic and Productivity Growth

anglo-


Average growth rate 12004 [0] 4.1 2. 3.4 3.4 3.

GDP per hour worked [2] 3.2 44.1 3.2 4.3 3.2

Growth in GDP per hour worked, 12004 [3] 2. 2.1 1. 2. 2.3

Growth in multi-actor productivity, 12002 [4] 1. 1.2 1.2 1.4 2.2


28/55


econd, the diferences are highly dependent

upon what base year is used or the purpose o

drawing the comparison. For example, in a more

recent period, rom 1995 to 2004, the growth rate

in GDP per capita in both anada and the nit-

ed tates was the same: 3.4%. nd over this pe-

riod, high-tax inland outgrew both countries,

with a rate o growth o 3.7%.

ird, the past 50 years have demonstrat-

ed that periods o economic growth tend to be

highly cyclical. or example, only 20 years ago

many economists were predicting that erma-

ny and then Japan should be the economic mod-

els to ollow.

Finally, almost all o the wealth created in the

nited tates over the past 20 years has benet-

ed the very rich. e real income o the typical

worker has hardly changed at all.

High Rates o Productivity Growth

Te wealth that a nation produces is determined

not only by how many hours workers work, but

also by how productive they are when they are

working. s noted above, merican and nglo-

merican workers generally work many more

hours than uropean workers. However, uro-

pean workers are generally more productive than

nglo-merican workers.

e average ordic country worker is sub-

stantially more productive than the average n-

glo-merican worker, although the diference

is not statistically signicant. n average, or-

dic country workers produce goods and servic-

es valued at $44.1 an hour, while nglo-mer-

ican workers only produce goods and services

valued at $38.2 an hour.

merican workers tend to be very productive,

on average producing goods and services worth

$46.3 per hour. However, it might be noted that

they are not nearly as productive as workers in

orway, who produce goods and services worth

$56.6 per hour, or even French workers who pro-

duce goods and services worth $47.7 per hour.

With the strong pick-up in economic growth

in the nited tates, particularly since the mid-

1990s, ater 50 years o catching up to the nit-

ed tates, uropean countries now nd them-

selves alling behind. n the nited tates, rom

1995 to 2004, the average annual growth in GDP

per hour worked was 2.5%. ndeed, this was the

average o the nglo-merican countries. ver

the same period, the annual average growth in

GDP per hour worked in ontinental urope-

an countries was only 1.5%. learly, i this di-

erence persists over a number o years, it will

make a large diference in living standards. How-

ever, it is odd to attribute the lack o productivi-

ty growth in urope to high tax levels, as many

business commentators do. or one thing, we-

den, the country with the highest tax levels in

the world, experienced productivity growth over

this period at almost the same level as the nit-

ed tates (an annual rate o 2.4% versus 2.5%).

Moreover, although the average growth in GDP

per hour worked rom 1995 to 2004 was lower

in the ordic countries than in the average n-

glo-merican countries (2.5% versus 2.1%), the

diference is not statistically signicant; it could

have been due to chance.

Price Stability

Tere are good reasons or believing that higher

taxes might enhance economic stability. First, the

higher levels o government spending that result

rom higher taxation tend to act as an automat-

ic stabilizer, reducing the impact on production

and employment o uctuations in other elements

o demand. econd, i the tax system is progres-

sive, this might act to dampen uctuations. i-

nally, it may be expected that, i the distribution

o personal income is more equal because o high

taxes and a generous transer system, personal

consumption will uctuate less over the business

cycle. ower-income amilies are more likely to

consistently spend their income, and thus con-

tribute to stable aggregate demand, than higher-

income amilies who might veer between bouts


29/55


o cautionary savings and credit-nanced con-

sumption binges.

lthough not a particularly good measure o

economic stability, it is noteworthy that, in the

most recent year or which there are comparable

data, the ination rate in the average nglo-mer-

ican country was 2.8%, while it was only 0.8% in

ordic countries. e ination rate was 3.3% in

the nited tates in this period, and only 0.4%

in Finland. Te diference is statistically signi-

cant. n addition, the association between lower

ination and higher tax level is strong.

Sustainable Debt Levels

n average, nglo-merican countries had a

surplus o 0.1% o GDP in 2004, but the ordic

countries had a much larger average surplus o

4.1% o GDP. e higher ordic percentage is

partly attributed to the 11.4% surplus o orway.

till, other ordic countries also outperormed

most o the nglo-merican countries, as in-

land had a surplus o 1.9% o GDP, enmark had

a surplus o 1.7% o GDP, and weden had a sur-

plus o 1.4% o GDP. mong the nglo-meri-

can countries, ew Zealand, reland, ustral-

ia, and anada were the countries in the black,

with a surplus o 5.5%, 1.4%, 1% and 0.7% o GDP,

respectively. But the .. and the .K. were in

the red, with a decit o 4.7% and 3.2% o GDP,

respectively.

lthough the ordic countries, on average,

carry a higher debt level than the nglo-mer-

ican countries, inland carries a lower debt lev-

el than the .. and anada. Te data show that

ustralia, ew Zealand, and reland each has a

much smaller national debt than anada, the

.. and the .K., with ustralias accounting or

about 18% o 2004 GDP and the other two coun-

tries totalling 29% each. n contrast, the ordic

countries debt levels are more even.

Viable International Balance o Payments

urrent account balance reects a countrys

transactions with other countries. n average,

the ordic countries had a current account sur-

plus o 7.4% o GDP in 2004, compared to the

3.2% decit o nglo-merican countries. e

diference is statistically signicant. Te associ-

ation between current account surplus and tax

level is moderate. anada had a surplus o 2.3%

o GDP in 2004, compared to a 5.7% decit o the

.. and a 5.1% surplus o inland.

table 21 Budget Surplus or Defcit

anglo-


Surplus or decit as percent o GDP [] 0.1 4.1 0. -4. 1.

Debt as percent o GDP [] 42. 4. 2.2 4 2.

table 20 Stable Prices

anglo-


Infation, 200304 [] 2. 0. 2.1 3 .3 0.4

table 22 Balance o Payments

anglo-


Surplus or decit as percent o GDP [] -3.2 .4 2.3 -. .1


30/55


High and Stable Rates o Employment Growth

e one economic measure on which the n-

glo-merican countries have signicantly out-

perormed the ordic countries is employment

growth. n 20042005, they had an employment

growth rate o 2.5%, compared to the ordic

countries where the employment growth rate

was only 0.9%.

e unemployment rate in nglo-meri-

can countries in 2004 was lower than that o

the ordic countries (5.2% versus 6.4%), but not

signicantly lower. mong the unemployed, on

average, about 18%20% are unemployed or a

year or more in the ordic and nglo-meri-

can countries.

Te labour orce participation rate in ordic

countries was higher than in nglo-merican

countries (77.8% versus 75.4%). e labour par-

ticipation rate o men was marginally higher in

nglo-merican countries (82.4% versus 80.6%),

but the labour participation rate o women was

signicantly higher in ordic countries (75.9%

versus 68.6%).

High Rates o Savings and Investment

Te rate o household saving in the ordic coun-

tries is higher than that in the nglo-merican

countries. n ordic countries, households save

on average 6.1% o their disposable income, while

in nglo-merican countries they save only 2.9%

o their disposable income. et national savings

rates are also higher in ordic countries than in

nglo-merican countries (11.6% versus 5.9%).

n addition, the act that the ordic countries,

on average, have a higher national savings rate

table

24

Unemployment Rateanglo-


Unemployment rate [1] .0 .2 . .1 .

Long-term rate [2] 1. 1. . 11. 24.

table 23 Employment Growth

anglo-


Growth [0] 2. 0. 1.4 1. 1.

table 25 Labour Force Participation Rate

anglo-


Total participation rates [3] .4 . . .4 4.3

Male participation rates [4] 2.4 0. 2. 1. .

Female participation rates [] . .0 3.1 .2 2.

table 26 Rates o Saving

anglo-


Household saving [] 2. .1 1.4 1. 2.

Net national saving [] . 11. . 1.3 .4


31/55


than the nglo-merican countries is statisti-

cally signicant.

e percentage change in real total gross

xed capital ormation is higher in nglo-mer-

ican countries than in ordic countries (8.2%

versus 5.6%).

nglo-merican countries have been able to

attract a greater amount o oreign investment

than ordic countries. oreign investment was

3.7% o 2004 GDP in nglo-merican countries,

but only 0.9% in ordic countries. lthough an-

adas inward oreign direct investment accounted

or only 0.6% o GDP in 2004 and is lower than

the 0.9% o the .., inlands 2.5% is sharply

higher than that o the .. Measured by the

inward FDI perormance index, o which over 1

means that a country attracts more inow o in-

vestment than its size warrants, nglo-meri-

can countries on average attract more investment

than ordic countries. eir average score was

2.3 compared to only 0.8 or the ordic coun-

tries. anadas score is higher than that o the

.., but lower than that o inland.

Innovation

nnovation is a main driving orce o long-term

economic growth. s indicated in able 29, as

innovators the high-tax ordic countries out-

perormed the low-tax nglo-merican coun-

tries.

e UNCTA D nnovation apability ndex

consists o the unweighted averages o two in-

dexes. ne is the echnological ctivity ndex,

which is made up o research and development

personnel per million people, .. patents grant-

ed per million people, and scientic publications

per mill ion people. nother is the Human ap-

ital ndex, which is made up o the literacy rate

as a percent o population, secondary school

enrolment as percent o age group, and tertiary

enrolment as percent o age group. n average,

the ordic countries scored 0.951, higher than

the 0.892 o the nglo-merican countries. Te

diference is statistically signicant. Te associ-

ation between the index and tax level is modest.

anada scored lower than the .., but inland

scored higher than the ..

table 29 Innovation

anglo-


UNCTAD innovation capability index [1] 0.2 0.1 0.0 0.2 0.

table 27 Investment

anglo-


Annual change in xed capital ormation [] .2 . . .4 4.

table

28

Foreign Direct Investmentanglo-


Inward oreign direct investment [] 3. 0. 0. 0. 2.

Inward FDI perormance [0] 2.3 0. 0. 0.4 1.


32/55


Research and Development

High-tax countries appear well placed to capital-

ize on opportunities or uture economic growth

and productivity. e average ordic country

spends signicantly more than the average n-

glo-merican country on research and develop-

ment (3.4% o GDP versus 1.7%), and has signi-

icantly more researchers per 10,000 o workers

(11.6% versus 7.3%).

Utilization o Inormation Technology

Te level o ability to make good use o inorma-

tion technology is another proxy or uture eco-

nomic growth and productivity. n average, the

ordic countries appear to be more prepared or

the normation ge than the nglo-merican

countries, as measured by both the etwork Read-

iness ndex and broadband subscription.

eveloped by the World conomic orum,

the etwork Readiness ndex measures the de-

gree o preparation o a nation or community to

participate in and benet rom inormation and

communication technology developments. e

index is composed o three component index-

es that assess the environment or inormation

and communication technology ofered by a giv-

en country or community, the readiness o the

communitys individuals, business and govern-

ments, and the usage o inormation and commu-

nication technology among these stakeholders.

e ordic countries rate higher than the

nglo-merican countries on both the et-

work Readiness ndex (1.61 vs 1.43), and have

signicantly more broadband subscribers per

100 inhabitants (15.8 vs 9.5). e .. appears to

be more network ready than inland and an-

ada, as shown in the latest etwork Readiness

ndex, but anada had more broadband sub-

scribers per 100 inhabitants in 2004 than in-

land and the ..

Competitive Economy

Te business press routinely bemoans the alleged

lack o competitiveness o the anadian econo-

my, again usually by comparison to the nited

tates economy. t is unclear whether the con-

cept o competitiveness has any sensible meaning

when applied to national economies; certainly

table 30 Research and Development

anglo-


R&D as % o GDP [3] 1. 3.4 2 2. 3.4

R&D researchers per 10,000 [4] .3 11. .2 .3 1.

table 31 Inormation Technology Development

anglo-


Network readiness index [] 1.43 1.1 1.4 2.02 1.2

Broadband subscribers [] . 1. 1. 13 1

table 32 Competitiveness Indexes

anglo-


Growth competitiveness index [] .3 . .3 .1 .

World competitiveness scoreboard [] 2.3 .3 2.2 100 2.2


33/55


countries are not competing with one anoth-

er in the same way that private rms compete;

nevertheless, a cottage industry has sprung up

measuring the competitiveness o national econ-

omies. Basically, what is usually being measured

is the extent to which a country is implement-

ing policies that are likely to encourage econom-

ic growth. ere is, o course, a vast literature

and considerable disagreement over what caus-

es economic growth; thereore, these measures

necessarily embody contested ideas about what

makes countries prosperous. o a great extent

they likely reect economic policies that the con-

structors o the index avour. evertheless, they

are routinely reerred to in debates over whether

anada is achieving its economic goals.

very all, the World conomic Forum, a busi-

ness-dominated, eneva-based, private organ-

ization, releases its Global ompetitiveness Re-

port. Te report contains a comprehensive index

that measures the competitiveness o countries

based upon around 150 variables, including each

countrys macroeconomic perormance, the qual-

ity o its public institutions, and the level

benefits and costs of taxation

Documents