Paul L. Caron

Tuesday, January 29, 2008

Becker & Posner on Why Are Tax Burdens So Different in Different Developed Countries?

Richard Posner and Gary Becker debate Why Are Tax Burdens So Different in Different Developed Countries?


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. ...

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.


The burden of taxes to a country depends not only on the fraction of its gross domestic product GDP that are collected as tax revenue -- the data shown in Posner's chart -- but on many other factors as well. Since my comment is brief I will confine my discussion to the link between tax burdens, the level of government spending, and the structure and incidence of taxes. ...

Since studies confirm that in the long run owners of capital get about the same rate of return that they would have without any taxes on capital, who then pays the capital tax in the long run? The answer is not capital but labor because wages and earnings are lower when workers have less capital to work with. Owners of capital continue to send in the checks to pay a capital tax, but the negative response of investments to a capital tax shifts the burden of a capital tax away from capital to labor. That eventually labor pays a tax on capital even though it is placed on capital explains why economists generally oppose long-term taxes on capital even though in the short run capital taxes have many desirable properties. Investment tax credits, accelerated depreciation, and low taxes on capital gains are some of the ways that the effective long run tax on capital is reduced toward zero.

(Hat Tip: Sagit Leviner.)

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