Low-tax Countries VS High-tax Countries - Study

[Mano]

Edit: My table formatting is rather screwy....
Edit Again: Fixed it Extarbags! And added another table. That's probably screwed up too.

OTTAWA—Canada is falling behind a number of OECD nations in a wide range of social and economic areas, and a study released today by the Canadian Centre for Policy Alternatives points to tax cuts as the culprit.

The study, by Neil Brooks and Thaddeus Hwong, compares high-tax Nordic countries and low-tax Anglo-American countries on 50 social and economic measures and finds the high-tax Nordic countries score better in 42 categories.

According to the study, tax cuts are disastrous for the well-being of a nation’s citizens. For example, the high-tax Nordic countries have:

* lower rates of poverty, more equal income distribution, and more economic security for their workers;
* a higher GDP per capita;
* higher rates of household saving and net national saving;
* greater innovation, including a higher percentage of GDP spent on research and development;
* a higher ranking on their growth competitiveness by the World Economic Forum;
* higher rates of secondary school and university completion; and
* less drug use, more leisure time, and higher life satisfaction.

“By cutting taxes the Conservative government is taking Canada in the wrong direction,” says Brooks. “It wants to make Canada more like the United States, yet our findings show that Americans bear severe social costs for living in one of the lowest taxed countries in the world.”

The U.S. falls near the bottom of the 21 industrialized countries in a strikingly large number of social indicators. It also ranks as the most dysfunctional country by a considerable margin.

In contrast, Finland ranks near the top of the industrialized world in most of the social indicators and has been named the most competitive country in the world by the World Economic Forum four years in a row.

“The tax cut lobby has it backwards,” says Hwong. “Not only do government social programs create a healthier society, they also create the conditions for a vibrant—and competitive—economy.”

http://www.policyalternatives.ca/documents/National_Office_Pubs/2006/Benefits_and_Costs_of_Taxation.pdf

angloamerican nordic canada u.s. finland
Life expectancy (males) 76 .2 76 .2 77 .2 74.5 75 .1
Life expectancy (females) 81.2 81.4 82.1 79 .9 81.8
Infant mort. per 1,000 live births 5.5 3.5 5.4 6.9 3.1
Low birth weight as % of live births 6.5 4.8 5.8 7.9 4.1

angloamerican nordic canada u.s. finland
Homicides per 100,000 [40] 2.2 1.4 1.5 7.1 2.5

angloamerican nordic canada u.s. finland
Confidence in parliament [42] 32.1 52.7 39.6 38 42.3
Confidence in justice system [44] 45.8 68 .9 54 36.7 66 .7
Union density [45] 23.9 71.5 28.1 12.8 76.2

angloamerican nordic canada u.s. finland
Drug users (% 15–64) [49] 11.6 3.8 10.8 11 2.9
Suicides [50] 11.1 15.2 11.7 10.4 21

angloamerican nordic canada u.s. finland
GINI coefficient 32.1 24.7 30.1 35.7 26.1
Incomeshare rich10%/poor10% 12.4 6.5 10.1 15.9 5.6
90th percentile/10th percentile 4.6 2.9 4 5.5 2.9

angloamerican nordic canada u.s. finland
Net old-age pension replacement rate 47.4 66.6 57.1 51 78.8
Relative income of disabled persons 67 86 84.6 58.7 83

Anyways, some of the study is rather interesting, but overall, nothing groundbreaking here. I think they ignore(or are oblivious) to certain factors in their analysis of some of the various categories since taxes don't neccesarily have that big of an impact relative to other variables(i.e. one the quickly jumps to mind is broadband penetration).

[extarbags]

Yeesh, Finnish males are only expected to live 5.1 years? That's a serious problem :(.

[Uncle Larry]

Yeesh, Finnish males are only expected to live 5.1 years? That's a serious problem :(.

That would explain all the deathmetal.

[Tim Partlett]

I often see Finland as an example of how governments can get it right sometimes, like Singapore is an example that dictatorships can sometimes be a success rather than a dystopic nightmare. I don't believe either prove a rule, however, rather they are exceptions to it. In general I believe capitalist democracies work better, with the less government interference the better, but that doesn't preclude dictators and socialists getting their policies right, it just means I don't think they don't tend to work as well, or as often.

[Glenn]

Thaddeus Hwong is an awesome name.

[MikeSofaer]

It's easy to say socialist governments work better if you use socialist metrics.

[Gordon Cameron]

If Higher Life Satisfaction is a socialist concept, I could use more of it. Not sure exactly how that's measured though.

[olaf]

Well how the fuck do they know the tax is a causal link? There are tons of differences between the countries, between the US and Europe, etc.

[TheTrunkDr]

It's easy to say socialist governments work better if you use socialist metrics.
I'm not sure how:
* a higher GDP per capita;
* higher rates of household saving and net national saving;
* greater innovation, including a higher percentage of GDP spent on research and development;
* a higher ranking on their growth competitiveness by the World Economic Forum;
are socialist metrics?

[Charles]

It's easy to say socialist governments work better if you use socialist metrics.

I'm sorry, what would be a non-socialist metric? Running water and amount of churches per household?

[wahoo]

Using one year when the US is just starting to recover from an economic downturn is interesting. The long-term growth rates of the US dwarf that of Scandavia. Furthermore, the differences between the country from size, population to different measurement of data makes this comparison meaningless.

The US has the best facilities in the world to save high-risk pregnancies. That's why the death rate is so for US births...the US tries to save infants that would have no chance in just about any other country in the world.

Poverty is another measure. The US doesn't count the bulk of its antipoverty programs in the poverty rate. Thus you get a different measure.

[DeepT]

I have trouble believing the drug users metric. If a drug is legal do they count it? How do they draw the line between a legal 'bad' drug vs a legal 'good' drug? Obviously if legal drugs do not count, then a pot smoker in the USA is considered a 'drug user' but the same pot smoker in Finland is not counted. Hardly a fair measure.

With regards to confidence in their government, how is this relevant to anything? At best I would argue lower confidence is better then higher confidence because a government with a lower approval rating under much more scrutiny then one with a high approval rating.

Homicides: You got us there, but before we put the USA at the bottom of the barrel, lets include the entire world. It would also be interesting to see a diversity metric with respect to crime. I bet the more 'pure' a population is, the less crime there is. If we upped the racial and social diversity in the Nordic countries to the levels there are in the USA, I bet their crime rate would sky-rocket. I bet it would vastly exceed that of the USA because we have been doing a lot of work to build a socially tolerant atmosphere. It is easy for a country to have tolerance when there is little to no diversity.

[Hawkeye Fierce]

What the hell is a socialist metric? The famous bourgeoisie swine to proletariat hero ratio?

[MikeJ]

The US has the best facilities in the world to save high-risk pregnancies. That's why the death rate is so for US births...the US tries to save infants that would have no chance in just about any other country in the world.

So the US infant mortality rate is twice that of Finland because the rest of the world sends all of their difficult pregnancies to America?

On another note, there are definitely some pretty political measures on the list: union density, pension replacement rate, income of disabled persons and income equality just among those listed.

People can argue whether having large numbers of unions is good thing, how much people should be paid in pensions versus their personal savings or how much subsidization of disabled people is fair. On income equality, Americans seem to prefer to let the chips fall where they may, more than other nationalities.

If a US conservative designed the survey, it might include things like church attendance, personal charity rates, children born out of wedlock, and fraction of the population dependent on government income supplements.

[wahoo]

"So the US infant mortality rate is twice that of Finland because the rest of the world sends all of their difficult pregnancies to America?"


Nope. What the US counts as infant mortality may count as a perinatal or early neonatal death in another country.

[MikeJ]

Nope. What the US counts as infant mortality may count as a perinatal or early neonatal death in another country.

That makes a lot more sense, but it still seems unlikely to be the major factor. It *may* be that the reporting standards are different, but I have a hard time believing Finland doesn't count all losses after birth, at least, in the infant mortality rate.

Do you think it's also possible that a significant fraction of the women in the US don't get proper medical care during their pregnancies?

[Hanzii]

"So the US infant mortality rate is twice that of Finland because the rest of the world sends all of their difficult pregnancies to America?"


Nope. What the US counts as infant mortality may count as a perinatal or early neonatal death in another country.


Your use of 'may' and DeepT's 'I bet' doesn't really sway me.
If you dicount the numbers or think they're comparing apples to oranges I'd like to see links or at least better arguments.

And DeepT, just because the Nordic countries don't fight quite the same war on drugs and incarcerate people caught with a few grams of pot, doesn't mean that potuse is any more legal. Police just have the discretion to make you get away with a confiscation and a slap on the wrist - but you're still breaking the law and a part of the statistics.

[Tim Partlett]

I think Finland does well by any metric. My education professor would rave about their academic system, and how successful it was. Instead of your typical state run school system, the Finnish one is heavily community based. Instead of planning the curriculum based on orders from anonymous civil servants from above, they get feedback from everyone with a vested interest in the school, like the parents and students, and then use that information to decide what subjects they are going to teach. This policy of bottom-up investment in the process imbues everything that they do in terms of education, and seems to have fantastic results.

[wahoo]

Mike: "Do you think it's also possible that a significant fraction of the women in the US don't get proper medical care during their pregnancies?"

Yes. I'd say that women with less education, and to a certain extent income, are more at risk for pregnancy complications. I think they will receive worse pre-natal care. Although, part of that might be the communication barrier(for example not being able to understand pre-natal care literature or instructions. ) But there are definitely causal links between infant mortality and a lack of education.

so that definitely raises the US infant mortality rate. But cross-country comparisons in this study are a no-no for some of the reasons I mentioned above. For example, some countries will count a death as pre-natal if the infant doesn't breathe after being delivered or even dies w/n 24 hours...That affects the rate.

It's important for the solutions to the problem. Rather than saying that the US has an inadequate health care system, maybe the education system is the real problem. Or you need more interpeters at hospitals to translate pre-natal care instructions.

[Ben]

Wait a second, when did this forum start accepting policy papers by obviously biased thinktanks as serious academic work?


Also, LOL at other countries having "greater innovation." What, is Finland making more of those little lightbulbs than we are?

[Mano]

Using one year when the US is just starting to recover from an economic downturn is interesting.

Eh? I skimmed through the whole report and I'm not sure what you're talking about. Unless I missed something the data seems to be averaged over any number of years ranging from 3 to 12 I think it was.

The long-term growth rates of the US dwarf that of Scandavia. Furthermore, the differences between the country from size, population to different measurement of data makes this comparison meaningless.

I wouldn't say it's meaningless. The study could have been better done a lot more thoroughly, sure. You just have to be aware of the problems with their methodology etc... It's like saying financial statements are meaningless. They all have problems you have to be aware of to make a meaningful analysis of whatever.

The US has the best facilities in the world to save high-risk pregnancies. That's why the death rate is so high for US births...the US tries to save infants that would have no chance in just about any other country in the world.

Sure the USA has some excellent private hospitals and whatnot; but I think you're making a large error in assuming that every high-risk birth in your Country gets a quality of treatment that far surpasses that of other developed nations, which would account for this difference. Seems rather implausible to me.

Nope. What the US counts as infant mortality may count as a perinatal or early neonatal death in another country.

True, but since all the data they use regarding that is from the OECD(who listed all that in what they measure regarding infant mortality), one could reasonably assume that the OECD would have already controlled for that to make cross country comparisons useful. See: OECD HEALTH DATA 2006 (http://www.oecd.org/dataoecd/43/5/36946481.pdf)

Do you think it's also possible that a significant fraction of the women in the US don't get proper medical care during their pregnancies?

I believe you could reasonably infer that from the study. Healthcare is accessible to everyone in the higher tax countries whereas in the USA, with privitization etc...there are people who don't have medical coverage etc...

I have trouble believing the drug users metric. In the footonotes of the study they say it's based on people who smoke pot.

In addition, the association between lower
cannabis use and higher tax level is strong. The R-squared
of an OLS regression, with cannabis use as the dependent
variable and the average of tax as percent of GDP in 1990–
2002 as the independent variable, is 0.71. Tax level is statistically
significant at 5% level in one-sided test.

Homicides: You got us there, but before we put the USA at the bottom of the barrel, lets include the entire world.....

I don't think the racial diversity argument would hold up, as Canada has quite a diverse population and the homicide rate for them is 1.5. It's more likely that a large proportion of the high number for the states could be attributed to poverty factors, which itself is partly based on the various social programs that higher taxes allow to be put in place.

If Higher Life Satisfaction is a socialist concept, I could use more of it. Not sure exactly how that's measured though.

Here's a link to the survey it's based on:
World Values Survey (http://margaux.grandvinum.se/SebTest/wvs/SebTest/wvs/articles/folder_published/survey_2000/files/root_q_2000.pdf)

Wait a second, when did this forum start accepting policy papers by obviously biased thinktanks as serious academic work?

You know, you don't have to believe everything you read ;P

[BrewersDroop]

Also, LOL at other countries having "greater innovation." What, is Finland making more of those little lightbulbs than we are?

"The UNCTAD Innovation Capability Index consists of the unweighted averages of two indexes. One is the Technological Activity Index, which is made up of research and development personnel per million people, U.S. patents granted per million people, and scientific publications per million people. Another is the Human Capital Index, which is made up of the literacy rate as a percent of population, secondary school enrolment as percent of age group, and tertiary enrolment as percent of age group."

[wahoo]

"rue, but since all the data they use regarding that is from the OECD(who listed all that in what they measure regarding infant mortality), one could reasonably assume that the OECD would have already controlled for that to make cross country comparisons useful. See: OECD HEALTH DATA 2006 (http://www.oecd.org/dataoecd/43/5/36946481.pdf)"


I believe the OECD uses reported data from a country. Hence their comparisons is different between apples and oranges. The US has a higher IMR b/c the US makes a better effort to try to save infants and has a more stringent definition than many other countries.

One study I've seen said that the US IMR would improve 40% if the US excluded births under 23 weeks from the rates...

As a point of comparison, in 1995 Philadelphia had 10 x more births(123) at under 23 weeks of life than Sweden, Australia, & New Zealand(12 or so). You can make 2 conclusions 1) why are so many more US women having emergency deliveries when the infant is so young or 2) The US is more likely to attempt emergency deliveries when their is a chance of a miscarriage. I'd argue that it is a bit of both.

This is my last contribution to the birth rate discussion. There are studies in med journals that illustrate why the US fares so poorly in international comparison.

Anyone who blithely throws out the poor US birth rate purpose is doing so to illustrate a point and try to change opinion to a certain perspective (usually in favor of more resources allocated to health care).

I don't find this study too serious for that reason.

[Jason McCullough]

The US has the best facilities in the world to save high-risk pregnancies. That's why the death rate is so for US births...the US tries to save infants that would have no chance in just about any other country in the world.

You're going to have to cough up hard data to support something this out there.

There's a significant correlation between high taxes and everything good; it's rather amusing. They're doing a shitty job arguing it means anything, though.

[skedastic]

Oh for crying out loud: we have two lawyers bungling along trying to do econometrics, failing to cite a single economics journal article in a paper allgedly about empirical public finance, leaping to ludicrous and naive conclusions about causality from unadjusted correlations, and issuing their "study" as a report from a think tank which wears its radical political biases on its sleeve. There's nothing even worth discussing here, this thing is pathetically incompetent.

[Mano]

I believe the OECD uses reported data from a country. Hence their comparisons is different between apples and oranges. The US has a higher IMR b/c the US makes a better effort to try to save infants and has a more stringent definition than many other countries....I don't find this study too serious for that reason.

U.S. Department of Health and human Services (http://mchb.hrsa.gov/chusa03/pages/status.htm)

Based on that It would seem that those the other 2 categories are entirely seperate from infant mortality.

There's nothing even worth discussing here, this thing is pathetically incompetent.

I wouldn't call it a very good study either, but some of it's still mildly interesting based on the underlying merits of the data. For instance, countries where people somke less pot have higher suicide rates. Coincidence? You be the judge ;P

Edit: damn quote tags

[Unicorn McGriddle]

What the hell is a socialist metric?

Sissy socialist metrics: poverty rate, public health, some kind of quality of life index.

Manly capitalist metrics: The Dow Jones Average, federal interest rates, number of flags per house.

[lesslucid]

Oh for crying out loud: we have two lawyers bungling along trying to do econometrics, failing to cite a single economics journal article in a paper allgedly about empirical public finance, leaping to ludicrous and naive conclusions about causality from unadjusted correlations, and issuing their "study" as a report from a think tank which wears its radical political biases on its sleeve. There's nothing even worth discussing here, this thing is pathetically incompetent.

Granted that correlation doesn't prove causation, correlation is still a starting point for looking for causation, don't you think? At the very least, a positive correlation is indicative that there isn't a causative relationship in the opposite direction.


I'm curious why you say "unadjusted correlation". Can you say what sort of adjustments they are failing to include?

[Euri]

This is my only contribution to this thread:

Wahoo, if you put the tag [quote ] (close the bracket completely) before and [/quote ] (again close it completely) after the thing you want to quote, it shows up in a nice handy box and looks far better in posts.

[MikeSofaer]

Sissy socialist metrics: poverty rate, public health, some kind of quality of life index.

Manly capitalist metrics: The Dow Jones Average, federal interest rates, number of flags per house.Che Gueverra t-shirts, don't forget.

Things like income disparity and union density are socialist metrics.

[Lunch of Kong]

Oh for crying out loud: we have two lawyers bungling along trying to do econometrics, failing to cite a single economics journal article in a paper allgedly about empirical public finance, leaping to ludicrous and naive conclusions about causality from unadjusted correlations, and issuing their "study" as a report from a think tank which wears its radical political biases on its sleeve.

Welcome to QT3!

[shang]

I have trouble believing the drug users metric. If a drug is legal do they count it? How do they draw the line between a legal 'bad' drug vs a legal 'good' drug? Obviously if legal drugs do not count, then a pot smoker in the USA is considered a 'drug user' but the same pot smoker in Finland is not counted. Hardly a fair measure.

As others have stated, pot is just as illegal in Finland as it is in the US. The 3% sounds pretty believable based on my personal experiences. While many people have tried pot at some point, there are very very few that use it regularly.

I think the difference in infant mortality can mostly be attributed to almost 100% of births happening in a high quality hospital here and to the fact that every mother gets free/cheap periodical checkups during the pregnancy.

[Hanzii]

No no no no, you guys are just counting it wrong. Finland sucks.

[Anders Hallin]

A better argument to make is if pot use matters at all. Sweden has one of the lowest rates of pot use in the western world, yet our heavy drug use is just as high as any other European country, which to me is a lot more significant.
Of course, in my opinion, alcoholism may well be a much more relevant statistic than either of the above.

[Bill]

I like that nobody is questioning the US's high homicide rate.

[Anders Hallin]

I like that nobody is questioning the US's high homicide rate.
No one would dare to give someone from Baltimore such lip.

[Nellie]

I like that nobody is questioning the US's high homicide rate.

Because that always turns into an argument about guns?

[Lurb]

Because that always turns into an argument about guns?
MIght be the combination of less equality + guns... Here we socialists are all equally poor, and only need to outrun our less motivated would-be assailants.

[SpoofyChop]

"Biased Study Confirms Preconceived Notions of Researchers"

Shocking details at 11.

[BrewersDroop]

Alright then, can someone suggest an unbiased set of metrics which can be used as quality of life indicators for a variety of countries?

[MikeSofaer]

Availability of running water in residential areas (legal and illegal)
Cost of power in kilowatts/average hourly wage
Cost of food in calories/average hourly wage
Homelessness rate
Average words/min reading speed at the 10th percentile of income

I'm sure those have their problems, but they're no worse than union density.

[Anders Hallin]

What do you mean by "hourly wage"?

[Jason McCullough]

Union density is the only strange one in that list; the rest look fine.

I don't see what's so controversial about "nordic countries have better quality of life than the US or Canada" - they do on dozens of metrics, unless you're a very rich (200k+ income, if not more) US or Canadian citizen.

[MikeSofaer]

I don't see why income disparity is a bad thing in itself, either.

I guess by hourly wage I mean the average going rate for unskilled labor. You could average in the unemployed as well when calculating this, if you include the money they get from social assistance.

[Nick Walter]

Alright then, can someone suggest an unbiased set of metrics which can be used as quality of life indicators for a variety of countries?

I don't think it's possible to gather that kind of data. Most girls willing to do threesomes won't fess up to in a survey, it's more of a while-they-are-drunk thing.

[Phil_Stein]

Do the Nordic countries absorb anything like the U.S. rate of [generally unskilled] immigrants (legal and illegal)?

Any data on this (not anecdotes...)?

[Huzurdaddi]

The interesting thing about this study is that it shows us how well we have been programmed. The majority of people are frothing at the mouth at the "audacity/idiocity" of this study yet when the same people read the headlines about the countless studies which imply the opposite they simply nod their head.

[Unicorn McGriddle]

Could we add percentage of potential workforce without jobs, cost of attending a university, and stats for the mean of the lowest third of incomes as well as the overall average?

Edit: I hadn't seen your post about it being the average wage for unskilled labor. Never mind that last bit.

[skedastic]

The important question isn't whether the outcome measures they used are good, it's whether the raw correlation between tax rates and those outcomes tell us anything useful about how changes in policy would change those outcomes. The innumerate authors of this "study" make at least three fundamental errors:

1. They ignore many social and economic factors which may affect both tax rates and the outcomes they examine. Is the only determinant of, say, drug use the national tax rate? Is it even a determinant at all? It seems more plausible that this correlation is spurious: many other factors are determining both drug and use tax rates.

2. They assume the direction of causality is from tax rates to the outcomes they study. In many of these cases the causality might go the other way around. For example, societies with high trust in the parliamentary system might tend to vote for more government programs and hence higher taxes. Generally, it could be the case that countries which are doing better in the senses defined by the authors tend to implement more social programs, not the other way around.

3. The assume that what is true of the correlation between national outcomes is also true for individual outcomes. This is a logical error known as the "Ecological fallacy" in some disciplines.

Taking these three considerations together, we cannot infer anything from these results about the question of interest: whether a given country would experience better or worse outcomes if it raised its taxes. It could plausibly be the case that the Nordic countries would do even better if they reduced taxes, and that countries like the U.S. would do even worse if they raised taxes.

A decent crack at these questions would involve collecting these sort of data over time rather than just computing correlations across countries at a given time. Then the researcher would build a statistical model which relates the outcome of interest to both tax rates and other observable social, economic, technological and demographic determinants of that outcome. The results might answer questions like, "Does a given country's outcomes tend to get better as tax rates rise, holding changes in other determinants of outcomes constant?" This would still be a pretty limited and problematic exercise, something an undergraduate might do as an exercise. The question is too grandiose and ill-posed to form the basis for serious research.

There is no indication that the authors of this piece are even vaguely aware of any of these issues. They appear to have no expertise in statistics or quantitative social science. Nor do they appear to be familiar with microeconomic theory at a similarly low level, and there is nothing in the paper to suggest that they even did the most cursory of literature reviews. It isn't like they're the first people to wonder why different countries experience different economic and social outcomes!

This article is just so arrogant and incompetent it pisses me off. Expert opinion isn't expert if the scholar is writing on a subject which isn't even vaguely related to his field of expertise. These guys don't know what they're doing, and for some reason think that they don't even have to do their homework and at least try to understand what the vast existing literatures touching on these questions conclude. They proceed to muddle their way to answer which oddly enough fits the ideological biases of the think tank through which they issue their "research." It's this sort of horseshit which gives social science a bad reputation -- it's the exception and not the rule, though.

[MikeSofaer]

Could we add percentage of potential workforce without jobs, cost of attending a university, and stats for the mean of the lowest third of incomes as well as the overall average?

Edit: I hadn't seen your post about it being the average wage for unskilled labor. Never mind that last bit.Unemployment for sure.

The higher education thing is tricky. One kWh is one kWh, but educations aren't like that. The cost also varies inversely with the value it has to the student, if you assume that academic scholarships succeed at targetting the intended people. If there were a worldwide standard college entry exam, you could look at attendance rates by people over some cutoff value, but short of that I don't see much you can do.

Your last metric is essentially the standard deviation of the price of unskilled labor, and probably would be interesting, if only because if varies by anything but housing prices in an area I'd be interested to know why.

[Desslock]

Anyways, some of the study is rather interesting, but overall, nothing groundbreaking here. I think they ignore(or are oblivious) to certain factors in their analysis of some of the various categories....

Yes, including the fact that Norway (in particular) and the other "scandinavian" countries actually have lower taxes than Canada, and have achieved much of their recent growth after heavily cutting their corporate taxes -- Canada is just copying their methods, as this report from one of the big 4 accounting firms indicates (a considerably less biased source than Neil Brooks, who's a good guy to have some pints with, but who is an extremist quack):
http://www.kpmg.ca/en/news/pr20061101.html


For more information, contact:
Julie Bannerjea
Senior Manager, Media Relations
Cell: (416) 527-1804
jbannerjea@kpmg.ca

Global competition leads countries to chase growth through lowering tax, says KPMG International

14-year survey supports link between tax and economic success

New global mobility helps push governments to adopt marketing strategies



(Toronto, Wednesday, November 1, 2006) – New research covering 86 countries, including Canada, has confirmed that low corporate tax rates can help to give a country a significant competitive advantage over economic rivals, and are connected with higher than average economic growth.

But the advantage tends to be short term and has to be backed up with a good legal and economic infrastructure and targeted incentives if countries are to attract long term private sector investment.

This conclusion comes from a study by KPMG International, which analyses international movements in corporate tax rates for the past 14 years, drawing on the annual surveys the organization has conducted since 1993.

The findings point to the economic growth enjoyed over this period by countries like Ireland, Norway, Sweden, and Denmark, and draws a parallel between this success and a favorable corporate tax regime.

The outstanding example has been Ireland, which has consistently pursued policies designed to attract new investment over the past 15 years. Its headline corporate tax rate has fallen in stages from 40 percent in 1993 to 12.5 percent today, giving it the lowest corporate tax rate of any developed country.

At its peak, the Irish economy enjoyed annual growth rates of up to 12 percent, although this has recently slowed to around 2.5 percent due to strong competition on tax rates and incentives for inward investment from Eastern European countries like Poland and Hungary.

The Scandinavian countries, Norway, Sweden and Denmark, have also enjoyed high growth rates while cutting corporate tax. Each of these countries was among the first to take radical action to cut taxes and reorganize their taxation systems in the late 1980s and early 1990s. The effect has been to help keep these countries among the world’s top 10 when measured by economic growth for the past decade.

Canada has followed the trend to cut corporate tax rates, reducing a representative combined federal/provincial rate from 44.3 percent to 36.1 percent between 1993 and 2006. This change results in a drop of 8.2 percentage points or 18.5 percent. Canada’s current corporate tax rate is slightly lower than the G7 average of 36.5 percent.

The main exception to the trend is the U.S., which has maintained high levels of growth with a consistently high corporate tax rate of 40 percent. “Despite its high taxes, the sheer economic power of the U.S. market has preserved its attraction for multinational companies,” said KPMG Canada’s National Leader of International Corporate Tax, Tony Swiderski.

But even here the effectiveness of reducing tax rates has been evident. For example, the American Jobs Creation Act of 2004, which reduced repatriation taxes from 35 percent to 5.3 percent for one year, caused U.S. companies to repatriate approximately US$300 billion during 2005, according to JP Morgan Chase.

Mr. Swiderski stressed that a single reduction in taxes is not enough by itself to ensure economic success. “Once a major industrialized economy cuts its rates, others seem compelled to do the same, in a process of international tax competition that continues and intensifies over time.” he said.

But given the intense global competition for tax revenue, it may make sense for governments to follow the example of the commercial sector and consider strategies other than simple price cuts to attract customers. It does not have to be a race to the bottom.

Mr. Swiderski said that this would recognize a subtle but important shift in the relationship between large multinational corporate taxpayers and national governments. As advances in technology mean that corporations can site their operations virtually anywhere, tax becomes a price that they have to pay to make use of the goods and services that a country can provide.

“Governments have an opportunity to attract inward investment not just through low taxation, but through astute global marketing of the benefits of placing operations in their countries,” said Penny Woolford, Leader of KPMG’s International Corporate Tax practice in Toronto. “Strategies being pursued include market share strategies (such as enforcement of transfer pricing rules) and diversification of income (a shift in the balance between direct and indirect taxes).”

“There is also better communication of government strategic policy for collecting taxes and spending the revenues. By actively explaining to investors the benefits arising from their social policies, governments can make it easier for corporations to persuade shareholders and others that a particular siting decision was financially sensible, socially responsible and capable of producing the sustainable benefits that investors are looking for.”

Notes to editors

Since 1993, KPMG firms have published an annual analysis of corporate tax rates around the world. In the initial survey, the rates from 23 countries were examined. Now, in 2006, the list stands at 86 countries.

The survey has recorded a consistent and dramatic reduction in corporate tax rates over that 14-year period. This reduction began in the mid-1980s in the United Kingdom when the government of Margaret Thatcher lowered the corporate tax rate from 52 percent to 35 percent between 1982 and 1986, forcing other countries to follow suit.

When Ireland joined the European Union in 1973, its GDP was 60 percent of the European average. In 2006, its GDP stands at 110 percent of the European average, and the country will, for the first time, pay more to the EU than it receives in grants and aid.

Denmark reduced its statutory tax rate from 50 percent to 30 percent in 1987, with an actual rate of 28 percent. Sweden followed in 1992 when it reduced the tax rate from 51 percent to 25 percent, with a slight rise to 26 percent today. Norway heavily reformed its tax system in 1992, implemented a flat tax system, and lowered corporate tax rate from 52 to 28 percent, which is still the actual rate.

A full copy of the study can be downloaded from KPMG.com.



Canadian corporate taxes are much higher than Scandinavia

[Desslock]

This article is just so arrogant and incompetent it pisses me off. Expert opinion isn't expert if the scholar is writing on a subject which isn't even vaguely related to his field of expertise. These guys don't know what they're doing, and for some reason think that they don't even have to do their homework and at least try to understand what the vast existing literatures touching on these questions conclude. They proceed to muddle their way to answer which oddly enough fits the ideological biases of the think tank through which they issue their "research." It's this sort of horseshit which gives social science a bad reputation -- it's the exception and not the rule, though.

Neil Brooks is just a hippie socialist, and he only "self-identifies" as socialist because the word communism has gone out of fashion -- he actually said that to me once, heh. He's spent the last 30 years arguing, and teaching, against capitalism, and constantly arguing for higher taxation, more punitive tax rates on the generation of capital, etc. He doesn't do research on anything, and never has --he's said the same thing for decades, and just constantly looks for opportunities to reiterate his political views.

[skedastic]

There exists a journal which might publish this "paper:"

The Journal of Spurious Correlations (http://www.jspurc.org/rese2.htm)

I think Craig Z. "Skippy" Anderson is one of the editors.

[Jason McCullough]

Spurious correlations is strictly for publishing results that are found to be inconclusive or negative of the experiment's hypothesis, right? I thought stupid ones go directly to cable television talking heads.

[Elton]

While I ain't no anti-tax zealot (I'm fine with America instituting new carbon/gas taxes and letting Bush's tax cuts expire), any study along these lines has to include one whopper of a category: the quality-of-life improvement of getting to take home more of one's paycheck.

And I personally admire the success of both the Scandinavian countries and America's economy, but for the purposes of comparison they are apples and screwdrivers. Aside from the huge disparity in size, does Sweden have an enduring urban underclass comprised largely of the descendants of ex-slaves? You'd have to compare, say, Minnesota with Sweden to get meaningful numbers about quality of life as it varies with tax rates.

[TheTrunkDr]

does Sweden have an enduring urban underclass comprised largely of the descendants of ex-slaves?
Uh... ok, I'm not sure what "ex-slaves" has to do with this issue at all but the issue here is that the US probably wouldn't have such horrible class disparity if there were more social programs available, which are paid for by... wait for it... TAXES!!

the quality-of-life improvement of getting to take home more of one's paycheck.
Getting to take home a larger percent of paycheck is great and all but in order to get the same benefits you have to spend more of that money on things like private healthcare, which is vastly more expensive than public healthcare and doesn't generally provide better quality for the same money except at the very high end of the scale.

[Elton]

Uh... ok, I'm not sure what "ex-slaves" has to do with this issue at all but the issue here is that the US probably wouldn't have such horrible class disparity if there were more social programs available, which are paid for by... wait for it... TAXES!!
The intended point was that there is an underclass in the U.S. which is the result of longstanding historical causes; the presence of which increases the amount of class disparity in the U.S. African-Americans are doing worse than the average American as a result of decades of racism, ghettoization and poor schooling, not because of low taxes/not enough social programs. (America spends more on education per student than most other countries -- the solution is education reform and improving the consistency of quality across school districts, not more tax money.) Sweden can afford a generous safety net because it didn't import millions of slaves which then became a free but destitute underclass. Points to Sweden for not being slavers, but I'm not sold on the idea that a social state would work for the U.S. Shoot, look at France -- is their underclass of young unemployed Muslims happy as a result of the French social state, or would they benefit from more economic growth and jobs?

[Hanzii]

Well there used to be a large underclass in the Nordic countries as well. Some of those immigrated in the US, which is why there's a bunch of people with funny names in states like Minnesota.
The rest stopped being dirt poor, because their countries implemented social programmes paid for by those with the means (through taxes - see how that works?). I don't see any reason why this isn't possible in the US.
I see plenty of arguments as to why people don't want that to happen, which is fair points, but it's not impossible.

[TheTrunkDr]

Canada took in a huge portion of those slaves prior to (and even after) emancipation, and infact continues to take in poor immigrants and refugees to this very day. It scores considerably higher than the US.

If the US had more social programs and support for lower income citizens for last several decades many of these problems would be significantly lessened today. The US attitude of letting it's citizens fend for themselves is what has made the class disparity far worse over the years, not better.

[Elton]

Well I'm going to politely disagree with you guys in the main (Hanzii & Trunk), although I'm glad that there is variety in the U.S. as far as taxes & social spending. Americans in San Francisco and Minnesota can go ahead and vote for more leftish economic policies while the country as a whole stays relatively lightly taxed.

[rhinohelix]

The intended point was that there is an underclass in the U.S. which is the result of longstanding historical causes; the presence of which increases the amount of class disparity in the U.S. African-Americans are doing worse than the average American as a result of decades of racism, ghettoization and poor schooling, not because of low taxes/not enough social programs. (America spends more on education per student than most other countries -- the solution is education reform and improving the consistency of quality across school districts, not more tax money.) Sweden can afford a generous safety net because it didn't import millions of slaves which then became a free but destitute underclass. Points to Sweden for not being slavers, but I'm not sold on the idea that a social state would work for the U.S. Shoot, look at France -- is their underclass of young unemployed Muslims happy as a result of the French social state, or would they benefit from more economic growth and jobs?

Note that these "chronic underclasses" might also be exaserbated and expanded rather than alieviated by those very social programs.

[Ben]

Canada took in a huge portion of those slaves prior to (and even after) emancipation, and infact continues to take in poor immigrants and refugees to this very day.

This is more or less a lie.