Taxes, American Style

A while back Harvard economist Greg Mankiw caused a bit of a kerfufle when he noted that the amount of tax revenues raised by the United States per capita wasn’t much different than the amount raised in Europe. Tax rates in the United States are lower than in Europe, but per capita income is also higher in America, and the two facts seem to largely cancel each other out. Here, for example, are the per capita tax revenues for a handful of developed countries:

France .461 x 33,744 = 15,556
Germany .406 x 34,219 = 13,893
UK .390 x 35,165 = 13,714
US .282 x 46,443 = 13,097
Canada .334 x 38,290 = 12,789
Italy .426 x 29,290 = 12,478
Spain .373 x 29,527 = 11,014

Now granted, European countries tend to spend their tax revenues differently than we do in the U.S. For example, we spend more on defense, whereas they spend more on welfare. However, to some extent Europe’s apparently larger welfare state is an optical illusion. It looks bigger than it is, because the rest of the economy is so small.

There are two ways to interpret this finding. The left wing interpretation is that it is just a coincidence that countries with higher tax rates tend to be poorer. If the U.S. had gone whole hog in favor of social democracy during the 1930s we would still be just as rich today (maybe even richer), and our welfare state would be correspondingly huger. If Europe had been dominated by devotees of Ayn Rand, it would still be just as poor, and it’s welfare state would be correspondingly smaller, etc.

The right wing interpretation is that the left wing interpretation is Not Bloody Likely.

When thinking about the size of the welfare state, is it better to think in terms of spending per capita or spending as a percentage of GDP? Well, suppose we compare two state’s within the U.S. that spend different amounts at the state and local level (on top of their share of what is spent by the federal government). According to calculations using based on statistics found here, total government spending (state, local, and federal) for the state of Mississippi was 47.5% of GDP in 2007. This put it slightly behind Canada and Germany in terms of spending. And since per capita income for Mississippi is slightly above the average for the European Union, the size of government in Europe is roughly comparable to the size of government in Mississippi, both in percentage and absolute terms.

By contrast, in “Taxachusetts” government spending at all levels was approximately 36% of GDP in 2007. Clearly, then, the social safety net must be a lot stronger in Mississippi than in Massachusetts, right? You get the idea.

One Response to Taxes, American Style

  1. Foxfier says:

    To be a devil’s advocate, the culture/history/bedrock/starting point of Europe is different– perhaps looking at the tax stats of Canada and South America might be more apples to apples? Or throw in Africa.

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