Comparative Analysis of Social Outcomes in Nordic and Anglo-American Countries, Lecture notes of Law

Download Comparative Analysis of Social Outcomes in Nordic and Anglo-American Countries and more Lecture notes Law in PDF only on Docsity!

> December 2006

The Social

Benefits and

Economic Costs

of Taxation

A Comparison of High-

and Low-Tax Countries

By Neil Brooks and Thaddeus Hwong

isbn 0-88627-514-

This report is available free of charge from the CCPA website at www.policyalternatives.ca. Printed copies may be ordered through the National Office for a $10 fee.

410-75 Albert Street Ottawa, on k 1 p 5 e 7

tel 613-563-1341 fa x 613-233- email ccpa@policyalternatives.ca www.policyalternatives.ca

About the Authors Neil Brooks teaches tax law and policy at Osgoode Hall Law School. Thaddeus Hwong teaches tax law and policy at Atkinson Faculty of Liberal and Professional Studies, York University.

the social benefits and economic costs of ta x ation 

“I believe all taxes are bad.” Stephen Harper made this remark during the federal election last year in announcing he would reduce the Goods and Services Tax from 7% to 5% if elect- ed Prime Minister. Taxes are the price citizens of a country pay for the goods and services they collectively pro- vide for themselves and for each other. So it is difficult 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? Although almost everyone — other than Prime Minister Harper — recognizes the need for some taxes, over the past 25 years public policy debates in every Anglo-American coun- try, including Canada, have been dominated by a campaign against taxes. Tax levels in Canada have always been sub- stantially below those in most other industrial- ized countries, and they have been significantly reduced over the past few years, yet the crusade against them continues unabated. In 1998, all taxes collected in Canada amounted to 36.7% of the gross domestic product (GDP). Due in part to

tax cuts, this percentage fell almost 3 percent- age points to 33.5% by 2004. Tax levels in the average industrialized coun- try that belongs to the Organization for Econom- ic Cooperation and Development (OECD) was over 2 percentage points higher than in Canada in 2004, 35.9% of GDP, and in the average Euro- pean country it was almost 5 percentage points higher, 38.3% of GDP. Yet the federal government’s major priority, as reflected in its first budget ta- bled last spring, and in statements made follow- ing the tabling of its Annual Financial Report for the Fiscal Year 2005–06 this fall, in which the government committed a $13.2 billion surplus to debt reduction, is more tax cuts. It is often difficult to know precisely what tax- cutters hope to achieve through more tax cuts and what evidence they think supports their claims. Their contention that Canadians would be better off if taxes were reduced is usually asserted as an article of faith. However, one way of attempting to answer the question of whether the Canadian 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?

the social benefits and economic costs of ta x ation 

Tax cuts are disastrous for the well-being of a nation’s citizens. Findings from this study show that high-tax countries have been more successful in achiev- ing their social objectives than low-tax coun- tries. Interestingly, they have done so with no economic penalty. On the majority of social measures we exam- ine, high-tax countries rank significantly above low-tax countries. On a number of the econom- ic indicators we examine, low-tax countries rank above high-tax countries, but the difference is almost never significant. We examine 50 indicators that are commonly used to measure a country’s social progress. On over half of these indicators (29), the outcomes in high-tax Nordic countries are significantly better than those in low-tax Anglo-American countries, and on most of the remaining indi- cators (13), social outcomes are somewhat bet- ter in Nordic countries. In short:

• Nordic countries have significantly lower rates of poverty across almost all social groups; - as an indicator of how well a country protects the vulnerable, the elderly have significantly higher pension income replacement rates in Nordic countries and the income received by those with disabilities relative to the population is much higher; - income is distributed significantly more equally in Nordic countries; - on every measure we examine there is significantly more gender equality in Nordic countries; - Nordic workers have significantly more economic security; - in terms of health outcomes, infant mortality rates are significantly lower and life expectancy is longer in Nordic countries; - in terms of educational outcomes, a greater percentage of the population completed secondary school and university in Nordic countries and 15-year old students score higher on math tests;

Summary

 canadian centre for policy alternatives

• as a measure of personal physical security, homicide rates are lower in Nordic countries;
• as indicators of the degree of community and social solidarity in a country and general happiness and life satisfaction, there is significantly more trust among individuals and for public institutions in Nordic countries;
• there is significantly less drug use in Nordic countries; individuals have significantly more leisure time; individuals have more freedom, according to a widely referred to index of economic freedom; individuals report more life satisfaction; and they are more likely to discuss politics with friends;
• Nordic countries rank much higher on an index of environmental performance, and the Nordic countries give significantly more in foreign aid than Anglo-American countries. Low-tax Anglo-American countries rank high- er than Nordic countries on only seven out of the 50 social indicators. In each case, it is a trivial dif- ference that could be easily due to chance: a slight- ly higher percentage of the 25–64 age group com- pleted either college or university; 15-year-olds did slightly better on reading and science tests; a slightly greater percentage of people report a greater sense of freedom; there are on average a lower number of suicides; and a slightly greater percentage of in- dividuals report they are very happy. With respect to the pursuit of economic goals, the indicators we examine suggest high- tax countries have achieved their social suc- cess with no economic penalty. Over the past 15 years, the low-taxed Anglo-American coun- tries have experienced slightly greater econom- ic growth than the high-taxed Nordic countries, but it would appear that the Nordic countries have positioned themselves for greater growth

in the future. Of the 33 economic indicators ex- amined, the Nordic countries lead on 19 indica- tors and the Anglo-American countries on 14. The high-tax Nordic countries have:

• a marginally higher GDP per capita;
• a higher GDP per hour worked;
• significantly lower unit labour costs and significantly lower rates of inflation;
• higher budget and current account surpluses;
• a higher total labour participation rate, and a higher female labour participation rate;
• much higher rates of household saving and net national saving;
• a higher ranking on indexes measuring innovation;
• a higher percentage of GDP spent on research and development and a higher percentage of their workers working as research and development researchers;
• a higher level of network readiness;
• a higher percentage of broadband subscribers;
• a significantly higher ranking on their growth competitiveness by the World Economic Forum; and
• a higher ranking on Richard Florida’s global creativity index. Anglo-American countries have:
• a higher rate of growth in GDP per capita between 1990 and 2004;
• a higher rate of growth in GDP per hour worked from 1995 to 2004;
• a higher rate of growth in multi-factor productivity from 1995 to 2002;
• a lower national debt;
• a significantly higher growth in employment from 1992 to 2002 (this is the

10 canadian centre for policy alternatives

vate sector. The United States spends over twice as much of its GDP on health care than Finland (15% versus 7.4%), and yet U.S. health care out- comes remain far worse — indeed, worse than most other industrialized countries. For exam- ple, the percentage of children who die at birth in the United States is the highest among indus- trialized countries. Finns live longer than Amer- icans, and the rate of infant mortality in Finland is less than one-half the American rate. The United States spends a greater percent- age of its GDP on education than Finland spends, yet the Finnish education system — which is a comprehensive public system based on equity and the professionalism and training of teach- ers — achieves much better outcomes. Ameri- can 15-year-olds rank near the bottom of OECD countries when it comes to science and math skills. By contrast, Finnish 15-year-olds rank first in the world in science and math skills. Amer- ican students also rank relatively low on read- ing skills, while the Finnish students come first in the world in this area as well. This pattern, with the United States ranking about the lowest among industrialized countries and Finland near the top, is evident on most of the remaining social indicators we examine — re- lating to social goals such as personal security, community and social solidarity, self-realization, democratic rights, and environmental govern- ance. We will not review them all here, except to note that, although Canada’s Conservatives ap- pear ready to adopt aspects of the United States’ justice system, such as mandatory criminal sen- tencing, the United States is by a wide margin the most violent industrialized country in the world (measured by the murder rate). Americans themselves express the third lowest measure of confidence in their justice system, in a tie with Belgium. Italians and Australians have slightly less confidence in their justice systems. This brief review of how well industrial- ized countries have achieved their social goals shows the United States ranks lower than most

countries on a wide range of social indicators, suggesting that the form of social organization used to accommodate contemporary life in the United States has gone profoundly amiss. Some commentators dismiss the miserable social out- comes achieved by the American social con- tract by noting that it is nevertheless one of the wealthiest countries in the world. GDP per cap- ita is higher in the United States than in most other industrialized countries. The results of this study, however, suggest a trade-off does not have to be made between material prosper- ity and social equity. In addition, there are countless problems with using GDP per capita as a measure of economic well-being. It takes no account of how the wealth that is produced in a country is distributed. For example, even though the United States experi- enced strong economic growth in recent years, between 1998 and 2004 the income of the typical (median) American family fell by 3.8%. Moreo- ver, per capita GDP is high in the United States primarily because Americans work many hours more than citizens of other countries. Low-in- come Americans often have to work at two or three jobs just to survive. Recent economic growth in the United States has also come at high long-term economic costs. The federal government budget is on an unsus- tainable path: the U.S. has the largest deficit in relation to its GDP of any industrialized na- tion; its trade deficit is the largest in the world, a staggering $805 billion last year; and, the U.S. also has one of the lowest savings rates of the industrialized countries. Moreover, even with its wealth, flexible economy and low taxes, the United States is not the most competitive coun- try in the world. From 2001 to 2005, in its com- prehensive survey of world economies, the busi- ness-dominated private World Economic Forum has determined that the most competitive coun- try in the world was Finland. In 2005–06, Fin- land was ranked as the second most competi- tive country after Switzerland.

the social benefits and economic costs of ta x ation 11

Industrialized countries are divided into four categories in Table 1, based upon their level of taxes: low-tax countries, low-intermediate tax countries, high-intermediate tax countries, and high-tax countries. Tax levels vary at least slight- ly from year to year; therefore a 12-year average from 1990 to 2002 was used. This period imme- diately precedes the year or years in which most of the social and economic indicators that we examine apply. Even taking the average tax level over a 12- year period, there are large differences between countries. Sweden, the highest tax country, col- lects almost twice as much tax as a percentage of its GDP (50.5%) as the lowest taxed country in the group, Japan (26.8%). The average for the five low-tax countries is about 29%; the average for the five high-tax countries is 47%, almost 60% greater than the low-tax countries. Given these large differences in tax levels, if high-taxed countries were not achieving their ob- jectives — or if they were doing so at substantial economic cost — this result should be revealed in aggregate data relating to a number of social and economic variables.

Political economists who study welfare state development traditionally divide modern indus- trialized countries into four categories: 1) “lib- eral welfare states” exemplified by the Anglo- American countries, in which the emphasis is on individual liberty and markets are the pri- mary form of social organization; 2) “corporat- ist welfare states” exemplified by most Western European countries, in which the emphasis is on social solidarity and occupational insurance plans play a large role in reducing social risks;

3. “Mediterranean welfare states” such as Portu- gal, Spain, Greece, and to a limited extent Italy, in which pensions are generous but otherwise state systems of support are less and in which the family and church play a large role in meet- ing the needs of citizens; and 4) “social demo- cratic welfare states,” basically the Scandinavian countries, in which the emphasis is on equali- ty and state-provided universal programs usurp the role of markets and the family in ensuring that the needs of individuals are met. Although they rely upon a more sophisticat- ed measure of the welfare state, there is obvious- ly a relatively close correspondence between the categorization of countries based simply on tax

Ranking Countries by Tax Level

the social benefits and economic costs of ta x ation 13

Our comparison of low- and high-tax countries is straightforward. For each major and widely agreed-upon social and economic objective of modern societies, we use one or more indicators that would suggest how successful a country has been in achieving these goals. We calculate the average score for the Anglo-American countries and compare it with Nordic countries.

Social Goals

Relief of Poverty Relief of poverty is an important goal in every society. A social contract should be struck that minimizes the number of those who are exclud- ed from the life of the community because of a lack of economic resources to purchase neces- sities. The number of children living in poverty is of particular concern. The Nordic countries have significantly lower rates of poverty across almost all social groups than Anglo-American countries. Four indicators are shown, as illustrat- ed in Table 2. The number in parentheses beside each indicator refers to the column number of the indicator in the Appendix: Comparing So-

cial and Economic Outcomes in Low- and High- Tax Countries. In low-tax Anglo-American countries, on av- erage, 12.6% of the population lives below 50% of the country’s median income; in Nordic coun- tries, less than one-half that percentage (only 5.6%) of the population is living below the pov- erty line. On average, in the low-taxed Anglo-Amer- ican countries, 15.9% of children live in pover- ty, while in the Nordic countries the percent- age of children living in poverty is less than one-quarter of the Anglo-American average, less than 3.3%. In the average Anglo-American country 45.2% of children in single-parent families live in pov- erty. In Nordic countries only 9.2% of children in single-parent families live in poverty. There is no significant difference between low- and high-taxed countries with respect to the percentage of elderly who live in poverty (in large part because the low rate of poverty among the elderly in Canada brings down the average for low-tax countries); nevertheless, a much lower percentage of the elderly live in poverty in Nor-

Comparing Social

and Economic Outcomes

in Low- and High-Tax Countries

14 canadian centre for policy alternatives

dic countries (9.2%) than in Anglo-American countries (13.5%). The United States has the highest rates of poverty in the industrialized world. In low-taxed United States, over 17% of individuals live below 50% of the country’s median income; almost 22% of all children live in poverty; a shocking almost 49% of children in single families live in poverty; and over 24% of the elderly live in poverty. In Fin- land, by contrast, the percentage of people living

in poverty in each of these groups is small: 6.4%, 3.4%, 10.5%, and 10.4%, respectively. Also, on most of these measures of the inci- dence of poverty, although Canada ranks far be- low the Nordic countries, it has a better record than the United States. In particular, while 21.7% of children live in poverty in the United States, in Canada a substantially lower percentage live in poverty: 13.6%. While 24.6% of the elderly live in poverty in the United States, in Canada only 4.3% of the elderly live in poverty. The 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, Society at a Glance: OECD Social Indicators, 2005, p.57. Child poverty data sourced from 1999, 2000, and 2001. Only high-income OECD countries with such data are included. Dashed line refers to the country average.

table 2 Relief from Poverty and Social Exclusion anglo - american nordic canada u.s. finl and

Relative poverty [] 12. . 10.3 1 .1 . Child poverty [] 1 . 3.3 13. 21. 3. Child poverty — single parent [] 4 .2 .2 42.1 4 . 10. Elderly poverty [10] 13. .2 4.3 24. 10.

1  canadian centre for policy alternatives

the income of persons with disabilities relative to that of the general population. In Anglo-Amer- ican countries, the income of those with disa- bilities is 67% of the general population, where- as in Nordic countries the income of those with disabilities is around 86% of the general popula- tion. The relative income of those with disabili- ties in Canada is almost equal to the relative in- come of those in the Nordic countries at 84.6%. Once again, the United States is at the low end of even the Anglo-American countries. In that country the income of those with disabilities is only 58.7% that of the general population; in Fin- land it is 83%.

Economic Equality One of the pressing issues facing every democ- racy is how economic resources should be dis- tributed. Large economic inequalities hold ad- verse consequences for the personal well-being of the citizens of a country: Inequalities erode social cohesion; they lead to worse health and personal security outcomes; they lead to the withdrawal of the haves from the life of the community and the exclusion of the have-nots; and, generally, inequality diminishes the rich- ness and flourishing of a society. Moreover, ex- treme levels of inequality have been shown to have a negative impact on economic growth by distorting the allocation of resources and tal-

ents. Income inequality has also been shown to destabilize political and social values, since dis- proportionate economic power invariably leads to increased influence over political and other societal decisions. One of the strongest associations between the variables examined in this study is between tax levels and a more equal distribution of econom- ic resources. In all three indices of inequality re- ported in Table 4, there are statistically signifi- cant differences between the Anglo-American and Nordic countries. For example, in Anglo- American countries, on average the richest 10% receive about 12.4 times the poorest 10%, while in the average Nordic country the richest 10% re- ceive only 6.5 times that of the poorest 10%. In the United States, where income is dis- tributed more unequally than in any other in- dustrialized country, the richest 10% of families receive almost 16 times as much of national in- come as the poorest 10%. In Finland, by contrast, the richest 10% receive only 5.6 times as much of the national income as the poorest 10%, about one-third the American multiple. Once again, Canada finds itself on this indicator in between the United States and the Nordic countries. In Canada, the richest 10% receive 10.1 times that of the poorest 10%. One of the most important social benefits that citizens buy with their taxes is a society in

table 3 Protection of the Vulnerable anglo - american nordic canada u.s. finl and

Net old-age pension replacement rate [11] 4 .4 . .1  1 . Relative income of disabled persons [12]   4. .  3

table 4 Economic Equality: Income anglo - american nordic canada u.s. finl and

GINI coefficient [13] 32.1 24. 30.1 3 . 2 . Income share of richest 10%/poorest 10% [14] 12.4 . 10.1 1 . . 0th percentile/10th percentile [1] 4. 2. 4 . 2.

the social benefits and economic costs of ta x ation 1 

which economic resources are distributed much more equally.

Gender Equality Every Western country is committed to equali- ty for women. Although progress has been slow, countries with higher taxes have had much great- er success in achieving this social goal. One ex- planation for this is that a considerable amount of the care-giving work that is borne by women in low-tax Anglo-American societies is paid for and financed by taxes in high-taxed countries. Thus, not only is the cost of these services spread more equitably across the entire population in high-tax countries, but women are also free to take a greater part in market, civil, and politi- cal life. On average, the level of gender equality in the Nordic countries is significantly higher than that in the Anglo-American countries, as measured by the indicators in Table 5. The World Economic Forum, which boasts the world’s 1,000 leading companies as its mem- bers, measures the extent to which women have achieved full 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 Gender Gap Index, with a higher index reflect- ing a narrower gender gap. The Nordic countries score an average of 5.35, which is higher than the average of 4.65 of the Anglo-American countries.

Canada scores 4.87, which is higher than the 4. for the U.S. but lower than Finland’s 5.19. In its annual Human Development Report, the United Nations Development Program computes a comprehensive index of gender equality: the gender empowerment measure. On this meas- ure, Nordic countries score an average of 0. while Anglo-American countries score only an average of 0.773. Canada scores 0.807, which was higher than the United States at 0.793, but low- er than Finland at 0.833. A simple measure of gender equality is the percentage of women who participate in the paid labour force and the percentage of wom- en who hold influential jobs. In Anglo-Ameri- can countries, 69% of women participate in the labour force: in Nordic countries 75% of women participate in the labour force. In Anglo-Amer- ican countries, on average, about 32% of doctors are females, 21% of members of Parliament are females, and 22% of senior civil servants are fe- males. By contrast, in Nordic countries, about 43% of doctors are females, 40% of members of Parliament are females, and 44% of senior civil servants are females. Once again, on all of these measures of gender equality, the Nordic countries are significantly better off than the Anglo-American countries. Once again, on every measure, Canada does bet- ter than the United States.

table 5 Social Equality: Gender anglo - american nordic canada u.s. finl and

Gender gap index [1] 4. .3 4. 4.4 .1 Gender empowerment [1] 0. 3 0. 0. 0  0. 3 0. 33 Female labour force participation [1] .  3.1 .2 2. Female doctors [1] 31. 42. 33.1 23.4 3. Female % in parliament [20] 21.4 3 . 24. 14. 3 . Female % in senior civil service [21] 21. 44.3 23.1 14.3 4 . % of population who favour men over women over scarce jobs [22] 1   1 . . 

the social benefits and economic costs of ta x ation 1 

Canada is almost three years longer than men and women in the U.S. Another common measure of health outcomes is infant mortality rates. The Nordic countries’ infant mortality rate is significantly lower than that of the Anglo-American countries. In the high-tax Nordic countries there is an average of 3.5 deaths per 1,000 live births, while in low- tax Anglo-American countries there is an aver- age of 5.5 deaths per 1,000 live births. On this measure of social progress, as on so many oth- ers, the United States has the worst record of all the industrialized countries. Its infant mortali- ty rate is 6.9 deaths per 1,000 births. Canada is about the same as the Anglo-American average, while Finland has only 3.1 infant deaths per 1, births, 50% less than the United States. The health of new-borns is another frequent- ly used measure of progress in the delivery of health care. On average, the percentage of new- borns weighing less than 2,500g in the Nordic countries is significantly lower than that in the Anglo-American countries. In high-tax Nordic countries, the percentage of low-weight births among new-borns is 4.8%, compared to 6.5% in

the low-tax Anglo-American countries. Canada’s 5.8% of low-weight births is lower than the 7.9% of the U.S., but higher than the 4.1 of Finland. Taxes fund health programs that ensure that all citizens have access to this vital service that is essential to human development.

Education The Nordic countries spend a greater percentage of their GDP on education than Anglo-American countries (6.4% versus 5.9%), and a much larger share of their expenditures for education is fi- nanced with taxes (97% versus 82%). Although the Nordic countries have a higher percentage of students who complete high-school (81.5% versus 73%) and university (22.1% versus 20.6%), the differences are not significant. More- over, the average PISA scores of 15-year-old stu- dents on reading, science, and math tests are, by and large, statistically indistinguishable between Nordic and Anglo-American countries. The United States has a larger percentage of students graduating from secondary school and university than any other industrialized country. Canada has the greatest percentage of students

table 7 Access to Services Essential to Human Development: Health anglo - american nordic canada u.s. finl and

Life expectancy (males) [2] .2 .2 .2 4. . Life expectancy (females) [2] 1.2 1.4 2.1 . 1. Infant mortality per 1,000 live births [2] . 3. .4 . 3. Low birth weight as % of live births [2] . 4. . . 4.

table 8 Access to Services Essential to Human Development: Education anglo - american nordic canada u.s. finl and

Completed secondary school [33]  3 1. 3. . . Completed college or university [34] 33 32.3 44 3  33 Completed university [3] 20. 22.1 22 2 .4 1 . PISA scores — reading [3]  1   12  2  4   43 PISA scores — science [3]  12  03  1  4  1  4  PISA scores — math [3]  13  1   32 4  3  44

20 canadian centre for policy alternatives

who completed college or university. Although Finland has a lower percentage of students com- pleting secondary school and university than the United States, its 15-year-old students score much higher than American students on read- ing, science, and math. Indeed, in all three of these subjects, its students score higher than any other high-income industrialized country. Ca- nadian students also score higher than Ameri- can students, although not as high as the Finn- ish students.

Physical Security A global index of physical security is difficult to imagine. One statistic frequently referred to in discussions of the physical security of citizens is the number of homicides in a country per pop- ulation of 100,000. On this index, although it is not statistically significant, there are fewer hom- icides in Nordic countries (1.4 per 100,000) than Anglo-American countries (2.2 per 100,000). Almost needless to say, the murder rate in the United States is far above that of every oth- er industrialized country: 7.1 per 100,000. Can- ada is close to the Nordic average, and Finland is above the Nordic average.

Community and Social Solidarity In the late 1990s, the concept of social capi- tal (usually defined as networks together with shared norms, values and understanding that facilitate cooperation within or among groups) gained widespread interest among researchers and policy-makers. The interest developed because of research results that suggested social capital was important, not only in facilitating produc- tive organization and economic development, but also in enriching many aspects of social life and fostering social engagement and democra- cy. Unfortunately, the concept of social capital is difficult to operationalize, but, from the so- cial indicators we examine, it would appear that citizens of high-tax countries are likely to have higher degrees of trust in one another and more confidence in public institutions. One could say they live in societies with more social capital than those living in low-tax countries. Since 1981, the World Values Survey has con- ducted four waves of surveys of people’s attitudes toward socio-cultural and political change. In Anglo-American countries, only about 38% of survey respondents agree with the statement that people can be trusted, whereas 64% of sur- vey respondents in Nordic countries agree with that statement. More citizens in Nordic countries have confidence in Parliament (52.7% in Nordic

table 9 Physical Security anglo - american nordic canada u.s. finl and

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

table 10 Community and Social Solidarity anglo - american nordic canada u.s. finl and

People can be trusted [41] 3 . 3. 3  3 .3 . Confidence in parliament [42] 32.1 2. 3 . 3  42. Confidence in corporation [43]  1 1. . 3. 42. Confidence in justice system [44] 4 . .  4 3 . . Union density [4] 23. 1. 2 .1 12. .