Responding to Justin Fox, editorial director of the Harvard Business Review Group, How big should a government be? in the Harvard Business Review blogs.
Interesting discussion overall, and it would have been nice to see the
actual data presented in the paper linked by the Washington Post article
(instead of 'data table goes here' notices). It would be interesting to
examine whether U.S. tax rates really are more progressive (and whether
tax rates are really relevant at all to people without an income) but
that would be t miss the main point.
Which is this: while
granting that government really should be bigger, Fox argues, "as his
research also shows, it really can't be done just by raising income tax
rates on the wealthy. The U.S. already has about the most progressive income tax system around.
European social democracies tend to have flatter income taxes, plus
value-added taxes that hit all consumers. They tax capital gains and
dividends at lower rates than regular income, just as the U.S. does, but
they also all have lower corporate tax rates than the U.S."
this doesn't follow. The proposition that the U.S. has a more
progressive system than Europe does not entail that the U.S. system
cannot be made even *more* progressive. Nor does it follow (from this
assertion, at least) that making it more progressive would be a bad
thing. Indeed, the difficulty with which tghe 'less progressive' tax
regimes in Europe have had coping with the economic crisis suggests that
having the means to tax windfall profits makes it easier for nations to
cope with economic turmoil.
This argument is pernicious because it infers that progressive taxation
hurts growth - drawing from Peter Lindert the Washington Post article
argues "European countries needed tax systems that could raise a lot of
without hurting growth, and only regressive consumption taxes fit the
The primary argument against progressive taxation,
iterated in the Prasad and Deng paper (p. 27) is that income taxes
penalize work effort in a way that regressive consumption taxes do not.
Fox restates this point: "The economic logic behind all this is that
progressive tax systems and
means-tested social programs can carry with them big disincentives to
work." An additional argument is that income taxes make the cost of
government programs more apparent, prompting taxpayer backlashes. But
none of this follows from the study either; it is speculation, at best
advanced as putative explanation for the data, but not inherent in the
More to the point, even if we accept the proposition that
the U.S. has a more progressive system (and again, this is far from
beyond dispute) nothing in the data supports any of the conclusions
advanced in this article. For example, we find Switzerland, Canada and
Australia all around the 28 percent income redistribution range, yet at
opposite ends of the 'progressiveness' scale, with Switzerland not very
progressive and Australia near the 'progressive' status of the U.S. On
the other axis, we find Canada, Germany and Belgium all around 0.1 in
the 'progressiveness' scale, but varying from 28 to almost 50 on
redistribution, the opposite ends of the scale. So it seems very
difficult to assert a correlation between progressiveness and
redistribution without introducing a large number of caveats and
In fact, it is regressive taxation that is most
obvious to the mass of people and which is most likely to create a voter
backlash. Canada's Conservative government of the 1990s, after it
introduced the Goods and Services Tax (GST), was reduced from a strong
majority government to a 2-member rump. In Britain the Value Added Tax
(VAT), introduced by the Conservatives in 1973, was followed by a Labour
victory in 1974 and an even more extreme anti-tax government under
Margaret Thatcher starting in 1979.
The basis for economic
success following the introduction of consumption tax is therefore not
related to voter satisfaction with taxation levels. Rather, consumption
taxes conferred on Europe, and later on Canada, an export advantage.
These taxes replaced existing sales, corporate and manufacturing taxes.
They were levied at the point of final consumption only;
business-to-business transactions were exempt from the taxes. They thus
represented a considerable state subsidy for export industry, financed
by consumers, that created prosperity in increasingly competitive
international markets, and especially against the United States.
(and Canadians) have used this prosperity to support a range of social
programs; these programs have in turn insulated the population from the
worst effects of the economic downturn in those nations that could
afford them. Would a GST or VAT help the United States? It may raise
more revenue, but with corporate taxes already at historic lows,
it will not generate an export advantage, and will not stimulate growth;
indeed, the drop in consumption would create a recession, as it did in
Britain in the 1970s and Canada in the 1990s, but on which, with no
export upside, would be longer-lasting and more severe.
face of recession, particularly a recession in which incomes have been
hit hard and consumer spending is quite low, the best mechanism for
recovery is to put more money into the hands of those most likely to
spend it, which is as always the poor. This is what Stephen Harper did in Canada, reducing the GST by two percent. Because economic growth is
hampered not by the disincentive to earn, but rather by the inability to
spend. Indeed, the suggestion that higher taxation makes rich people
work less hard is spurious and inaccurate; the wealth the rich earn year
after year has little to do with their effort, and far more to do with
the advantage derived from their existing wealth.
To tell us, as
this post does, that there is no point to taxing the rich is to build a
fallacy onto a fabrication, to perpetuate the foolish presumption that
it is the rich who generate wealth in an economy, and therefore only the
poor who should pay for social programs. It is, frankly, an outrageous
lie. Society requires not just the labour of its people to generate
wealth, but also their active participation in the marketplace. When
money flows disproportionately to the wealthy, they hoard it, or spend