A Capital Idea Part 80: Higher Taxes = Better Life
After last time, I realized that I should also look at the relation between tax rates and the economic and life satisfaction outcomes, so I have moved to the next phase of my analysis of nations.
I performed the same sort of calculations as last time, using the nations with the highest and lowest tax rates (http://en.wikipedia.org/wiki/List_of_countries_by_tax_revenue_as_percentage_of_GDP), and comparing them on Quality of Life (http://en.wikipedia.org/wiki/Quality-of-life_index), Satisfaction with Life (http://en.wikipedia.org/wiki/Satisfaction_with_Life_Index), and Per-Capita Income in 2010 according to the IMF (http://en.wikipedia.org/wiki/List_of_countries_by_GDP_(PPP)_per_capita). The results were pretty stunning, especially considering that there were a few nations which threw proverbial monkey wrenches into the process. Of course, these findings do not take all nations into account, and are not correlations. Nor have I included tests of statistical significance, but they very likely show significant trends which encompass all nations.
The ten nations with the highest tax rates are: Austria, Belgium, Bosnia and Herzegovina, Denmark, Finland, Germany, Iceland, the Netherlands, Norway, Sweden, and Zimbabwe, in alphabetical order. The ten nations with the lowest tax rates are: Algeria, Haiti, Iran, Kuwait, Libya, Nigeria, Oman, Qatar, Saudi Arabia, and the United Arab Emirates, in alphabetical order. The tax rates I used are tax revenue as percentage of GDP, which includes all taxes, and the nations with the higher tax rates are generally in the 40-50% range, while the nations with the lower tax rates are less than 10%. Several nations, including France, had to be excluded from the analysis, because they lacked data on one or more of the other variables, unfortunately. By the way, this data was collected by the conservative, Heritage Foundation, of all places, so it certainly cannot be claimed to have a liberal bias. Most of the data is from 2009. The Heritage Foundation even refers to low tax rates as "Fiscal Freedom" or "Economic Freedom."
Here is what I found:
1. Looking at Quality of Life for these 20 nations, using their rankings, I found that the average Quality of Life ranking for the high tax rate nations was 32.7, while the average ranking for the low tax rate nations was 76.1, with lower scores being better. For example, the nation ranked best in Quality of Life would be ranked number 1. Thus, nations with the highest tax rates ranked far better on Quality of Life, on the whole, compared to nations with the lowest tax rates. Note that Zimbabwe seems to be a basket case of a nation. I am not sure what is going on there, but I believe that there is major political and civil strife occuring there, but it has a very high tax rate. It ranks last of all nations in Quality of Life, at 111. Otherwise, the results would have been even more extreme. I am guessing that the high tax rates in Zimbabwe, rather than being used to enhance people's Quality of Life, are being used for military purposes, or to enrich its leaders, defeating the purpose of raising taxes;
2. In terms of Satisfaction with Life, there were similar findings, but not as extreme. The average Satisfation with Life ranking for the ten nations with the highest tax rates, was 43.2, while that for the ten nations with the lowest tax rates, was 74.2. Thus, citizens of nations with the highest tax rates rated themselves considerably more satisfied with their lives than did citizens of nations with the lowest tax rates. In this case, Zimbabwe had the second worst ranking on Satisfaction with Life, 177 out of 178 nations; otherwise, the difference between the two groups would have been considerably greater;
3. I was interested in differences in income between the two groups, as well, for several reasons. This is a complicated topic, but needs to be examined. If nations with high tax rates have higher incomes as well, it could be argued that differences in Quality of Life or Satisfaction with Life between the two groups may be due to income differences. On the other hand, it may be argued, as I suspect, that higher tax rates result in higher per capita incomes. It also may be the case that nations with higher per capita incomes tend to develop more liberal economic policies and therefore higher tax rates. Citizens in nations with better incomes may feel more capable of paying high tax rates, although that certainly doesn't seem to be the inclination of most wealthy people here in the United States. In any case, I found the following. The average Per-Capita Income ranking for the ten nations withthe highest tax rates was 40.2, with Zimbabwe bringing up the rear again in position 180. The average Per-Capita Income for the ten nations with the lowest tax rates was 64.0, meaning that these nations did tend to have poorer Per-Capita Incomes, but the difference between the two groups was less than the other two comparisons. Qatar actually had the world's best Per-Capita Income, at $88,559 per year (oil money presumably). Several other nations in the lowest tax rate group also had good Per-Capita Incomes, but eight of the ten nations in the highest tax rate group had rankings of 22nd or better on Per-Capita Income, accounting for the difference between the groups;
4. I also looked at public debt for these 20 nations (http://en.wikipedia.org/wiki/List_of_sovereign_states_by_public_debt), but didn't do a comparison of the groups, partly because Wikipedia listed the data as suspect, and also because there were considerable differences between two different measures of debt. (For example, the United States was listed as having only 58.9% of GDP national debt as of 2010 according to the CIA and Eurostat, but 92.7% according to the IMF.) Also, public debt probably isn't as relevant as the other variables. Governments are not meant to be profit making businesses, and nations with good economies and high tax rates have considerable ability to repay their debts. I found that Japan, which is more or less run as a democratic socialist nation, but with only moderate tax rates, has the world's highest public debt at 225% of GDP, a fact mentioned by Thom Hartmann, coincidentally, the other day. I think Japan, along with the U.S., needs to raise its tax rates. Zimbabwe came in fourth place, at 149% of GDP, giving that nation another reason for having high tax rates. Overall, the high tax rate nations ranged from 4th to 75th in terms of public debt as a percentage of GDP, not great, but not too bad. The low tax rate nations admittedly did better on this measure, ranging from 59th all the way to the most fiscally responsible nation in the world, according to conservative terminology, at 128th. Which nation was this that had the world's lowest public debt as percentage of GDP? Libya, no less, surely a model of practical, conservative economic principles worthy of emulation by Republican politicians. Libya's percentage was only 3.3%, never mind that its people are revolting against the government and now it's in the midst of a civil war. Other repressive nations with low public debts include Iran and Saudi Arabia;
5. I also attempted to compare the GINI Indices of the two groups, but found that most of the nations in the low tax rate group did not have one listed, although undoubtedly, these would be high ones indicating high economic disparities (http://en.wikipedia.org/wiki/List_of_countries_by_income_equality).
Overall, my findings provide substantial support for my thesis that progressive policies help not only a nation's economy in the long run, but also life satisfaction and quality of life. Since taxes are set by governments, hopefully with the consent of the public, these are policy decisions which affect other outcomes. Thus, a strong case for the causality of tax rates in terms of other outcomes can be made, although real life is messy and never so simple. Nonetheless, it is difficult to conceptualize the main causal path as being anything other than tax rates affecting Quality of Life and Satisfaction with Life. Over time, it probably even helps a nation's income by creating an environment in which the greatest number of people can find gainful employment which is well paid.
Lowering taxes and thinking that will help the economy, or the well-being of the public -- as conservatives argue -- is clearly moving in the wrong direction. Of course, having low tax rates also ensures that a nation such as the United States will continue to amass huge public debts, so it is a self-defeating policy for debt-hating conservatives. We desperately need to raise tax rates, especially on the upper income levels. It is also of utmost importance to use the revenues for constructive purposes, such as infrastructure building, education and research, and care of needy children (welfare) as well as mental health care, rather than to support the United States' military empire and military adventures. The importance of this conclusion cannot be overstated.
p.s. Happy Birthday to my beautiful wife, Eunice, or as I call her, You-Nice.