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John Crotty is an author and historian traditionally published by The History Press and Merrion Press.
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I came across this on social media, it’s obviously an American anti-tax rant, he’s talking about a tax on a breakfast beverage, that’s obviously a reference to the Boston Tea Party, when according to legend, American colonists protested against a British tax on tea, I think that the reality is a bit more complicated, but it’s the legend that’s important here.
So we get the idea, the guy doesn’t like taxes, I’m pretty sure nobody does, but there is a confusion here between two different issues.
One is how much tax we pay – how much of our income, through one tax or another, ends up being taken by the taxman. That’s a real issue that deserves, especially since it has a big impact on how lots of other things in the economy work.
The second issue here is how the tax system works and, in particular for this guy, how many different types of taxes there are, and what they are levied on. That’s another important debate, and the outcome of that debate also has a big impact on how the economy works.
But I think that clip illustrates the real problem here that I want to talk about. These two issues are, these two separate issues, get confused very often, and I think that confusion makes the two separate debates on the these two separate issues run into the sand, and really go nowhere.
The first debate is how much money should the government take. In fact it’s really easy to at least measure what is being done here, because I can find on Wikipedia a list of countries and their total tax revenue, expressed as a percent of their GDP.
This can be calculated in a number of ways, and the page actually lists two listings, one complied by the World Bank, another by the UN. These figures can vary because of different methodology, but the UN measure is basically tax is defined as any money the government takes in by any means, with a couple of exceptions like fines imposed by courts, and I’m going by that where it’s available. So things like PRSI in Ireland, and social security contributions in the US are counted as tax, as are the cost of getting your driving licence, whether it’s described as a tax or a purchase price.
When you look at the list, you can see that at the bottom of the list, the countries that collect the least taxes are some failed states like Somalia and Haiti where there is no effective government to collect the taxes, along with oil-rich states like where I presume governments are funded by the profits of nationalised oil companies. Libya is at he absolute bottom, I think that it might count as both. Their tax as a percent of GDP is in the low single digits.
Unsurprisingly, the countries at the top of the list include the Scandinavian and western European social-democracies, Denmark is at 47 per cent, so nearly half of the total GDP goes to the government; New Zealand, Sweden, Iceland, Norway and France are all between 30 and 35 percent.
Ireland comes in at 18 per cent, close to the middle of the rankings, but I think that figure is distorted downwards by our artificially inflated GDP figures. For the American in that clip, the US comes in slightly higher at 20 per cent, so not that high, but I think that doesn’t count the cost of non-state healthcare, which is gigantic in the US.
As I said, there is a real debate to be had here; should the state spend more to provide a social safety net for its people, or does that cause inefficiency, would the economy grow more if that was left to the market.
In the 1980s, Ronald Regan talked about the Laffer Curve, which said that lower taxes are better, because the state can get more income with lower taxes, because that stimulates more economic activity which can be taxed at that lower rate. There is certainly some truth to this, the Laffer Curve is basically a semi-circle which starts at zero, if your tax rate is zero then for sure you are going to get zero tax revenue; but it ends at zero too, which seems right because if you tax everything at 100 percent, then nobody will do anything because they wouldn’t get paid anything, and again you get zero tax revenue.
The two extremes of tax rates yield nothing, and the optimum point is somewhere in between, and it’s important to remember that ‘optimum’ here is a value judgement, not something that can be calculated definitively by a graph. Some people think that having taxes as low as practically possible is the optimum, other people think that it’s maximizing revenue, or funding specific services.
Anyway the Laffer Curve doesn’t claim that all tax reduces economic activity. As I said, Haiti and Somalia have very low tax takes, but these are lawless states with very little economic because they are so insecure that anything anyone makes is sure to be stolen. If you could, if you could, impose a tax to pay for an effective police force to provide security, those countries would be economically far better off. In that example higher taxes would create more economic activity, and there are many more.
So, yes, lower taxes generally tend to stimulate the economy, but that effect has its limits, and it doesn’t always work, and sometimes it works the other way. The world just isn’t as simple as the anti-tax extremists would like it to be. Like most things in political economy, it’s complicated.
And that leads me back to the rant that I started with. Many people complain not so much about the level of taxes, but the complexity of them.
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Note that this guy doesn’t mention the rate of a single one of the taxes he’s complaining about. This is a really important economic effect, and it’s completely irrational. It’s not unlike the question about whether you would go an hour out of your way to pay €200 euro for a washing machine that is available for €300 next door?
Most people would. But would you go an hour out of your way to get €100 off a €50,000 car? Most people wouldn’t bother, even though the money and time cost are identical, and you tend to buy both with roughly equal frequency. Humans aren’t always logical.
For the same reason, it seems very appealing to people, even when they understand they would pay the same total amount of tax, to pay it all in one lump sum, rather than have lots of taxes like PAYE, VAT, car tax, property tax, bin charges and many more.
In their first iteration, Renua – remember them, they still exist, believe it or not, they’ve gone through several phases and now come out as full-on anti-immigration anti-EU, ironic given their founder. In their first iteration, Renua proposed something like this, just one flat-rate income tax; it didn’t go anywhere obviously, but this idea does attract some positive comment sometimes.
It’s an attractive idea, particularly because it appeals to that irrational bit of us that would go across town to save €100 euro on a washing machine, but not on a car. The problem is that, to use the words of HL Mencken, for every problem there is a solution that is simple, neat—and wrong. And this is a prime example.
First off, let me acknowledge that in some cases, simplifying the tax code can reduce the collection cost, and also the compliance cost for citizens, but that’s really tweaking the edges. The real effect here is that taxes cause what economists call behavioural responses. People change what they do in response to taxes.
We can use this for good effects, higher taxes on cigarettes reduce smoking, lower taxes on schoolbooks and so on, but this means that unintended consequences are a big issue here. If we tax one area of the economy and not another, experience has shown that that this distorts economic and produces perverse results. One example is that in Britain, gingerbread men are not allowed to smile. I’m not kidding.
British VAT is not imposed on biscuits – unless they are chocolate covered, which is considered a luxury. But how coved in chocolate do they have to be to attract the wrath of the VAT man? Is a tiny bit of chocolate allowed? Yes, that’s OK. The gingerbread man can have chocolate eyes. But a mouth? No, that’s too close to making it chocolate-covered. So the result is that all gingerbread men in Britan can have chocolate eyes, but not a mouth, so no smile.
That’s a humorous effect, other effects are not so harmless. In Ireland we have almost no taxes on property, either directly on the property itself, or indirectly for water supply or the like. The taxes that you and I pay are overwhelmingly either on our income, or on our purchases, like VAT. It won’t take you long in any political discussion forum to come across ferocious opposition to the minuscule property tax that we have to pay, and there’s no shortage of people who will puff themselves into a tizzy with all sorts of claims that property tax is an outrageous infringement on their moral right to live free as though they were a trekking the Oregon trail.
Their argument is simple, neat and wrong. Our tax system is massively unbalanced, with far more tax on economic activity – earning and spending money, and far less on economic inactivity – owning property. The effect of this is that our economy is focussed on unproductive property ownership, at the expense of actually producing anything.
Remember that in the low-tax US, depending on where they live, many people will pay more tax on their house than on their wages. Many states have no state income tax at all, so people pay just the federal income tax and the state is funded largely by property taxes.
What does this do? Well higher income taxes deter economic activity – that’s just economics 101. Taxes have behaviours responses. If investing in property is less worthwhile, less people will do it, and if investing in economic activity is more worthwhile, that’s where the investment would go.
And that investment would have an impact. With investing in property less worthwhile, the utility of property as an investment vehicle is reduced, so the price of houses would reflect more their value as providing a home for someone. And that money would have to be invested somewhere. With relatively lower taxes on economic activity, that would stimulate the productive economy.
So more and better paying jobs, lower tax on that pay, higher property tax but no increase in the total amount of tax, and lower housing costs. That sounds like a win to me.
Remember that the next time some gombeen comes knocking on your door looking for a vote in return for a cut in the Local Property Tax that’s worth about the price of one chocolate bar a week.


























