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Headshot of Jeffrey Simpson. (Brigitte Bouvier/Brigitte Bouvier/For The Globe and Mail)
Headshot of Jeffrey Simpson. (Brigitte Bouvier/Brigitte Bouvier/For The Globe and Mail)


There’s no straight line between tax rates, prosperity Add to ...

Nothing gets the dander up among politicians and taxpayers more than taxes.

The political right says low taxes are the path to growth and prosperity. The political left insists that higher taxes are needed for good social programs that lead to prosperity. So what’s the right level of taxation?

The answer is, there isn’t an answer. Some countries with a very high share of taxes in relation to national wealth show strong growth, low unemployment, good productivity and a solid fiscal situation. Others with very low taxes show average growth, high unemployment, good productivity and a weak fiscal situation.

In Paris this week, the Organization for Economic Co-operation and Development released a compendious report on revenue levels in member countries that won’t settle the argument about the rate and composition of taxes. What it will settle, or ought to, is that there’s no correct answer to the dispute.

Take Japan and the United States, for example. They both have a low share of tax revenue as a portion of GDP – 27.6 per cent for Japan, 24.8 per cent for the U.S. This low take is supposed to spur growth and lead to other wonderful economic outcomes. Instead, both countries are plagued by slow growth and huge budgetary deficits. Indeed, 80 prominent U.S. business people said this week that the country’s tax rate has to rise as part of the struggle against the deficit – a statement of the blindingly obvious, except to the Republican Party. Australia’s tax rates are low, too, but the Australians enjoy a much better economic situation than either the Japanese or the Americans.

Take Sweden and Denmark. They have high shares of tax revenue to GDP – 45.5 per cent for Sweden, 47.6 per cent for Denmark – but they boast low unemployment, good growth, stable fiscal situations and strong social programs. Other relatively high-tax countries don’t fare as well. France, for example, has a ratio of 43 per cent, yet suffers from higher unemployment, slow growth and a bad fiscal situation.

Germany (36 per cent) and Britain (35 per cent) have almost identical tax ratios, yet Germany consistently outperforms the U.K. on almost every economic measurement from overall output and productivity to unemployment and growth, and it has a solid network of social programs. If total tax rates dictated economic results, the two countries should be showing similar results. But they don’t.

In Canada, as elsewhere, all sorts of political claims are made about tax rates and their relationship to economic and social indicators. The argument is as much about ideology as anything.

Today, the share of tax to GDP in Canada is the same as it was in 1975 – about 32 per cent. The share got as high as 35.6 per cent in 2000 and has declined since, because governments cut taxes and the economy grew strongly before the 2008 recession.

The Canadian pattern – ratios about the same now as almost four decades ago – is more or less the prevailing one across most OECD countries. The Scandinavians, France, Italy and Spain drove up their ratios.

Canada is rather offside in the OECD in its mix of taxes. It collects less in sales tax as a share of total tax revenue, something most economists would say is a mistake. The OECD itself has criticized implicitly the Harper government’s two-point GST reduction, as has almost every independent economist. But, then, that tax cut was much more about politics than good economics.

Despite all the claims about tax ratios and rates, it would appear they’re just one factor among many in determining a country’s economic and social well-being. What seems clear is that, if countries insist on having very low tax ratios, they’re also quite likely to run fiscal deficits that, if left unattended, eventually cause big-time problems.

This is precisely the drama being played out in the U.S., in a campaign during which neither presidential candidate has fessed up to the seriousness of the problem, although Mitt Romney’s prescription will almost certainly make things worse.

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