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Can We Tolerate Higher Taxes? Heed the Swedish Chef

The official Republican Party line on taxes remains more or less what Grover Norquist wants it to be. Taxes must not go up, in any way or for any reason. And that's a big problem, because without higher taxes future generations will be left with a miserable choice: Cope with much higher deficits or enact massive cuts to essential government programs, starting with Medicare and Social Security.

The classic Republican (and conservative) response is that higher taxes would extract a different, even more onerous cost: They would stifle the economy. The argument has intuitive appeal: Don't taxes on income discourage people from working? Don't taxes on goods would discourage people from buying things? But, as a number of scholars and policy analysts (myself included) have said before, the data from abroad seems to confound this thesis. The Scandinavian countries, in particular, raise proportionally more in taxes than we do, without obvious ill effects on their economies.

Is that data misleading? A new blog post from Lane Kenworthy suggests that it is not.

Kenworthy, a political scientist and sociologist with a blog (appropriately) called "Consider the Evidence," notes that taxation levels in the U.S., Denmark, and Sweden were actually very similar as late as the 1960s, when tax collections amounted to about a quarter of GDP in all of the countries. Afterwards, they diverged, with U.S. levels staying roughly level and the Scandinavian levels peaking at around 50 percent of GDP in the 1980s:

Kenworthy then proceeds to compare economic performance among the three countries, according to a variety of leading indicators. If the Danes and Swedes are suffocating under their tax burden, the data don't seem to show it:

Begin with GDP per capita. America’s is higher than Denmark’s or Sweden’s. But that’s a legacy of the distant past. Growth of per capita GDP in the three countries has been virtually identical, both in the five decades since 1960 when the divergence in tax levels began and in the three decades since the 1970s (shown in the chart) when the tax difference has been most pronounced. ...
Each year since 2001 the World Economic Forum has scored most of the world’s countries on a “competitiveness” index. The index aims to assess the quality of twelve components of a nation’s economy: institutions, infrastructure, macroeconomic stability, health and primary education, higher education and training, goods market efficiency, labor market efficiency, financial market sophistication, technological readiness, market size, business sophistication, and innovation. In 2007 Denmark and Sweden were judged to be virtually identical to the United States in competitiveness. That was true throughout the decade. It also was true for the “innovation” components of the index in particular.

Kenworthy goes on to note that neither Denmark nor Sweden have allowed the ratio of debt-to-GDP to rise as high as it has in the U.S. In addition, life expectancy and professed satisfaction with life in Denmark and Sweden are as high, or a bit higher, than in the U.S.

The Scandinavian countries have flatter income distributions, which means the poor do better than their American counterparts, the rich do (much) worse, and the middle class does slightly worse or roughly the same--depending on how you account for the more comprehensive public services available in Scandinavia. Although many conservatives may be inclined to scream "socialism" and fret about liberty, they should consult the Heritage Foundation-Wall Street Journal "index of freedom" -- which, Kenworthy says, gives all three countries roughly the same grade for overall economic liberty.