British tax mix as a percentage of GDP

The large rise in tax in personal income in the 1970s coincided with the rise of the British disease and British economy becoming widely known as the sick man of Europe. The large decline in taxation in personal income under Thatchernomics was followed by an economic boom.

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Source: OECD Stat.

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@equitablegrowth @PaulHannon29 Eurosclerosis, Swedosclerosis, the British Disease and rising inequality harming economic growth

The Washington Centre for Equitable Growth have joined the Wall Street Journal in falling for that dodgy OECD hypothesis about rising inequality holding back economic growth.

The chart below shows stark differences between egalitarian Sweden and France, and the more unequal UK since 1970 in departures from a trend growth rate of 1.9% in real GDP per working age person, PPP.

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Source: Computed from OECD Stat Extract and The Conference Board. 2015. The Conference Board Total Economy Database™, May 2015, http://www.conference-board.org/data/economydatabase/

In the above chart, a flat line is growth at the same rate as the USA for the 20th century, which was 1.9%  for GDP per working age person on a purchasing power parity basis. The USA’s growth rate is taken as the trend rate of growth of the global technological frontier. A falling line in the above chart is growth in real GDP per working age person, PPP, at below this trend rate of 1.9%; a rising line is above trend rate growth for that year.

  • Sweden really had been the sick man of Europe until it turned its back on high taxing, welfare state socialism in the early 1990s.
  • France has been in a long decline so much so that the global financial crisis is hard to pick up in the acceleration in its long decline in the mid-1990s.

Britain did very well, both under the neoliberal horrors of Thatcherism and the betrayals by Tony Blair of a true Labour Party platform. The UK grew at above the trend annual growth to 1.9% for most of the period from the early 1980s to 2007.

Neither France or Sweden, despite their egalitarian economies, kept up with the US growth rate since 1970. Under the OECD’s hypothesis, if France and Sweden had been more unequal, their trend growth rates would have been even more appalling since 1970.

How @equitablegrowth showed inequality helps growth when arguing inequality harms growth

The Washington Centre for Equitable Growth recently tweeted that inequality harms growth in the USA as compared to Sweden, France, Germany and the UK. It was relying on some dodgy OECD research.

The Washington Centre for Equitable Growth did not check their inequality ratios they tweeted against trends in economic growth and economic policy since 1970, which I have reproduced in figure 1. Germany is not included in figure 1 because German data on growth is thrown askew by German unification.

Figure 1: Real GDP per British, French and Swede aged 15-64,  2014 US$ (converted to 2014 price level with updated 2011 PPPs), 1.9 per cent detrended, 1970-2013

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Source: Computed from OECD Stat Extract and The Conference Board. 2015. The Conference Board Total Economy Database™, May 2015, http://www.conference-board.org/data/economydatabase/

Figure 1 shows that France has been in a long-term decline since the late 1970s despite the blessings of a more equal society than the USA as championed by the Washington Centre for Equitable Growth. In figure 1, a flat line is growth in real GDP per working age person, PPP, at the same rate as the USA for the 20th century, which was 1.9% per year. A falling line in figure 1 indicates growth of less than 1.9% while a rising line indicates growth in real GDP per working age person, PPP, in excess of 1.9%. In figure 1, France hardly ever grew at the trend rate of growth for the USA of 1.9% per year and was frequently well below that rate.

Sweden tells a slightly different story in figure 1 because of regime change in the early 1990s when Sweden adopted more liberal economic policies where taxes and government spending were reduced:

The rapid growth of the state in the late 1960s and 1970s led to a large decline in Sweden’s relative economic performance. In 1975, Sweden was the 4th richest industrialised country in terms of GDP per head. By 1993, it had fallen to 14th.

That regime change reversed a long economic decline since 1970 under the egalitarian policies of the Swedish Social Democratic Party. Under the Swedish Social Democratic Party, Sweden was almost always growing at less than the trend rate of growth of the USA, which was 1.9%. That position reversed only when there was a turn away from big government and high taxes.

Figure 1 tells a similar story for the British economy: a long economic decline in the 1970s when Britain was the sick man of Europe. Under Thatchernomics, Europe had a long economic boom for 20 years or more – see figure 1.

In the 1970s, under the high taxes of the Heath, Callaghan and Wilson administrations, as figure 1 shows, Britain was the sick man of Europe. With the election of the Thatcher Government, Britain soon grew at better than the US trend growth rate for nearly 20 years through few exceptions.

Swedosclerosis, Eurosclerosis and the British disease compared

Figure 1 shows stark differences between Sweden, France, Italy and the UK since 1970 in departures from trend growth rates of 1.9% in real GDP per working age person, PPP. Italy did quite OK until 2000 growing at about the trend growth rate of 1.9% after which it fell into a hole so deep that it barely notice the onset of the global financial crisis. Sweden really had been the sick man of Europe until it turned its back on high taxing, welfare state socialism in the early 1990s. France has been in a long decline so much so that the global financial crisis is hard to pick up in the acceleration in its long decline in the mid-1990s. Figure 1 also shows Britain did very well, both under the neoliberal horrors of Thatcherism and the betrayals by Tony Blair of a true Labour Party platform. The UK grew at above the trend annual growth to 1.9% for most of the period from the early 1980s to 2007. The UK has done not so well since the onset of the global financial crisis.

Figure 1: Real GDP per Swede, French, British and Italian aged 15-64, 2014 US$ (converted to 2014 price level with updated 2011 PPPs), 1.9 per cent detrended, 1970-2013

Source: Computed from OECD StatExtract and The Conference Board. 2015. The Conference Board Total Economy Database™, May 2015, http://www.conference-board.org/data/economydatabase/

Note: When the line is flat, the economy is growing at its trend annual growth rate. A falling line means below trend annual growth; a rising line means of above trend annual growth. Detrended with values used by Edward Prescott.

German data was not in figure 1 because German unification threw all of its data into disarray for long-term comparison purposes.

Tax revenues as a percentage of GDP, selected OECD member countries

Sir Humphrey was right on why Britain entered the common market in 1973? Real GDP growth per working age British and French, PPP, detrended, 1950 – 2013

Figure 1: Real GDP per British and French aged 15-64, converted to 2013 price level with updated 2005 EKS purchasing power parities, 1.9 per cent detrended, 1950-2013

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Source: Computed from OECD Stat Extract and The Conference Board, Total Database, January 2014, http://www.conference-board.org/economics

Figure 2: Real GDP per British and French aged 15-64, converted to 2013 price level with updated 2005 EKS purchasing power parities, 1.9 per cent detrended, base 100 = 1974, 1950-2013

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Source: Computed from OECD Stat Extract and The Conference Board, Total Database, January 2014, http://www.conference-board.org/economics

In figure 2, a flat line represents annual real GDP growth at a rate of 1.9%, which is the trend rate of annual growth of the USA in the 20th century. A rising line means annual growth at above that trend rate; a falling line means annual growth at below that trend rate of 1.9% per year.

The sick men of Europe? British and Irish unemployment rates, 1956–2013

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Source: OECD StatExtract

Ireland and Britain justly earned the name the sick man of Europe in the 1980s. Irish unemployment was  in the mid teens much of the 1980s because the Irish economy was in a great depression  from 1973 to 1992.

Unemployed people are defined as those who report that they are without work, that they are available for work and that they have taken active steps to find work in the last four weeks. The ILO Guidelines specify what actions count as active steps to find work; these include answering vacancy notices, visiting factories, construction sites and other places of work, and placing advertisements in the press as well as registering with labour offices.

Two booms, two depressions: British and Irish real GDP detrended, 1955–2013

Figure 1: Real GDP per British and Irish aged 15-64, converted to 2013 price level with updated 2005 EKS purchasing power parities, 1955-2013

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Source: Computed from OECD Stat Extract and The Conference Board, Total Database, January 2014, http://www.conference-board.org/economics

Figure 2 detrends British real GDP growth since 1955 by 1.9% and Irish real GDP growth  by 3.6%. The US  real GDP growth in the 20th century is used as the measure of the global technological frontier growing at trend rate of 1.9% in the 20th century. The Irish economy is more complicated story because its growth rate in figure 2 was detrended at a rate of 3.6% because it was catching up from a very low base. Trend GDP growth per working age Irish for 1960-73 was 3.6 per cent (Ahearne et al. 2006).

Figure 2: Real GDP per British and Irish aged 15-64, converted to 2013 price level with updated 2005 EKS purchasing power parities, 1.9 per cent detrended UK, 3.6% detrended Ireland, 1955-2013

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Source: Computed from OECD Stat Extract and The Conference Board, Total Database, January 2014, http://www.conference-board.org/economics

A flat line in figure 2 indicates growth at 1.9% for that year. A rising line in figure 2 means above-trend growth; a falling line means below trend growth for that year.

In the 1950s, Britain was growing quickly that the Prime Minister of the time campaigned on the slogan you never had it so good.

By the 1970s, and two spells of labour governments, Britain was the sick man of Europe culminating with the Winter of Discontent of 1978–1979. What happened? The British disease resulted in a 10% drop in output relative to trend in the 1970s, which counts as a depression – see figure 2 .

Prescott’s definition of a depression is when the economy is significantly below trend, the economy is in a depression. A great depression is a depression that is deep, rapid and enduring:

  1. There is at least one year in which output per working age person is at least 20 percent below trend; and
  2. there is at least one year in the first decade of the great depression in which output per working age person is at least 15 percent below trend; and
  3. There is no significant recovery during the period in the sense that there is no subperiod of a decade or longer in which the growth of output per working age person returns to rates of 2 percent or better.

The British disease in the 1970s bordered on a depression. There was then a strong recovery through the early-1980s with above trend growth from the early 1980s until 2006 with one recession in between in  1990. So much for the curse of Thatchernomics?

Figure 1 suggests a steady economic course in Ireland until the 1990s with a growth explosion growth with the Irish converged on British living standards up until the global financial crisis.

Figure 2 shows the power of detrending GDP growth and why Ireland was known as the sick man of Europe in the 1970s and 1980s with unemployment as high as 18% and mass migration again. The Irish population did not grow for about 60 years from 1926 because of mass migration.

Figure 2 shows that real GDP growth per working age Irish dropped below its 3.6 per cent trend for nearly 20 years from 1974 , but more than bounced back after 1992. The deepest trough was 18 per cent below trend and the final trough was in 1992  –  see Figure 2.

The deviation from trend economic growth made the Irish depression from 1973 to 1992 comparable in depth and length to the 1930s depressions (Ahearne et al. 2006).

The Irish depression of 1973 to 1992 can be attributed to large increases in taxes and government expenditure and reduced productivity (Ahearne et al. 2006). There were two oil price shocks in the 1970s and many suspect Irish policy choices from 1973 to 1987.

There were three fiscal approaches: an aggressive fiscal expansion from 1977; tax-and-spend from 1981; and aggressive fiscal cuts from 1987 onwards. In the early 1980s, Irish CPI inflation at 21 per cent, public sector borrowing reached 20 per cent of GNP.

To rein in budget deficits, taxes as a share of GNP rose by 10 percentage points in seven years. The unemployment rate reached 17 per cent despite a surge in emigration. The rising tax burden raised wage demands, worsening unemployment. Government debt grew on some measures to 130 per cent of GNP in 1986 (Honohan and Walsh 2002).

From 1992, Ireland rebounded to resume catching-up with the USA. The Celtic Tiger was a recovery from a depression that was preceded by large cuts in taxes and government spending from the late 1980s (Ahearne et al. 2006). Others reach similar conclusions but avoid the depression word. Fortin (2002, p. 13) labelled Irish public finances in the 1970s and to the mid-1980s as a ‘black hole’.

Fortin (2002) and Honohan and Walsh (2002) disentangle the Irish recovery into a long-term productivity boom that had dated from the 1950s and 1960s, and a sudden short-term output and employment boom since 1993 following the late 1980s fiscal and monetary reforms.

Honohan and Walsh (2002) wrote of belated income and productivity convergence. The delay in income and productivity convergence came from poor Irish economic and fiscal policies in the 1970s and 1980s.

This was after economic reforms in the late 1950s and the 1960s that started a process of rapid productivity convergence after decades of stagnation and mass emigration; Ireland’s population was the same in 1926 and 1971. During the 1950s, up to 10 per cent of the Irish population migrated in 10 years.

In the 1990s, many foreign investors started invested in Ireland as an export platform into the EU to take advantage of a 12.5 per cent company tax rate on trading profits. Between 1985 and 2001, the top Irish income tax rate fell from 65 to 42 per cent, the standard company tax from 50 to 16 per cent and the capital gains tax rate from 60 to 20 per cent (Honohan and Walsh 2002).

What happened after the onset of the global financial crisis in Ireland  and the UK are for a future blog posts.

Average tax rates on consumption, investment, labour and capital in USA, UK and Canada, 1950-2013

Income taxes in the USA and UK didn’t change all that much after the mid-70s. Prior to that, income tax rose quite steadily in the UK in the 1950s and 1960s and not surprisingly, Britain was the sick man of Europe in the 1970s. Income taxes rose quite steadily in Canada for most of the post-war period up until 1990 and then levelled out for most of that decade before a small tapered downwards.

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Source: Cara McDaniel.

Taxes on consumption expenditure were very different stories across the Atlantic. There has been a tapering down in the  average tax rate on American consumption expenditure since 1970 after modest increases before that. Canadian taxes on consumption expenditure rose steadily until the 1970s, then drop steadily  in the 1970s  and than rose  in the 1980s and dropped again after 1992. British taxes on consumption expenditure rose sharply in the late 1960s,  dropped sharply and then rose again in the 1970s and was pretty steady after that.

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Cara McDaniel.

The sleeper tax in all three countries was payroll taxes to fund social security and the welfare state. These rose steadily in the USA, UK and Canada up until the 1990s.

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Source: Cara McDaniel.

Despite all that nonsense about neoliberalism from the  Left over Left, the average rate of tax on capital income did  not appear to change much at all over the last 50 years. There was a modest taper in US capital income taxation from the mid-30s to the mid-20s over the entire post-war period. The average Canadian tax rate on income from capital rose steadily in the 60s, fell steadily in the 70s before  rising again in the  mid-1980s and fell again after 2000. The average British tax rate on capital income rose steadily in the 60s and 70s, coinciding with the emergence of Britain as a sick man of Europe, and then stabilised in the the 1980s onwards but with a dip in the late 80s before a rise in the early 1990s.. Despite the large cuts in the statutory corporate tax rate in the UK, there was only a mild taper in the average tax rate on capital income in the UK. 

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Source: Cara McDaniel.

The average tax rate on investment expenditures is pretty stable in the USA  for the entire post-war period. The only significant increase in the average tax rate on investment expenditures in the UK  coincided with the emergence of the sick man in Europe after a drop in the early 70s. The average tax rate on investment expenditures do not change at all in the UK after the 1970s. The Canadian average tax rate on investment expenditures is higher than elsewhere. It rose steadily in the 50s and 60s, dropped in the 70s and rose again in the 80s before tapering  from 1992 onwards.

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Source: Cara McDaniel.

These higher on rising taxes and the UK and Canada did nothing for either country in catching up  with the USA. The figure 1 below shows real GDP per working age per American, Canadian and British.

Figure 1: Real GDP per Canadian, British and American aged 15-64, converted to 2013 price level, updated 2005 EKS purchasing power parities, 1950-2013

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Source: Computed from OECD StatExtract and The Conference Board, Total Database, January 2014, http://www.conference-board.org/economics

The USA is pulling away from Canada and the UK in GDP per working age person. The exception is British economy from about 1990 onwards which caught up with Canada.

Figure 2, which is detrended GDP data, illustrates the British economic boom in the 1990s. Each country’s annual economic growth rate is detrended by 1.9%, the detrending value currently used  by Ed Prescott. A flat line is growth at 1.9%, a rising line is above trend growth, a falling line  is below trend growth.

Figure 2: Real GDP per Canadian, British and American aged 15-64, converted to 2013 price level, updated 2005 EKS purchasing power parities, detrended 1.9%, 1950-2013

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Source: Computed from OECD Stat Extract and The Conference Board, Total Database, January 2014, http://www.conference-board.org/economics

Figure 2 shows that Canada has been in a long-term decline since the mid-1980s  with much of this decline coinciding with periods of rising taxes on income from labour.

The British economy boomed in the 1990s, after the tax hikes of the 1970s and early 80s were reversed. This growth dividend was squandered by the Blair government in the 2000.

Figure 2 also shows that US growth was rather stable with some ups and downs up until 2007, expect during the productivity slowdown in the 1970s. The first major departure from trend growth of 1.9% was with the onset of the great recession.