Tax mix in the USA as a percentage of GDP since 1965

The only major change in the US tax mix in the last 50 years has been greater reliance on social security contributions.

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Source: OECD Stat.

The share going to income taxes bobbing up and down quite a lot in the last 30 years much of that to do with the business cycle. In the 1990s, the share of taxes from personal income increased during boom times. In the Great Recession, the tax share to income tax rose with the declining economy as did that on corporate profits.

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Taxation of personal income and social security contributions as a percentage of US, British, Danish, German, French and New Zealand GDPs since 1965

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Source: Tax – Social security contributions – OECD Data and Tax – Tax on personal income – OECD Data.

The impact of the 1986 GST on the New Zealand tax mix since 1965

The introduction of the GST in 1986 led to a major change in the New Zealand tax mix. There was no offsetting income tax cuts.

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Source: Tax – Tax on goods and services – OECD Data and Tax – Tax on personal income – OECD Data.

General government expenditure and general government revenue as a % of Australian and New Zealand GDP since 1970

I do not trust the numbers for New Zealand prior to the early 1990s released by the OECD. New Zealand simply did not have a tax structure including a GST in the double digits back then to support estate of that size. Nonetheless, the size of government in New Zealand is systematically larger than in Australia, a richer country which can afford a large government and generous welfare state.

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Source: General government – General government revenue – OECD Data and Data extracted on 12 Feb 2016 08:45 UTC (GMT) from OECD.Stat from OECD Economic Outlook November 2015.

General government spending and general government revenue as % of US GDP since 1970

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Source: General government – General government spending – OECD Data and Source: General government – General government revenue – OECD Data.

Japanese, Korean and US tax revenues as a % of GDP since 1965

Japanese and Korean growth in the size of government seems to validate Directors’  Law. Government get bigger after countries become rich.

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Data extracted on 23 Feb 2016 07:08 UTC (GMT) from OECD.Stat.

General government expenditure as % of US, British and Canadian GDP since 1960

Both the British and Canadian economies experienced major winding backs in the size of government. Only the UK, under neoliberal pawn and closet Thatcherite Tony Blair, was that undone. He is now despised by many Labour Party members including its current leader for this record.

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Data extracted on 23 Feb 2016 07:45 UTC (GMT) from OECD.Stat.

General government expenditure as % of Portuguese, Italian, Greek and Spanish GDP since 1960

I do not think any of these countries have governments who can really handle managing half of national income on a regular basis. The Italian, and I assume Greek GDPs at least are topped up quite considerably to take account of their underground economies. The top up for Italy is 20%.

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Data extracted on 23 Feb 2016 07:45 UTC (GMT) from OECD.Stat.

Once were Sweden! New Zealand, Swedish and Australian general government expenditure as % of GDP since 1986

I came across this data showing that New Zealand and Sweden had the same sized public sectors in the mid-1980s some years ago. The data could not be found again for a long time in the OECD statistical databases. One reason was the OECD changed its name to general disbursements.

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Data extracted on 12 Feb 2016 08:45 UTC (GMT) from OECD.Stat.

The size of the public sector in Australia has not changed much for 30 odd years. The public sector has been in a long decline in Sweden and New Zealand since peaks  as a percentage of nominal GDP in the late 1980s  and early 1990s respectively.

I know of no comments on the large size of the New Zealand public sector as measured by general government expenditure in the late 1980s. Its contribution to the stagnant economic growth of that time is worth exploring.

The left-wing tax dilemma

Source: The President’s Revenue Problem | Tax Foundation.

@garethmorgannz @geoffsimmonz the public choice illogic of the UBI

Things are pretty grim when your ideas for fixing child poverty by throwing a lot more money at the problem are easily outclassed by the Greens in terms of economic rationale, fiscal sense and political practicality.

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Source: Greens launch billion dollar plan to reduce child poverty | Green Party of Aotearoa New Zealand.

But that is the case for Gareth Morgan’s proposals for a universal basic income for New Zealand. His proposal for a universal basic income funded by comprehensive capital tax make much less sense than those of the Greens for giving the in work family tax credit for those do not work but are on a welfare benefit.

The Greens have a far superior proposal for reducing child poverty and a far better chance of getting it implemented in parliament. Their proposal is simply to introduce a parental tax credit and give the in work tax credit to those currently on the benefit to increase their incomes.

Gareth Morgan’s solution to child poverty is to give billions of dollars to adults not in poverty and leave those who are in poverty worse off under the universal basic income. It is obvious which of these is more likely to attract political support and provoke resistance from taxpayers and political parties willing to court those are opposed to great big new taxes.

One of the economic reforms in the 1980s and 1990s that saved the welfare state was more efficient taxes and more efficient government spending. The targeting of government social spending reduce  growth in the overall tax burden and therefore the political resistance it provoked.

Government spending grew in many countries in the 20th century because of demographic shifts, more efficient taxes, more efficient spending, a shift in the political power from those taxed to those subsidised, shifts in political power among taxed groups, and shifts in political power among subsidised groups. Sam Peltzman argues that:

governments grow where groups which share a common interest in that growth and can perceive and articulate that interest become more numerous.

The median voter in all countries was alive to the power of incentives and to not killing the goose that laid the golden egg. After 1980, the taxed, regulated and subsidised groups had an increased incentive to converge on new lower cost modes of redistribution.

More efficient taxes, more efficient spending, more efficient regulation and a more efficient state sector reduced the burden of taxes on the taxed groups. Most subsidised groups benefited as well because their needs were met in ways that provoked less political opposition.

Gary Becker and Casey Mulligan in Deadweight Costs and the Size of Government (NBER Working Paper Number No. 6789) concluded that flatter and broader taxes encourage bigger government. This is because taxpayers offer less resistance to increases in flat tax rates than to more onerous and less efficient forms of taxation. Any decline in the resistance of taxpayers to taxes leads to larger governments since an endless number of groups lobby to divide up the large revenue base.

An inefficient tax system or spending program  from the standpoint of optimal tax theory can improve taxpayer welfare this so-called inefficient system creates additional political pressure for suppressing the growth of government. Inefficient taxes do not raise much revenue and therefore do not support a large sized government.

A switch to more efficient taxes through tax reforms allows governments to raise the same amount or larger amount of revenue for the same level of political resistance from taxpayers. This is because less revenue and output is wasted by discouraging labour supply, investment, savings and investment in capital with high marginal rates of tax on narrower tax basis.

The rising deadweight losses of taxes, transfers and regulation all limit the political value of inefficient redistributive policies. Tax and regulatory policies that are found to significantly cut the total wealth available for redistribution by governments are avoided relative to the germane counter-factual, which are other even costlier modes of redistribution.

Everyone can gain from converging on more efficient modes redistribution. The tax burden is less than otherwise. Government spending is more than a wise because taxes are raised with less deadweight social costs.

An improvement in the efficiency of either taxes or spending reduces political pressure from taxed and regulated groups for suppressing the growth of government and thereby increases total tax revenue and spending because there is less political opposition. Improvements in the efficiency of taxes, regulation and in spending reduce political pressure from the taxed and regulated groups in society.

The post-1980 reforms of Thatcher, Reagan, Clinton, Hawke and Keating, Lange and Douglas and others saved the modern welfare state. Their moves towards more efficient taxes and better targeted social spending  did reduce growth in government spending but also prevented even larger cuts to  social spending since 1980 at the behest of the increasingly restive taxpayer.

Social spending growth did temper after 1980 but the level of spending was larger than otherwise because of the extra revenue raised through more efficient taxes – more efficient taxes which provoked less political opposition.

More efficient taxes, more efficient spending, more efficient regulation and a more efficient state sector reduced the burden on the taxed groups while still supporting extensive but more tempered social spending.

Governments everywhere hit a brick wall in terms of their ability to raise further tax revenues. Political parties of the Left and Right recognised this new reality. Gareth Morgan has not when he proposes a great big new tax to fund his universal basic income.

Billions of extra dollars in revenue must be raised and political resistance provoked to his proposed comprehensive capital tax to fund a universal basic income for those who are not poor. Child poverty is not reduced  by a universal basic income because single parents and the children receive no more income support from government than before.

Which has more political legs? The Greens’ proposal to raise taxes by $1 billion to fight child poverty or the proposal by Gareth Morgan to raise taxes by 10 times that and have less impact on child poverty?

The current and future governments of New Zealand have enough on their plate to work out how to fund  a universal old age pension and health spending without giving away billions of dollars to the non-poor through an universal basic income.

Here’s how Scandinavian countries pay for their spending

https://twitter.com/conradhackett/status/683884984772341760