Monday, August 27, 2007

Tax as Percentage of GDP

In the 17th century French economist Jean Baptiste Colbert said "The art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing”. His observation is as true today as it was then.

Whenever the government in the UK decides to charge for something, especially if it was previously free, it is in turn charged with "stealth taxation". I don't know about other countries, but I imagine that the politics are similar. There is often a good reason why the government wants to levy a charge, which often has nothing to do with its overall level of income. An example is the recent proposal to charge by the kilo for domestic refuse collection: the "polluter pays" principle is generally recognised as sound and "free" rubbish collection is increasingly expensive. But not everyone agrees:

Mother-of-five Mandy Price, who has just begun to recycle but still produces an average of nine bin liners of rubbish a week, said the assembly could not justify introducing such a policy in the wake of council tax rises.

She said: "You pay your council tax for the local authority to come and collect your rubbish, so why should we pay more?"

In other words, the charge is perceived primarily as just another source of revenue rather than an attempt to shift the costs onto the people who actually use the service the most. The government response is always to say that this is going to be offset by lower taxes elsewhere (in this case, council tax), but this makes a very unconvincing soundbite.

Gross Domestic Product is a standard way of measuring the overall economic activity in a nation or economic area, and the usual way of measuring the tax burden on an economy is the ratio of taxation to GDP. For instance, Reform points out that the US takes 26.4% of GDP as tax, whereas the UK takes 35.8%. Of course, these figures are almost useless for international comparison because they don't say what the tax pays for. In the UK most health care is paid for by the government out of general taxation whereas in the US it is mostly paid for privately by employer-funded health schemes that get a tax break. The NHS is funded out of taxation, and so is charged to the government's account, but a scheme partly funded by a tax reduction (as in the US) is not. If the US were to eliminate the tax break and subsidise these schemes directly instead then the basic nature of the system would not change one whit, but the proportion of US GDP taken in tax would increase. The US spends around 16% of GDP on health care (compared to about 8% in the UK). From an employer's point of view taxation and healthcare are both just costs of doing business, and the overall burden of general taxation and healthcare in the US is actually higher than in the UK. As always you get what you pay for, but a worrying amount of political debate seems to revolve around which ledger the payment is recorded in.

However one place where such figures would be useful (but never seem to be used) is in domestic political arguments. The Liberal Democrats used to have a policy of adding 1% to the rate of income tax in order to fund improved education. Meanwhile the Tories are struggling with a reputation for aggressive cost-cutting in public services in order to fund tax cuts, and the Labour government has been increasing taxes in order to spend more on public services (with notable lack of effect, but thats another issue).

What I would like to see is for each party to declare a target level of taxation as a percentage of GDP. That gets their macro-economic policy on taxation out in the open, without confusing it with a lot of micro-economic questions over how it is collected. Thats not to say that those micro-economic questions are unimportant, but they need to be separated from the macro-economic debate about the overall level of taxation.


Neil Mitchell said...

I have no problem with the idea that producing more rubbish should lead to higher charges, I just don't see any way of it being implemented. York already only collects 1 bin per premises every other week - this is insufficient for many households, and as a result rubbish is tipped in parks, and thrown in other peoples bins. By increasing the cost of rubbish, you increase the incentive to cheat, in a system that is really easy to cheat and hard to be caught at. Economics makes this inevitable to failure.

Neil Mitchell said...

PS. I realise that the point of your article wasn't about rubbish collection charges - just that the one person who you quote gives rather silly reasons against it, when there are perfectly legitimate reasons it will be a disaster.

Brampton said...

Living in the US, I am no great admirer of the US system of individual insurance, because so much of health expenditure goes to pay for paperwork.

However, it is not accurate simply to add the percentage of GDP spent on healthcare to the overall level of taxation.

Only about 55% of US health expenditure is private. The rest is spent by the government in various ways, at both federal and state levels, and raised out of general taxation.

US government expenditure in 2004 was $2724.70 per capita, compared to $2208.6 in the UK, in terms of the international dollar rate, based on purchasing power parity.

As for rubbish collection, it has mainly been privatized in the US, in order to provide more cash flow for local authorities without raising taxes. This really is a form of hidden taxation.

I have to contract to have my rubbish and my recyclables collected. This is relatively painless, as everyone else needs the same service.

Recently, however, the county decided to privatize leaf collection, while passing a law against leaf burning, the excessive practice of which had led them to collect leaves in the first place.

The council sold all its equipment to the private contractors, so there's no going back. The workforce has been laid off.

Competition was supposed to bring down the price and increase efficiency. The price had been paid out of local taxes, and the process of contracting and collecting was initially chaotic. No one knew who was offering the service and the firms had no experience in estimating costs or collecting. The workforce is largely composed of non-union immigrant workers.

Only two firms have entered the market, one because it wants to muscle in on rubbish collecting, the other because it wants the landscaping business on housing developments. There is little direct competition, as they have carved up the area between them.

The one firm prepared to collect from me has offered a price of $700, or more if I exceed the volume they estimate.

It's in little ways like this that the tax burden is kept artificially low. The state and county roads are full of potholes. There's no urban renewal in most inner cities. Schoolchildren are not provided with paper, pencils, books, and so forth, even in the poorest neighbourhoods. There is no effort made to ensure that people receive the benefits to which they are entitled. Services for groups that have no political clout, such as refugees, are suddenly cut by the state government. The collective bargaining rights of all state workers have been abolished in this state.

Tejvan Pettinger said...

Good article. Many people just want lower tax without thinking about the consequence of what this involves