Taxes, inequality, prosperity

Taxes, inequality, prosperity

Taxation serves two primary purposes although they are not the only ones, raise revenue for government expenditures and income redistribution. In simple terms the size of the government is shown by the total taxes as percentage of GDP at all government levels. From Table 1 and Table 2, tax levels can’t be an indicator of economic prosperity. GDP per capita ppp is probably better than GDP per capita nominal because it takes into account the cost of living. Scandinavian countries have very high tax levels as percentage of GDP, the highest among advanced nations. On the other side of advanced nations are English speaking countries, New Zealand, UK, Canada, Ireland, Australia, USA. The rest are in between.

Switzerland and Norway are at the top of the GDP per capita list with 68,060 and 65,510 dollars. Switzerland has 27.8% tax rate while Norway has double (54.8%) and is in the fourth place internationally. Switzerland has the same rate as Australia. They are slightly above USA with 27,1% which is the lowest among English speaking countries while UK has the highest with 34.4%. USA has the lowest tax rate among advanced nations. On the other hand some poor countries have very high tax rates and other poor countries very low. So it can’t be an indicator of poverty or prosperity although prosperous nations are mostly in the upper half of the list which has higher tax rates. An explanation is that in poor countries, people are very poor, barely surviving and can't pay taxes.

Income redistribution is a secondary purpose of taxation. Gini coefficient measures income inequality, 0% is equality and 100% maximum inequality. The same pattern is seen here. Income inequality is not an indicator of prosperity or poverty although prosperous nations tend to be more in the lower half of the list which has smaller income differences. USA ranks high in terms of  inequality among advanced nations. This could be attributed to the fact that it has a large percentage of immigrants that tend to be poor. That also may bring down a little its GDP per capita.

Ex-communist countries have the lowest inequalities and then are Scandinavian countries. Norway has 26.8 while Belarus is right below with 26.7%. Belarus has less than half (24,2%) of Norway’s tax rate (54.8%). Turkey is right above Belarus in terms of tax rate (24.9%) but very far in terms of income inequality (41.9%). It does not seem to be a clear relation between inequality and level of taxes although generally higher tax levels respond to lower inequality. Two interesting cases are Ireland and Switzerland. They have high GDP per capita, low tax rate and relatively low income inequality.

Level of taxes and income inequality are related in terms that they are both derive from taxation. There are other government revenues but taxation is the main one. There are also other ways to achieve lower inequality. Some were examined, co-entrepreneurship, remote work nets, co-franchising, reducing working week. There is a clear relation between level of taxes and income inequality, in ideological terms. Left tends to favor higher tax levels and lesser inequality while right favors lower tax levels and higher inequality.

While the level of taxes is determined by it’s average % of GDP, redistribution is achieved by having different tax rates in different tax brackets. A flat tax rate for all brackets would have no effect on redistribution. The bigger the differences on tax rates the more redistribution is achieved. Higher overall rates allow more room for redistribution but this is not a significant factor. Fifth Way proposes low taxes and low income differences. No ideology exists that has that position. The reasons are economical and philosophical and will be explained later.

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