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Sweden v. Canada: Taxation and Inequality

2013 January 13
by Ian Welsh

Ok, so Stephen Gordon in MacLeans feels compelled to weigh in on taxes, to suggest that the Nordic countries just redistribute money from the bottom 99% to each other to maintain equality and so Canada should increase its GST and give money to the poor and middle classes.

It’s true that Nordic countries redistribute a lot more than Canada does, but let’s examine what that means (these #s are slightly wrong as I’m taking them from different, though recent years, but they are within a percent of correct):

The Social Security tax rate in Sweden is about 30%.  This is paid by the employer, if not self-employed.  This is either a tax on the employee, if one assumes that the employer would have paid the employee this if not taxed), or it is a 30% tax on all labor costs for a corporation, and for most corporations, labor is the largest cost.

Pension insurance costs another 7%.  It’s capped, though, but since Gordon is only dealing with the bottom 99% we can ignore that.

The standard VAT rate is 25%.

70% of workers are unionized.

The top tax rate is 57%.

Corporate tax (I’ll use Gordon’s figures) is 26.3%.

Canada: Social Security (Canada or Quebec Pension) is about 10%, between employer and employee contributions.  Remember, the combined SS and Pension insurance tax in Sweden is 37% of  income.

Harmonized GST, in most provinces runs 10 to 15%.  10 to 15% less than Sweden.

Corporate tax rates, both nominal and effective, are so close there’s no difference (unless, of course, you count that employer paid SS tax, in which case Sweden’s are significantly higher.)

Unionization in Canada is about 31%.  Less than half of Sweden’s rate.

Gordon thinks that the best way to deal with income inequality below the top 1% is to increase the GST (because it does less harm to growth than corporate taxes, he claims).  Note that the GST (a VAT) is regressive, while SS taxes (if they aren’t capped) are not regressive.  So Gordon prefers a regressive tax.

What GST rate would we need to increase to, if we held everything else equal but wanted to to have total taxation, as a percentage, equal to Sweden’s?  Canada’s total tax as a percentage of GDP is 32.2%.  Sweden 47.9%. Canada would need to bring in approximately 49% more taxes to match Sweden’s rate.  VAT taxes made up, as of 2009, approximately 11.5% of Canadian tax income.  To use the GST/HST  alone to increase taxes to the Swedish rate would require approximately quadrupling the VAT taxes.  So, in Ontario, the rate would be about 60%.

That’s not happening.

Gordon’s article only deals with income inequality in the bottom 99%, but he notes that you can’t tax the top 1% to pay for transfers, they don’t actually have enough money.  I’ll just note that you don’t tax the richest (really, the top .1%) at massively progressive rates to get money from them, you tax them so they don’t have money to buy up the system, including both politicians and the market.  The US is the paradigmatic case of what happens to your political system when you allow the rich to get too rich, but the same process is happening in Canada.  (You also don’t allow a few media corporations to own almost all media, for the same reason.)

Finally, let’s just cut the bullshit. High progressive tax rates do not decrease growth.  There is no unequivocal empirical evidence that they do.  The best growth in the developed world happened in the 50s and 60s, when the developed world had much higher tax rates on both individuals and corporations.  Much, much higher rates, as in 90% on top income earners (pdf – pg. 17) in many cases, and corporate tax rates were much higher as well.

Correlation may not be causation, but causation w/o correlation is extraordinarily rare.

Corporations invest and hire more people when they have a reasonable expectation of more demand for their products and services.  If there is not enough demand, it does not matter if they have money to spend, they will not spend it.  This isn’t even economics, this is business 101.  The poorer someone is, the more they consume as a percentage of their income.  An affluent middle class, heck a working class that has disposable income, creates more demand than rich people do.

Demand alone is not enough, if there are supply bottlenecks, but the supply bottlenecks we are facing right now are not in money. Corporations have record amounts of money and are not spending it.  When individuals, whether corporations or people, won’t spend, it is the government’s JOB to take the money and spend it, and spend it in a way that will get rid of whatever supply bottlenecks exist.

They must also make sure that an actual free market exists and that no one has pricing power. It does no good to redistribute money if all that will happen is that companies with pricing power will just raise prices and take the money away, meaning no real new demand is created, and thus no new jobs and new real economic activity, whatever the nominal numbers show.

On edit: further investigation shows that almost all of the VAT is returned to low income earners.  This means the VAT functions as a luxury tax, starting about about the middle middle class.  Luxury taxes are on the best taxes, and by luxuries we mean “stuff that’s imported, and especially imported stuff ordinary people can’t afford anyway.”

4 Responses
  1. January 14, 2013

    OMG, Stephen Gordon has been beating this ludicrous drum for very many years now, and every time someone must take him to the woodshed. It has been explained to him (by me, for one) many many times that naive redistributionism is not a durable solution to inequality and that taxation policy must take into account the political structure of society. For some reason, the explanation simply does not take.

    For those of you who are new to Stephen, I first met him online 10 years ago when he decided he would be Grand Missionary of Academic Economics to the Canadian left by joining the then-popular babble forum. Since then he has learned precisely nothing, and actually if anything retrogressed.

  2. bystander permalink
    January 14, 2013

    re: They must also make sure that an actual free market exists and that no one has pricing power.

    Let me count the ways I utterly loathe free market in that sentence. Have we totally jettisoned any idea of competitive markets? The former carries the cachet of a market free of regulation; free to grow, acquire, envelop, and absorb – free to pollute – free to shift the risks, the costs, the negative externalities. It’s the latter that puts a brake on pricing power, not the former.

  3. Ian Welsh permalink*
    January 14, 2013

    Good point. I mean “competitive market” when I say free market, but given how debased free market has become, I suppose competitive market is better, especially in a stand-alone article like this one.

  4. Ian Welsh permalink*
    January 14, 2013

    I decided to write the post because he was being obtuse on twitter, and you just can’t take something like this apart at twitter length. (Though your formulation is good, and close.)

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