Learning from the European Experience: Do Higher Tax Burdens Lead to Less Red Ink?

I’ve been arguing against higher taxes because of my concerns that more revenue will simply lead to a bigger burden of government spending.

Yes, I realize it is theoretically possible that a tax hike could be part of a political deal that produces a good outcome, such as entitlement reform.

But that doesn’t seem to happen in the real world. Indeed, I pointed out almost exactly one year ago that the only budget deal that gave us a surplus was the 1997 pact that cut taxes instead of raising them.

But maybe there’s evidence from other parts of the world showing that tax hikes lead to balanced budgets. Perhaps we can learn something from European nations.

Let’s start with this chart I put together after digging through historical data from the United Nations, European Commission, and Organization for Economic Cooperation and Development. It shows tax burden for the 15 nations of the pre-2004-expansion European Union, minus Luxembourg which didn’t collect this kind of data in the 1960s. Basically, we’re looking at the average tax burden in Western Europe for 1965-1969 and for 2006-2010.

Not surprisingly, it shows that the tax burden has jumped significantly. I suspect the adoption of the value-added tax deserves a good bit of the blame, but that’s  a separate issue.

For this post, we’re wondering whether this big jump in taxes resulted in more red ink or less red ink.

This second chart looks at the burden of government debt, which averaged 45 percent of GDP for the 1965-1969 period. And we see a stick figure wondering whether the debt for 2006-2010 will be higher or lower. In other words, did politicians use the additional revenue to pay down the debt, did they spend it, or did they spend all the added revenue and then borrowed even more?

Well, knock me over with a feather. The next chart shows that debt is much higher today, averaging about 60 percent of GDP.

In other words, every penny of new tax revenue got spent. Not only that, but Europe’s politicians accumulated even more red ink because they increased spending even faster than they increased revenue.

What’s the moral of this story? Well, President Obama claims his class-warfare tax policy will reduce deficits as part of a “balanced approach.”

But what he’s actually proposing is that the United States should emulate our friends on the other side of the Atlantic. And it seems their idea of a “balanced approach” simply means higher taxes, as you can see from this shocking chart. Gee, what a coincidence.

Based on what we know about the evidence in Europe, and based on what we know about the proclivities of American politicians, anybody want to guess what will happen to U.S. government debt if Obama prevails?

P.S. The pre-2004-expansion European Union nations were Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Netherlands, Portugal, Spain, Sweden, and the United Kingdom.

P.P.S. The figures in this post are for central government taxes and debt.

P.P.P.S. There are some good lessons to be learned from other nations, as shown in this video. And if you pay attention to the details in that video, you’ll notice that the key to good fiscal policy is…drumroll please…following Mitchell’s Golden Rule.

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Guided by the Spirit of Fox Butterfield, the New York Times Inadvertently Confirms that Tax Competition Is Needed to Curtail Government Greed

More than two years ago, while writing about the Laffer Curve, I described the “Butterfield Effect.”

A former reporter for the New York Times, Fox Butterfield, became a bit of a laughingstock in the 1990s for publishing a series of articles addressing the supposed quandary of how crime rates could be falling during periods when prison populations were expanding. A number of critics sarcastically explained that crimes rates were falling because bad guys were behind bars and invented the term “Butterfield Effect” to describe the failure of leftists to put 2 + 2 together.

Last year, I was amused to see a New York Times columnist complain that Republicans were being stubborn in their opposition to tax hikes, but she inadvertently provided evidence against her own position.

She obviously wants readers to conclude that bad, mean, wicked Republicans are being too dogmatic because they won’t agree to big tax hikes. But the chart she prepared tells a completely different story. The only budget agreement that actually produced a balanced budget was the 1997 deal, and that deal contained tax cuts rather than tax increases!

I’m thinking this habit of accidentally helping the other side should be called the “Own-Goal Effect,” even though I generally don’t like anything associated with soccer (with one very important exception).

Given the track record of the New York Times in these matters, you won’t be surprised that the self-styled newspaper of record just published a story that combines the Butterfield Effect and the Own-Goal Effect.

Here are a couple of sentences from the recent NYT story, noting that taxpayers in many parts of the world face a tsunami of tax increases.

Taxes on earnings, investment income, sales and a few other things have gone up already in many countries, and further increases are possible, including a huge one in the United States. …“Quite a few countries are trying to increase tax revenue,” said Kevin Cornelius, a partner in Geneva for the Human Capital Practice at Ernst & Young. “The question is who’s raising taxes the slowest. I can’t remember as much tax legislation going through as we’ve seen in the last 24 months.”

Nothing remarkable in that excerpt. My blog is filled with stories about greedy governments seeking to extract more revenue from the economy’s productive sector.

But notice the headline that the NYT assigned to the article. Channeling the wisdom of Fox Butterfield, it fails to make an obvious causal link. As I have repeatedly noted in my writings about tax competition and tax havens, taxpayers need places to hide their money in order to curtail the ability and incentive of politicians to impose higher tax rates.

Heck, don’t believe me. Greg Mankiw has written the same thing.

In other words, the headline actually should read: “Taxes Trend Higher Worldwide Because there are Few Places to Hide.”

The article includes some discussion of how politicians are trying to shut down escape routes.

A rise in rates is not the only unpleasant matter that taxpayers must contend with. Tax lawyers, accountants and bankers highlight a global game of gotcha being played by revenue authorities. Taxpayers are being asked to provide more detailed information about financial accounts. Americans living or doing business abroad are conspicuous targets in this effort, and on the off chance that they will be less than forthcoming, the Internal Revenue Service is asking foreign financial institutions and tax agencies to join the cause. Elsewhere, vehicles that individuals and families use to shelter income and assets from tax, like trusts, corporations and foundations, are being examined more closely and critically. In certain cases, laws are amended to neutralize the effectiveness of tax-avoidance methods soon after they are devised. Also, foreign visitors’ claims of nonresidence for tax purposes are being treated more skeptically. “We’ve seen a huge amount of tax scrutiny,” said Mr. Cornelius at Ernst & Young. “Authorities are more aggressive in pursuing individuals. There’s more sharing of information across borders. That’s going to continue.”

What a depressing excerpt. And it doesn’t even touch on some of the worst ideas being advanced by the political elite, such as a potential international tax organization. Governments clearly are doing everything they can to pave the way for higher tax rates and a bigger burden of government spending.

To be fair to the author, I don’t detect ideological bias in the story. He inadvertently provides evidence confirming that tax competition is needed to restrain greedy politicians, so he scores a goal against the statists. But, unlike our President and some others who are even more radical, I don’t think he was trying to advance the left-wing narrative that tax competition is bad and that tax havens are evil.

So perhaps he’s only guilty of the “Butterfield Effect” and not the “Own-Goal Effect.”

But he does work at the New York Times, which is tediously left wing (see here, here, here, here, here, here, and here), so we’ll give the newspaper an award for the “Own-Goal Effect.”

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