Friday, January 30, 2015

Why are taxes in Scandinavia so high?

A difficulty for conservatives is that the most prosperous countries in the world include Norway, Sweden or Denmark, whose size of government exceeds 50% of GDP, casting doubt on the idea of laissez-faire. H.J. Kleven explains in the Journal of Economic Perspectives why these countries are able to tax so much and be so wealthy at the same time, given that taxes in general distort economic activity and have a cost in terms of efficiency. He finds three main reasons:
First, information reduces tax evasion: he argues that Scandinavian tax systems have very wide coverage of third party information reporting, and more generally, well-developed information trails that ensure a low level of evasion.
Second, broad bases reduce tax avoidance: there are few exceptions and reductions, so that behavioral tricks cannot be used to avoid paying taxes. One example is focusing on high indirect taxation (25% of VAT rate), which although paradoxically is regressive, has lower efficiency costs than direct taxation.
Third, taxes and public expenditures are complementary of labour supply, for example promoting the work of women or investment in human capital through good education systems.
Kleven also explores the argument that all this is cultural and social, and based on the irreplicable fact that these societies are small and homogeneous. He argues that the social features that support this line of reasoning are also endogenous to the policies, and therefore there is no reason why lessons cannot be extracted for larger democratic aggregates.

No comments:

Post a Comment