How can Scandinavians tax so much? London School of Economics professor Henrik Jacobsen Kleven takes up this question in the most recent issue of the Journal of Economic Perspectives. His is a fine paper. But of course it’s not perfect, doesn’t settle the question, and Professor Kleven is appropriately cautious:
How are Scandinavian countries able to combine exceptionally large tax takes with some of the strongest economic outcomes in the world? The wider question extends beyond Scandinavia. Is it in general possible to design a tax and enforcement system that raises large amounts of revenue while keeping tax evasion and labor market distortions at a modest level, or is there something special about the Scandinavian countries that make it hard to replicate their successful outcomes in other settings?
We do not claim to provide an exhaustive or conclusive treatment of these big questions. The descriptive cross-country evidence is consistent with social and cultural factors playing a role, although we are far from being able to interpret this evidence fully. But the discussion has also identified a set of concrete policies that can go some way towards explaining the Scandinavian puzzle, namely the use of far-reaching information trails that facilitate tax compliance, broad tax bases that limit the scope of legal tax avoidance, and large public spending focused on complements to work. Indeed, these factors may intertwine: that is, the social and cultural factors may make it easier to enact these kinds of policies, and in turn the social and cultural norms may themselves be driven by the design of policies and institutions.
As we continue our efforts to understand and draw lessons from the social and economic success of the Scandinavian countries, it is worth remembering that these countries have some specific traits. They are small and homogenous, racial and religious diversity is limited, human capital is high, and they have been largely unaffected by violent conflict. It is not clear to what degree lessons learned from Scandinavia carry policy implications for large, diverse, and unequal countries such as the United States. Certainly the political economy surrounding the implementation of the policies proposed here would be different in the United States — indeed this is partly why we observe stark policy differences to begin with — and conditional on political feasibility, the effects and appropriate design of those policies might be different in the United States. Hence, replicating the Scandinavian policies and institutions in societies that are fundamentally different is unlikely to be achievable or perhaps even desirable. The point is instead for countries everywhere to think carefully about how to collect taxes and redistribute income with less distortion from tax evasion, tax avoidance, and reduced labor supply, and the Scandinavian experience may provide ideas on how to expand the conversation about these important questions.
I don’t have much of a problems with any of these paragraphs.
I’m quoted in an article in the New York Times on the paper, and as the article reports I do think that we can learn some things from Scandinavia — better transportation, better public education — and I oppose expanding the government’s role in child care (we have enough middle-class entitlements, thank you very much).
But naturally, these quotes don’t exhaust my views on the subject. I agree with professor Kleven that there are limits to what we can learn from his paper specifically, and from Scandinavia generally.
Dr. Kleven spends most of his time on tax policy and policies that compliment work because those are the policies that he can most accurately measure. But he, correctly, discusses cultural factors — much harder to measure but that, I would speculate, matter quite a bit to Scandinavia’s situation — that would make importing Scandinavia’s policies to the U.S. very difficult.
I would make two other points as well. Americans might be willing to fork over more of their hard-earned cash to the government if they had more confidence that the government would spend the money in a productive way.
And, as I have written, very high marginal income tax rates would likely be very damaging to the long-term future of the United States. Why would a young person want to be a surgeon or an entrepreneur if the government will take seventy cents of her top dollars of income? Like Scandinavian culture, the longer-term reactions to high top rates — skill acquisition, occupational choice, general attitudes about work — are much harder to measure. And it is fine for economists to focus on what they can measure when writing their papers. But it is not fine for the public debate to assume that these effects are zero just because economists can’t measure them.
Let me close by offering for your consideration the reaction of my Dutch colleague Dr. Stan Veuger.
A small number of overwhelmingly white Northern European countries with a Christian cultural heritage or even a Protestant established church are, for quite a few American progressives, the place to turn to for public policy inspiration. This can probably be explained by a strong belief that those countries – Denmark, Sweden and Finland, perhaps even Iceland, the Netherlands or Austria – are characterized by more equal outcomes, higher rates of social mobility, better public education and higher taxes. (I suppose that secularism, drug policy and bike lanes help as well.)
The high taxes are particularly awesome, especially because they don’t seem to destroy everyone’s willingness to show up to work. Now, it is obviously infuriating to believe that other countries have discovered and implemented a technology to immanentize the eschaton, and that you could, too, if only your political opponents believed in science and weren’t so racist. Why, you ask, why, tell me why!
You can find the rest of his answer here.
— Michael R. Strain is deputy director of economic policy studies and resident scholar at the American Enterprise Institute. You can follow him on Twitter at twitter.com/MichaelRStrain.