Comment by AnthonyMouse
16 days ago
It isn't funding education in itself that lowers GDP, it's high tax rates. Investors put money where it gets the best returns. Suppose one country has a 20% tax rate and the other has a 60% tax rate, i.e. they keep 80% of the returns instead of 40%. Then they don't invest in the second country unless the returns are twice as high to begin with, and in most cases they're not.
Governments making beneficial use of tax dollars can counteract some of that, because the investments would increase productivity there (e.g. more educated workforce), but for that to work the government would have to make net positive investments against the losses resulting from higher tax rates. That's notoriously difficult and governments more often fail than succeed at doing it efficiently, and there is a strong incentive for corruption. If any significant amount of tax money is directed to cronies or politically connected constituencies, the possibility of not causing net harm quickly plummets.
Moreover, government spending has diminishing returns. Collecting enough in taxes to have a basic government that can at least enforce laws against violence and provide transportation infrastructure has very high returns. The first $10M you spend on police might cause the number of unsolved murders to go from 1000 to 500. The next $10M you spend might cause it to go from 500 to 450, because the remaining ones are harder to solve, and because there are fewer remaining to solve. At some point additional spending isn't getting enough of a benefit to be worth the cost. And the same for infrastructure and education and all the rest of it.
The exact breakeven point is obviously a matter of some debate, but there is generally a negative correlation between higher tax rates and GDP per capita, implying that most current governments are either taxing at inefficiently high levels because the marginal government program isn't worth the cost, or that there are productive investments governments could be making with the existing money but instead they're allocating it to something else, e.g. because of government corruption or mismanagement.
> There is generally a negative correlation between higher tax rates and GDP per capita
There are lots of reasons for high/low GDP per capita, but I would like to see proof of this to believe it.
Why is Denmark so high up for example, generally considered the country in the world with the highest tax pressure, and without any substantial natural resources. Cherry picking of course, but your claim is very sweeping, so I'd put the pressure on you to prove it.
https://en.wikipedia.org/wiki/List_of_countries_by_GDP_(nomi...
> Why is Denmark so high up for example, generally considered the country in the world with the highest tax pressure, and without any substantial natural resources.
It isn't the country with the highest tax pressure, e.g. Denmark government revenue is 36% of GDP, approximately equal to the UK, vs. 44% for France or 48% for Greece:
https://en.wikipedia.org/wiki/List_of_countries_by_governmen...
But the major source of variance in the numbers is that it not only matters what the tax rate is, it also matters how effectively you spend the money.
Suppose a government with the level of competence of Denmark would have an optimal tax rate of 20%, i.e. that's the point at which the low-hanging fruit is gone and additional spending starts to become net negative. That doesn't mean it's enormously net negative, when the government is more competent and efficient than average the loss could be small, so that Denmark at 36% might still only be slightly worse than breakeven compared to the lower tax rate.
Meanwhile a different government has the 20% tax rate, but three quarters of the money is lost to corruption or incompetence instead of funding the beneficial programs it should have been, so they could be worse off because high levels of corruption and waste can be as bad as high taxes.
The worst case is, of course, when you do both and have a high tax rate which goes to a government with a high level of corruption, which is what you see in e.g. Greece. But this is also what tends to happen in any place with a less efficient government that tries to solve it by raising taxes. The inefficiency that was the cause of the problem to begin with then gets more money to set on fire and that makes it even worse.
Maybe, but now you are pushing opinions, not facts.
I am pretty sure that you will not see a negative correlation between tax and GDP, just look at that list.
And maybe the politicians and tax officers in Denmark are people that got there because they enjoyed free university education instead of getting it paid by their parents?
Or maybe they were even re-educated factory workers?
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They are optimising different things and the GDP for them is just a means to an end. They are trying to achieve objectives like: healthcare for all, certain minimum standards of living and safe neighbourhoods everywhere. It's natural that if you don't optimise for GDP then GDP will probably not be maximised.
What our objective function should be is of course a very deep and interesting question. We don't talk about it enough. Most people think about solution first like: socialism, liberalism, sharia law, biblical law etc...
> It's natural that if you don't optimise for GDP then GDP will probably not be maximised.
They're not unrelated though.
Suppose that at a 30% tax rate you long-term end up with a GDP per capita of $50,000, whereas at 20% it would be $80,000. Then in the first case you get $15,000 per capita to provide healthcare and things, whereas in the second case it's $16,000.
There is a point where that stops working. If a 15% tax rate would get you a GDP per capita of $100,000, 15% of $100k isn't more than 20% of $80k. Then whether the extra GDP is worth having lower government revenue becomes a more complicated question. But if the tax rate is too high, it isn't even a trade off, the higher rate is just a net loss to everyone.
I get the idea that small fractions of bigger pies can be more than a big fraction of a small pie. And I can assure you that Scandinavians are well aware of tax revenue optimisation.
I will even say that it is very likely that they are already near the optimum for their country. The reason is simply that if every time you increase taxes and notice revenue goes down, you will naturally reverse it. Society moves through incremental changes.
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