Wednesday, April 25, 2012

My Norwegian Dream

I've written here before about one thing Norway does very well: managing their sovereign wealth fund.  But Norway does a lot else really well and this came to light in a recent discussion I had with my first year pharmacy student.

He was totally incredulous when I told him I am typically an NDP supporter in federal elections, and usually in provincial elections, although I will admit to voting PC this time around.  He didn't understand how someone who is in a high tax bracket and is pro-business could also support the NDP, a party that many mistakenly assume is in bed with Communists.  He then threw out a common refrain voiced by those who oppose the NDP.  "You know if they ever came to power you can kiss half of your paycheque goodbye, right?" 

It is a commonly held myth that democratic socialism means less disposable income.  While it is true that, in general, nations governing by this dictum often have higher personal tax rates, that does not translate into less disposable income.  If everyone throws a little more money into the pot and that is efficiently and intelligently used to pay for services for the entire population, a practice which often reduces the price of providing those services due to the impact of bulk purchasing power, then a larger portion of the remainder of the paycheque is available for wants, not needs. 

But my student is an intelligent young lad so he deserved a well thought out response.

So here it is.  I analyzed the most recent data from the OECD for the following countries: Australia, Austria, Belgium, Canada, Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Japan, Korea, Luxembourg, Mexico, Netherlands, New Zealand, Norway, Poland, Portugal, Slovakia, Spain, Sweden, Switzerland, United Kingdom, and United States.  I analyzed disposable income per capita, government expenditure as a % of GDP, VAT rate (similar to GST; basically sales tax), total government tax revenue as a % of GDP, total personal tax wedge, Gini coefficient, Human Development Index, and various income tax figures after he made a comment about the impact of taxation on higher wage earners.  I looked at the income tax rates of singles and married couples in the highest tax brackets, looking at the base rate, base rate plus social security contributions, and marginal rate, or the percentage in tax paid on the last $ of earned income.  (If you are a sucker for punishment, feel free to ask me for the original data).

I wanted to see how each factor correlated with three other factors: disposable income per capita, Gini coefficient, and Human Development Index. 

Disposable Income Per Capita most strongly correlates with the income tax level on singles and married couples in the highest earnings bracket.  As well, as you can imagine, it correlates quite strongly with HDI, as the more money people have to themselves, the more developed a nation is likely to be.  The other correlations are quite weak aside from a moderate correlation between disposable income and total government tax revenue.  This may not be intuitive but when individuals pay more taxes, they are essentially being forced to save their money by spending it into a pool that is used to purchase services for the whole population.  Thus, they have to pay out of pocket for fewer goods and services and thus a larger percentage of what they earn is disposable because their needs are taken care of by the tax pool.  As an aside, the Gini coefficient correlates negatively with disposable income per capita, which makes sense, because as disposable income goes up, the Gini coefficient goes down, representing movement towards perfect equality.  This stands to reason since the more free money people have to spend PER person, the less likely it is that all the earned income in that nation is concentrated in the hands of a few.

Right away, the data conflicts with the preconceptions of most Canadian conservatives.  They would have you believe that if the government collects less taxes, we will all have more money in our pockets.  I hate to cloud the issue with facts, but it doesn't appear that way, at least not in the 28 OECD nations I analyzed. 

How about Gini coefficient?  What makes a country equal?  There is a very strong correlation between government expenditure as a % of GDP, total government tax revenue, and total personal tax.  Again this stands to reason as the more is put in tax coffers and then spent on the population, the more likely is equality.  This also holds for the tax rate paid by the highest wage earners.  Also makes sense since the more tax we take from them, the more we spread the love throughout the country.

What about HDI?  There are almost no strong correlations here EXCEPT the income tax rate on the highest wage earners, whether they be single or married.  So it seems the more we tax the highest wage earners, the more developed our nation is.  Even when I ran a regression analysis and took out the impact of all the other factors and looked at the impact of these rates alone, rate of income tax collected from highest wage earners in a country is still significantly positively correlated with HDI.

Now to top it all off.  Where does the United States, that bastion of free market capitalism and the poster child for fiscal conservatives everywhere, stand in the rankings for the various factors? (Out of 28 OECD nations)

1.  Disposable Income Per Capita: 3rd
2.  Government Expenditure as % of GDP: 23rd
3.  Tax Revenue as % of GDP: 27th
4.  Total Personal Tax Wedge: 21st
5.  Gini coefficient: 27th (it is only less unequal than Mexico)
6.  12th highest income tax rate for high earning singles
7.  About middle of the pack for the other high earning tax figures
8.  HDI: 4th

So, since the disposable income per capita is quite high, but the Gini coefficient is so high, it stands to reason that large amounts of wealth are concentrated in the hands of a small percentage of the population.  This drives the DIPC up but is not shared equally.  For someone like Warren Buffett or Bill Gates, that is fantastic news.  But for the average Joe/Jane, not so great news.

Is there a better way?  In my opinion, yes.  Sure, if you want to make lots of money as a balls to the wall entrepreneur, you are best off in the States.  But if you are just a regular Joe working in a profession or trade and trying to raise family, that doesn't mean a hill of beans to you.  Which nation has the highest DIPC, highest HDI, and lowest Gini coefficient? Norway

Their DIPC is more than $5000 MORE than the US.  So instead of the general population making peanuts but a few people making buckets of money, everyone makes a decent living.  And they are not even that reckless with their tax and spend policies.  They are only the 16th highest spending government, have the 5th highest tax revenue, and "burden" their citizens with the 14th highest total personal tax wedge. 

Just to make their system more attractive they also elect their legislative representatives by proportional representation.  And they get around the mess that could create in Canada by, believe it or not, working together.  Weird right?  How do they do this?  Legislation that says their parliament CANNOT be dissolved in the four-year span between fixed-date elections.  So if you can't agree on something, you are going to work together until you get it figured out.  Because you are stuck with each other for four years.  THAT is what we need to do in Canada.

Don't get me wrong.  I love Canada.  Always have, always will.  But over the years the impression has been creeping across the border that we need to take all the power away from government and leave as much money in the pockets of wage earners as possible.  This is thought to be the only way to true success and economic prosperity. 

Nations like Norway, Sweden, Finland, and Denmark show us that there is another way.  It is time we start taking some of their great ideas and working them into this amazing country we have to make it all the better.  Who wouldn't love to see Canada one day sitting with the highest disposable income per capita, HDI rating, and income equality?

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