http://www.law.ucla.edu/docs/final_-_benefits_and_costs_of_taxation.pdf

The Social Benefits and Economic Costs of Taxation
A Comparison of Highand Low-Tax Countries
By Neil Brooks and Thaddeus Hwong

About the Authors
Neil Brooks teaches tax law and policy at Osgoode Hall Law School. Thaddeus Hwong teaches tax law and policy at Atkinson Faculty of Liberal and Professional Studies, York University.

5 Taxes: Are They Really All Bad?
7 Summary
11 Ranking Countries by Tax Level
13 Comparing Social and Economic
Outcomes in Low- and High-Tax Countries
35 To What Kind of Country Do Canadians Aspire?
37 Appendix

Taxes: Are They Really All Bad?
“I believe all taxes are bad.” Stephen Harper made this remark during the federal election
last year in announcing he would reduce the Goods and Services Tax from 7% to 5% if elected Prime Minister.

Taxes are the price citizens of a country pay for the goods and services they collectively provide
for themselves and for each other. So it is difficult to know exactly what Harper meant
when he said he believes all taxes are bad. Was he saying that all actions taken collectively by
citizens through democratically elected institutions are bad?

Although almost everyone — other than Prime Minister Harper — recognizes the need for some taxes, over the past 25 years public policy debates in every Anglo-American country, including Canada, have been dominated by a campaign against taxes.

Tax levels in Canada have always been substantially below those in most other industrialized
countries, and they have been significantly reduced over the past few years, yet the crusade
against them continues unabated. In 1998, all taxes collected in Canada amounted to 36.7% of
the gross domestic product (GDP). Due in part to tax cuts, this percentage fell almost 3 percentage
points to 33.5% by 2004. Tax levels in the average industrialized country that belongs to the Organization for Economic Cooperation and Development (OECD) was over 2 percentage points higher than in Canada in 2004, 35.9% of GDP, and in the average European country it was almost 5 percentage points higher, 38.3% of GDP. Yet the federal government’s major priority, as reflected in its first budget tabled last spring, and in statements made following the tabling of its Annual Financial Report for the Fiscal Year 2005–06 this fall, in which the government committed a $13.2 billion surplus to debt reduction, is more tax cuts. It is often difficult to know precisely what taxcutters hope to achieve through more tax cuts and what evidence they think supports their claims.

Their contention that Canadians would be better off if taxes were reduced is usually asserted as an article of faith. However, one way of attempting to answer the question of whether the Canadian government should be cutting taxes even more is to look across countries and compare the social and economic outcomes in high-taxed countries with the social and economic outcomes in low-taxed countries. Is it really the case, as assumed by those who think taxes need to be further reduced
in Canada, that the quality of life of the average citizen is higher in low-taxed countries than high-taxed countries?

That is the question we undertake to answer in this study. We compare high- and low-tax countries
on a wide range of social and economic indicators. As representative of low-tax countries, we study all six Anglo-American countries: the United Kingdom, the United States, Canada, Ireland, Australia, and New Zealand. As representative of high-tax countries, we study the four Nordic countries: Sweden, Norway, Denmark, and Finland. If the story about taxes and the welfare state told by tax-cutters has any credibility, the results should be evident in comparisons between industrialized countries with low taxes and those with high taxes. Indeed, if the story is even remotely true, one would expect those countries with even marginally higher tax levels than Canada to be modern-day economic basket cases and to be no better off in terms of social outcomes or of the quality of the lives enjoyed by their citizens.

Summary

Tax cuts are disastrous for the well-being of a nation’s citizens.
Findings from this study show that high-tax countries have been more successful in achieving their social objectives than low-tax countries. Interestingly, they have done so with no economic penalty. On the majority of social measures we examine, high-tax countries rank significantly above low-tax countries. On a number of the economic indicators we examine, low-tax countries rank above high-tax countries, but the difference is almost never significant. We examine 50 indicators that are commonly used to measure a country’s social progress. On over half of these indicators (29), the outcomes in high-tax Nordic countries are significantly better than those in low-tax Anglo-American countries, and on most of the remaining indicators (13), social outcomes are somewhat better in Nordic countries. In short:
• Nordic countries have significantly lower rates of poverty across almost all social groups;
• as an indicator of how well a country protects the vulnerable, the elderly have significantly higher pension income replacement rates in Nordic countries and the income received by those with disabilities relative to the population is much higher;
• income is distributed significantly more equally in Nordic countries;
• on every measure we examine there is significantly more gender equality in Nordic countries;
• Nordic workers have significantly more economic security;
• in terms of health outcomes, infant mortality rates are significantly lower and life expectancy is longer in Nordic countries;
• in terms of educational outcomes, a greater percentage of the population completed secondary school and university in Nordic countries and 15-year old students score higher on math tests;
• as a measure of personal physical security, homicide rates are lower in Nordic countries;
• as indicators of the degree of community and social solidarity in a country and general happiness and life satisfaction, there is significantly more trust among individuals and for public institutions in Nordic countries;
• there is significantly less drug use in Nordic countries; individuals have significantly more leisure time; individuals have more freedom, according to a widely referred to index of economic freedom; individuals report more life satisfaction; and they are more likely to discuss politics with friends;
• Nordic countries rank much higher on an index of environmental performance, and the Nordic countries give significantly more in foreign aid than Anglo-American countries.

Low-tax Anglo-American countries rank higher than Nordic countries on only seven out of the 50 social indicators. In each case, it is a trivial difference that could be easily due to chance: a slightly higher percentage of the 25–64 age group completed either college or university; 15-year-olds did slightly better on reading and science tests; a slightly greater percentage of people report a greater sense of freedom; there are on average a lower number of suicides; and a slightly greater percentage of individuals report they are very happy. With respect to the pursuit of economic goals, the indicators we examine suggest hightax countries have achieved their social success with no economic penalty. Over the past 15 years, the low-taxed Anglo-American countries have experienced slightly greater economic growth than the high-taxed Nordic countries, but it would appear that the Nordic countries have positioned themselves for greater growth in the future. Of the 33 economic indicators examined, the Nordic countries lead on 19 indicators and the Anglo-American countries on 14.

The high-tax Nordic countries have:
• a marginally higher GDP per capita;
• a higher GDP per hour worked;
• significantly lower unit labour costs and significantly lower rates of inflation;
• higher budget and current account surpluses;
• a higher total labour participation rate, and a higher female labour participation rate;
• much higher rates of household saving and net national saving;
• a higher ranking on indexes measuring innovation;
• a higher percentage of GDP spent on research and development and a higher percentage of their workers working as research and development researchers;
• a higher level of network readiness;
• a higher percentage of broadband subscribers;
• a significantly higher ranking on their growth competitiveness by the World Economic Forum; and
• a higher ranking on Richard Florida’s global creativity index.

Anglo-American countries have:
• a higher rate of growth in GDP per capita between 1990 and 2004;
• a higher rate of growth in GDP per hour worked from 1995 to 2004;
• a higher rate of growth in multi-factor productivity from 1995 to 2002;
• a lower national debt;
• a significantly higher growth in employment from 1992 to 2002 (this is the only measure on which Anglo-American countries exceed Nordic countries in a way that is statistically significant);
• a lower rate of general unemployment, a marginally lower rate of long-term unemployment, a marginally higher rate of male labour participation rates;
• a greater change in fixed capital formation; and
• greater inward foreign direct investment and inward foreign direct investment performance.

In making their case for lower taxes, taxcutters in Canada frequently point to the United States, which has one of the lowest tax levels of the industrialized countries in the world, and suggest that Canadian society should strive to become more like American society. So, in addition to comparing social and economic outcomes broadly between low- and high-tax countries, we highlight the social and economic outcomes in the United States and ask: should Canadians really want their country to become more like the United States? To provide some basis for comparison, we compare the outcomes in the United States with those of another country Canada might wish to emulate: Finland.

Our findings show Americans bear incredibly severe social costs for living in one of the lowesttaxed
countries in the world. For a strikingly large number of social indicators, the United States ranks not only near the bottom of the 19 industrialized countries, but it ranks as the most dysfunctional country by a considerable margin:
• Poverty is widespread. A greater percentage of Americans, and in particular children and the elderly, live in poverty in the United States than in any other industrialized country in the world.
• The income of vulnerable citizens, such as the elderly and those with disabilities, is much lower compared to others in the United States than almost all other industrialized countries.
• Living conditions are shockingly unequal.
By any measure, income is distributed more unequally in the United States than in every other industrialized country. In 2004, America’s richest 1% held more of the nation’s wealth than the bottom 90% (34.7% versus 29.9%).
• Ordinary workers in the United States have less economic security than workers in any other industrialized country (as shown by a comprehensive index of economic security developed by the International Labour Organization).
• As an indication of gender inequality, women in the United States still hold a relatively small percentage of positions in the professions, legislative bodies, and senior civil service. In contrast to the United States, Finland ranks near the top of the industrialized world on each of the following social indicators:
• The percentage of the population living below the poverty line is very low (for example, only 3.4% of children).
• The elderly and those with disabilities have incomes that are close to those of the rest of the population.
• Income is distributed relatively equally.
• Women hold about 50% of the positions in legislative bodies and senior civil service.
• Workers in Finland enjoy one of the highest levels of economic security among workers in the industrialized world. It is well known that there are profound problems with the United States’ health and education system — where values such as selectivity, diversity, and choice predominate and a large percentage of the spending is done through the private sector. The United States spends over twice as much of its GDP on health care than Finland (15% versus 7.4%), and yet U.S. health care outcomes remain far worse — indeed, worse than most other industrialized countries. For example, the percentage of children who die at birth in the United States is the highest among industrialized countries. Finns live longer than Americans, and the rate of infant mortality in Finland is less than one-half the American rate.

The United States spends a greater percentage of its GDP on education than Finland spends, yet the Finnish education system — which is a comprehensive public system based on equity and the professionalism and training of teachers — achieves much better outcomes. American 15-year-olds rank near the bottom of OECD countries when it comes to science and math skills. By contrast, Finnish 15-year-olds rank first in the world in science and math skills. American students also rank relatively low on reading skills, while the Finnish students come first in the world in this area as well.
This pattern, with the United States ranking about the lowest among industrialized countries and Finland near the top, is evident on most of the remaining social indicators we examine — relating to social goals such as personal security, community and social solidarity, self-realization, democratic rights, and environmental governance. We will not review them all here, except to note that, although Canada’s Conservatives appear ready to adopt aspects of the United States’ justice system, such as mandatory criminal sentencing, the United States is by a wide margin the most violent industrialized country in the world (measured by the murder rate). Americans themselves express the third lowest measure of confidence in their justice system, in a tie with Belgium. Italians and Australians have slightly less confidence in their justice systems. This brief review of how well industrialized
countries have achieved their social goals shows the United States ranks lower than most countries on a wide range of social indicators, suggesting that the form of social organization used to accommodate contemporary life in the United States has gone profoundly amiss. Some commentators dismiss the miserable social outcomes achieved by the American social contract by noting that it is nevertheless one of the wealthiest countries in the world. GDP per capita is higher in the United States than in most
other industrialized countries. The results of this study, however, suggest a trade-off does not have to be made between material prosperity and social equity.

In addition, there are countless problems with using GDP per capita as a measure of economic well-being. It takes no account of how the wealth that is produced in a country is distributed. For example, even though the United States experienced strong economic growth in recent years, between 1998 and 2004 the income of the typical (median) American family fell by 3.8%. Moreover, per capita GDP is high in the United States primarily because Americans work many hours more than citizens of other countries. Low-income Americans often have to work at two or three jobs just to survive. Recent economic growth in the United States has also come at high long-term economic costs. The federal government budget is on an unsustainable path: the U.S. has the largest deficit in relation to its GDP of any industrialized nation; its trade deficit is the largest in the world, a staggering $805 billion last year; and, the U.S. also has one of the lowest savings rates of the industrialized countries. Moreover, even with its wealth, flexible economy and low taxes, the United States is not the most competitive country
in the world. From 2001 to 2005, in its comprehensive survey of world economies, the business-
dominated private World Economic Forum has determined that the most competitive country
in the world was Finland. In 2005–06, Finland was ranked as the second most competitive
country after Switzerland.

Ranking Countries by Tax Level

Industrialized countries are divided into four categories in Table 1, based upon their level of taxes: low-tax countries, low-intermediate tax countries, high-intermediate tax countries, and high-tax countries. Tax levels vary at least slightly from year to year; therefore a 12-year average from 1990 to 2002 was used. This period immediately precedes the year or years in which most of the social and economic indicators that we examine apply. Even taking the average tax level over a 12-year period, there are large differences between countries. Sweden, the highest tax country, collects almost twice as much tax as a percentage of its GDP (50.5%) as the lowest taxed country in the group, Japan (26.8%). The average for the five low-tax countries is about 29%; the average for the five high-tax countries is 47%, almost 60% greater than the low-tax countries. Given these large differences in tax levels, if high-taxed countries were not achieving their objectives — or if they were doing so at substantial economic cost — this result should be revealed in aggregate data relating to a number of social and economic variables.

Political economists who study welfare state development traditionally divide modern industrialized countries into four categories:
1) “liberal welfare states” exemplified by the Anglo- American countries, in which the emphasis is on individual liberty and markets are the primary
form of social organization;
2) “corporatist welfare states” exemplified by most Western European countries, in which the emphasis is on social solidarity and occupational insurance plans play a large role in reducing social risks;
3) “Mediterranean welfare states” such as Portugal, Spain, Greece, and to a limited extent Italy,
in which pensions are generous but otherwise state systems of support are less and in which
the family and church play a large role in meeting the needs of citizens; and
4) “social democratic welfare states,” basically the Scandinavian countries, in which the emphasis is on equality and state-provided universal programs usurp the role of markets and the family in ensuring
that the needs of individuals are met.

Although they rely upon a more sophisticated measure of the welfare state, there is obviously a relatively close correspondence between the
categorization of countries based simply on tax levels and one based upon notions of the commodification of labour and related concepts used by political economists to classify welfare states. Liberal or Anglo-American countries are clustered in the low-tax column; Mediterranean countries are clustered in the low-intermediate column; continental European countries are clustered in the high-intermediate column;
and the Scandinavian countries are clustered in the high-tax column. Therefore, in comparing low- and high-tax countries in this study,
we compare the social and economic outcomes in the six Anglo-American countries (United States, Australia, Ireland, New Zealand, Canada, and the United Kingdom) — all of which are relatively low-tax countries — with those in the four Nordic countries (Norway, Finland, Denmark, and Sweden) — all of which are relatively high-tax countries. Social and economic indicators of all countries in the four groups are
provided in the appendix.

Annual Average Tax Revenue as Percent of GDP of High-Income OECD Countries, 1990–2002
at: http://www.law.ucla.edu/docs/final_-_benefits_and_costs_of_taxation.pdf

Comparing Social and Economic Outcomes in Low- and High-Tax Countries

Our comparison of low- and high-tax countries is straightforward. For each major and widely agreed-upon social and economic objective of
modern societies, we use one or more indicators that would suggest how successful a country has been in achieving these goals. We calculate the average score for the Anglo-American countries and compare it with Nordic countries. Social Goals Relief of Poverty Relief of poverty is an important goal in every society. A social contract should be struck that minimizes the number of those who are excluded from the life of the community because of a lack of economic resources to purchase necessities.

The number of children living in poverty is of particular concern. The Nordic countries have significantly lower rates of poverty across almost all social groups than Anglo-American countries. Four indicators are shown, as illustrated in Table 2. The number in parentheses beside
each indicator refers to the column number of the indicator in the Appendix: Comparing Social and Economic Outcomes in Low- and High-
Tax Countries. In low-tax Anglo-American countries, on average, 12.6% of the population lives below 50% of the country’s median income; in Nordic countries, less than one-half that percentage (only 5.6%) of the population is living below the poverty line. On average, in the low-taxed Anglo-American countries, 15.9% of children live in poverty, while in the Nordic countries the percentage of children living in poverty is less than one-quarter of the Anglo-American average, less than 3.3%. In the average Anglo-American country 45.2% of children in single-parent families live in poverty. In Nordic countries only 9.2% of children in single-parent families live in poverty. There is no significant difference between low- and high-taxed countries with respect to the percentage of elderly who live in poverty (in large part because the low rate of poverty among the elderly in Canada brings down the average for low-tax countries); nevertheless, a much lower percentage of the elderly live in poverty in Nor-dic countries (9.2%) than in Anglo-American countries (13.5%).
The United States has the highest rates of
poverty in the industrialized world. In low-taxed
United States, over 17% of individuals live below
50% of the country’s median income; almost 22%
of all children live in poverty; a shocking almost
49% of children in single families live in poverty;
and over 24% of the elderly live in poverty. In Finland,
by contrast, the percentage of people living
in poverty in each of these groups is small: 6.4%,
3.4%, 10.5%, and 10.4%, respectively.
Also, on most of these measures of the incidence
of poverty, although Canada ranks far below
the Nordic countries, it has a better record
than the United States. In particular, while 21.7%
of children live in poverty in the United States,
in Canada a substantially lower percentage live
in poverty: 13.6%. While 24.6% of the elderly live
in poverty in the United States, in Canada only
4.3% of the elderly live in poverty. The percentage of elderly living below the poverty line in Canada
is, in fact, lower than in any of the Nordic
countries. It would appear the Americans have
a good deal to learn from Canadians.
One social good that citizens buy with their
taxes is a dramatically smaller percentage of
their fellow citizens living in poverty.
Although we concentrate in this study solely
on a comparison between the low-taxed Anglo-
American countries and the high-taxed Nordic
countries, for most of the social indicators we
examine, the social indicators are closely correlated
with tax levels across all industrialized
countries. Figures 1 and 2 illustrate this correlation
with respect to child poverty. Figure 1 is
a bar graph that shows the rates of child poverty
across 19 industrialized countries. Figure 2
is a chart that reveals how closely rates of child
poverty are related with tax levels. Generally, the
higher a country’s tax level, the lower its rate of
child poverty.
Protection of the Vulnerable
Every just society must protect the vulnerable:
children, the elderly, and those with disabilities.
One measure of whether the elderly are fully integrated
into society is the extent to which pensions
for the elderly are able to replace the salaries
they earned while working.
In the Nordic countries, pensions replace
66.6% of the salaries of pensioners, while in Anglo-
American countries the pension replacement
rate is only 47.4%. Canada is on the high end of
the Anglo-American countries with a replacement
rate of 57.1%. In the United States, the pension
replacement rate is only 51%, while in Finland
it is 78.8%.
One way of measuring how well a society accommodates
those with disabilities is to compare the income of persons with disabilities relative to
that of the general population. In Anglo-American
countries, the income of those with disabilities
is 67% of the general population, whereas
in Nordic countries the income of those with
disabilities is around 86% of the general population.
The relative income of those with disabilities
in Canada is almost equal to the relative income
of those in the Nordic countries at 84.6%.
Once again, the United States is at the low end
of even the Anglo-American countries. In that
country the income of those with disabilities is
only 58.7% that of the general population; in Finland
it is 83%.
Economic Equality
One of the pressing issues facing every democracy
is how economic resources should be distributed.
Large economic inequalities hold adverse
consequences for the personal well-being
of the citizens of a country: Inequalities erode
social cohesion; they lead to worse health and
personal security outcomes; they lead to the
withdrawal of the haves from the life of the
community and the exclusion of the have-nots;
and, generally, inequality diminishes the richness
and flourishing of a society. Moreover, extreme
levels of inequality have been shown to
have a negative impact on economic growth by
distorting the allocation of resources and talents.
Income inequality has also been shown to
destabilize political and social values, since disproportionate
economic power invariably leads
to increased influence over political and other
societal decisions.
One of the strongest associations between the
variables examined in this study is between tax
levels and a more equal distribution of economic
resources. In all three indices of inequality reported
in Table 4, there are statistically signifi-
cant differences between the Anglo-American
and Nordic countries. For example, in Anglo-
American countries, on average the richest 10%
receive about 12.4 times the poorest 10%, while
in the average Nordic country the richest 10% receive
only 6.5 times that of the poorest 10%.
In the United States, where income is distributed
more unequally than in any other industrialized
country, the richest 10% of families
receive almost 16 times as much of national income
as the poorest 10%. In Finland, by contrast,
the richest 10% receive only 5.6 times as much of
the national income as the poorest 10%, about
one-third the American multiple. Once again,
Canada finds itself on this indicator in between
the United States and the Nordic countries. In
Canada, the richest 10% receive 10.1 times that
of the poorest 10%.
One of the most important social benefits
that citizens buy with their taxes is a society in which economic resources are distributed much
more equally.
Gender Equality
Every Western country is committed to equality
for women. Although progress has been slow,
countries with higher taxes have had much greater
success in achieving this social goal. One explanation
for this is that a considerable amount
of the care-giving work that is borne by women
in low-tax Anglo-American societies is paid for
and financed by taxes in high-taxed countries.
Thus, not only is the cost of these services spread
more equitably across the entire population in
high-tax countries, but women are also free to
take a greater part in market, civil, and political
life. On average, the level of gender equality
in the Nordic countries is significantly higher
than that in the Anglo-American countries, as
measured by the indicators in Table 5.
The World Economic Forum, which boasts
the world’s 1,000 leading companies as its members,
measures the extent to which women have
achieved full equality with men in economic participation,
economic opportunity, political empowerment,
educational attainment, and health
and well-being, and reports the results as the
Gender Gap Index, with a higher index reflecting
a narrower gender gap. The Nordic countries
score an average of 5.35, which is higher than the
average of 4.65 of the Anglo-American countries.
Canada scores 4.87, which is higher than the 4.4
for the U.S. but lower than Finland’s 5.19.
In its annual Human Development Report, the
United Nations Development Program computes
a comprehensive index of gender equality: the
gender empowerment measure. On this measure,
Nordic countries score an average of 0.868
while Anglo-American countries score only an
average of 0.773. Canada scores 0.807, which was
higher than the United States at 0.793, but lower
than Finland at 0.833.
A simple measure of gender equality is the
percentage of women who participate in the
paid labour force and the percentage of women
who hold influential jobs. In Anglo-American
countries, 69% of women participate in the
labour force: in Nordic countries 75% of women
participate in the labour force. In Anglo-American
countries, on average, about 32% of doctors
are females, 21% of members of Parliament are
females, and 22% of senior civil servants are females.
By contrast, in Nordic countries, about
43% of doctors are females, 40% of members of
Parliament are females, and 44% of senior civil
servants are females.
Once again, on all of these measures of gender
equality, the Nordic countries are significantly
better off than the Anglo-American countries.
Once again, on every measure, Canada does better
than the United States. Also, as an indication of how these differences
affect public attitudes (or are affected by them),
in Anglo-American countries 17% of the population
reported in a survey that men should have a
priority in filling jobs, while in Nordic countries
only 8% of the population held this view.
Economic Security
Individuals and families need work-related security
in order to make long-range plans, to flourish,
and to develop. In 2004, the International
Labour Office published a major report on economic
security as part of its socio-economic security
program, Economic Security for a Better
World. That program examined how countries
organized work and how their organization of
work connected to broad social goals.
The ILO identified seven forms of work-related
security: 1) labour market security (adequate
employment opportunities); 2) employment security
(protection against arbitrary dismissal and
so on); 3) job security (the possession of a niche
in work, allowing some control over the content
of a job, what the worker actually does and the
opportunity he or she has of building a career);
4) work security (protection against accidents
and illness at work); 5) skill reproduction security
(widespread opportunities to gain and retain
skills); 6) income security (protection of income
through minimum wage machinery, wage
indexation, and comprehensive social security;
and 7) representation security (protection of collective
voice in the labour market, etc). It developed
an index for each of these forms of security
and then combined them into one overall
index: an Economic Security Index.
According to the ILO’s Economic Security
Index, which measures the economic security
provided in a country relative to other countries,
the Nordic countries offer significantly more economic
security than the Anglo-American countries.
A high economic security index indicates
that country is providing more security than a
country with a lower score. The average score
for Anglo-American countries is 0.70; the average
score for Nordic countries is 0.94.
The United States ties with New Zealand in
providing workers with the lowest level of economic
security among industrialized countries:
0.61. Finnish workers have one of the highest levels
of economic security: 0.95. Canada’s score is
above the Anglo-American average at 0.79.
Taxes enable a country to buy services and
social insurance programs that provide workers
with a higher degree of economic security.
Access to Essential Services
Health
Generally, people are able to live long and healthy
lives in all high-income industrialized countries,
certainly relative to poorer countries. Therefore
it is hard to find an index that distinguishes between
health outcomes in industrialized countries.
A common measure is life expectancy at
birth. By this measure there is little difference
between Nordic and Anglo-American countries:
on average, males live 76.2 years in both
low- and high-taxed countries; females, on average,
live a little longer in high-taxed countries
(81.4 years versus 81.2 years). Once again, however,
on this index of social progress the United
States is below the average of low-tax countries.
In fact, among industrialized countries, Americans
have one of the lowest life expectancies at
birth. The life expectancy of men and women in Canada is almost three years longer than men
and women in the U.S.
Another common measure of health outcomes
is infant mortality rates. The Nordic countries’
infant mortality rate is significantly lower than
that of the Anglo-American countries. In the
high-tax Nordic countries there is an average
of 3.5 deaths per 1,000 live births, while in lowtax
Anglo-American countries there is an average
of 5.5 deaths per 1,000 live births. On this
measure of social progress, as on so many others,
the United States has the worst record of all
the industrialized countries. Its infant mortality
rate is 6.9 deaths per 1,000 births. Canada is
about the same as the Anglo-American average,
while Finland has only 3.1 infant deaths per 1,000
births, 50% less than the United States.
The health of new-borns is another frequently
used measure of progress in the delivery of
health care. On average, the percentage of newborns
weighing less than 2,500g in the Nordic
countries is significantly lower than that in the
Anglo-American countries. In high-tax Nordic
countries, the percentage of low-weight births
among new-borns is 4.8%, compared to 6.5% in
the low-tax Anglo-American countries. Canada’s
5.8% of low-weight births is lower than the 7.9%
of the U.S., but higher than the 4.1 of Finland.
Taxes fund health programs that ensure that
all citizens have access to this vital service that
is essential to human development.
Education
The Nordic countries spend a greater percentage
of their GDP on education than Anglo-American
countries (6.4% versus 5.9%), and a much larger
share of their expenditures for education is fi-
nanced with taxes (97% versus 82%).
Although the Nordic countries have a higher
percentage of students who complete high-school
(81.5% versus 73%) and university (22.1% versus
20.6%), the differences are not significant. Moreover,
the average PISA scores of 15-year-old students
on reading, science, and math tests are, by
and large, statistically indistinguishable between
Nordic and Anglo-American countries.
The United States has a larger percentage of
students graduating from secondary school and
university than any other industrialized country.
Canada has the greatest percentage of students who completed college or university. Although
Finland has a lower percentage of students completing
secondary school and university than
the United States, its 15-year-old students score
much higher than American students on reading,
science, and math. Indeed, in all three of
these subjects, its students score higher than any
other high-income industrialized country. Canadian
students also score higher than American
students, although not as high as the Finnish
students.
Physical Security
A global index of physical security is difficult to
imagine. One statistic frequently referred to in
discussions of the physical security of citizens is
the number of homicides in a country per population
of 100,000. On this index, although it is
not statistically significant, there are fewer homicides
in Nordic countries (1.4 per 100,000) than
Anglo-American countries (2.2 per 100,000).
Almost needless to say, the murder rate in
the United States is far above that of every other
industrialized country: 7.1 per 100,000. Canada
is close to the Nordic average, and Finland
is above the Nordic average.
Community and Social Solidarity
In the late 1990s, the concept of social capital
(usually defined as networks together with
shared norms, values and understanding that
facilitate cooperation within or among groups)
gained widespread interest among researchers and
policy-makers. The interest developed because
of research results that suggested social capital
was important, not only in facilitating productive
organization and economic development,
but also in enriching many aspects of social life
and fostering social engagement and democracy.
Unfortunately, the concept of social capital
is difficult to operationalize, but, from the social
indicators we examine, it would appear that
citizens of high-tax countries are likely to have
higher degrees of trust in one another and more
confidence in public institutions. One could say
they live in societies with more social capital than
those living in low-tax countries.
Since 1981, the World Values Survey has conducted
four waves of surveys of people’s attitudes
toward socio-cultural and political change. In
Anglo-American countries, only about 38% of
survey respondents agree with the statement
that people can be trusted, whereas 64% of survey
respondents in Nordic countries agree with
that statement. More citizens in Nordic countries
have confidence in Parliament (52.7% in Nordic countries versus only 32.1% in Anglo-American
countries) and in the justice system (68.9% in
Nordic countries versus 45.8% in Anglo-American
countries). About the same percentage of
citizens in both groups of countries report having
confidence in the civil service (about 48%)
and major companies (about 51%).
Many sociologists investigating the nature
of social capital and the role it plays in society
have suggested that trade unions are one of the
most important organizations in society for the
creation of social capital. Unions are organizations
where people develop skills essential in a
thriving democracy — such as tolerance, willingness
to compromise, and respect for other
viewpoints. They also stimulate political participation,
increase people’s political skills, and
promote an appreciation of both the rights and
obligations of citizenship. Furthermore, they are
organizations that foster collegiality. Not surprisingly,
the average union density in Nordic countries
is much higher than that of Anglo-American
countries. About 24% of the work force, on
average, is unionized in Anglo-American countries,
whereas over 71% is unionized in Nordic
countries. Canada’s union density of about 28%
is higher than that of the U.S., where only 13% of
the work force is unionized, but much lower than
the over 76% union density in Finland.
Self-Realization Goals
It is difficult to know which indicators might be
examined to infer whether people are generally
achieving their personal goals and satisfied with
their lives; however, we have selected a few commonly
used indicators.
Personal Freedom and Autonomy
Since 1995, the Heritage Foundation and the Wall
Street Journal have jointly produced an index of
economic freedom. They claim that “countries
with the most economic freedom also have higher
rates of long-term economic growth and are
more prosperous than are those with less economic
freedom.” Somewhat surprisingly, even
though high taxes are taken as an indication of
the lack of economic freedom in the compilation
of the index, the average score of the Nordic
countries on the overall economic freedom
index is only slightly higher than that of the Anglo-
American countries. The average ranking for
Anglo-American countries is 1.78; the average
ranking for Nordic countries is slightly higher
at 1.97. Also, survey evidence suggests that the
sense of freedom of citizens in Nordic countries
is almost as high as it is in the average Anglo-
American country (82.7% versus 84.4%).
Drug Use and Rate of Suicides
The inference to be drawn from the rate of drug
use in a society is uncertain: Is drug use indicative
of people who are living lives of quiet desperation,
or is it indicative of people who are simply
less inhibited in the pursuit of happiness? Whatever
inference might be drawn from it, on average
a significant lower percentage of people in
Nordic countries are cannabis users than people
in Anglo-American countries. An average of
11.6% of the population between the ages of 15
and 64 report using cannabis in the past year in
Anglo-American countries, but two-thirds less,
or only 3.8%, report doing so in Nordic countries.
Cannabis use is about the same in Canada and
the United States, at about 11%, but only about 3% of the population between the ages of 15 to
64 report using cannabis in Finland.
A high rate of suicide might suggest the citizens
of a country are dissatisfied with their lives.
In Anglo-American countries, the suicide rate is
lower than in Nordic countries (11 per 100,000
versus 15 per 100,000), and the difference is statistically
significant but there is no strong association
between tax level and suicide rates. Japan
has the highest rate of suicide, but Finland
is among those countries with the highest rates
with 21 suicides per 100,000, over twice the
American rate.
Leisure
On the assumption that most people prefer leisure
to work, one indirect measure of the quality
of life in a country might be the amount of leisure
that individuals are able to enjoy. On average,
people in the Nordic countries work significantly
fewer hours than those in the Anglo-American
countries. In Anglo-American countries, the average
person works 1,752 hours a year, while in
the Nordic countries the average person works
only 1,550 hours a year (over 200 hours less than
in Anglo-American countries).
Americans enjoy significantly less leisure
than citizens of most other countries. On average,
they work 1,824 hours a year. This is 274
hours more than the Nordic average and 88 hours
a year more than Canadians. Among the Nordic
countries, the Finns enjoy less leisure than average
Scandinavians. They work about the same
number of hours a year as Canadians.
Of course, whether working fewer hours a
year results in a higher degree of welfare for citizens
of Nordic countries depends upon what
accounts for the increased leisure enjoyed by
people in high-tax countries. Does it reflect a
lifestyle choice that contributes to the quality
of their lives or do high taxes cause them to
substitute leisure for work and thus diminish
their well-being?
Attempting to determine the reason for the
difference between the number of hours worked
by Europeans and Americans has generated a
good deal of research. Some studies conclude
that the higher marginal tax rates in European
countries account for the reduced number of
hours worked in those countries. If this is the
case, the increased leisure enjoyed by citizens
in high-tax countries would not indicate that
these citizens are better off. Indeed, it would
indicate that they are worse off since, in the absence
of taxes, or if they faced lower tax rates,
they would prefer to work longer hours. Other
researchers have found that the differences in
hours worked reflects differences in taste. Europeans,
they argue, simply value their leisure
more than Americans.
One of the most recent studies on this issue
found the difference in the number of hours
worked between Europeans and Americans is
largely explained by European labour market regulations. After the first oil shock in 1973, European
unions pushed hard for a shorter work
week and longer vacations. In addition to their
collective bargaining efforts, unions also lobbied
for the adoption of government-mandated
vacation time and a generous number of holidays.
If this is the correct explanation for the
differences, then the effect on workers’ well-being
is ambiguous.
If these labour market regulations force workers
to take time off when they would prefer to
work, then presumably the regulations reduce
their well-being. However, the authors of this
recent study conclude that, instead of reducing
worker well-being, these regulations actually
increase worker well-being by helping to solve
a collective action problem. Individual workers
often work longer hours than they would prefer
because their co-workers are working longer
hours. In order to keep up with the relative
income of their co-workers and to compete for
promotions, they must work equally as hard.
This gives rise to the equivalence of an arm’s
race. Each worker works harder and harder, but
each would prefer not to. Regulation helps them
solve this coordination problem. The authors of
this study suggest that this latter explanation is
the correct one. They note that “Europeans seem
to be happy to work less and less.”
Happiness and Life Satisfaction
Ultimately, at least according to one widely held
personal philosophy, what life on the planet is
all about is happiness and satisfaction with one’s
life. As set out so eloquently in the American
Declaration of Independence, everyone has an
unalienable right to “life, liberty, and the pursuit
of happiness.” Given the enormous diversity
of individual preferences and tastes, it is hard
to imagine indicators that could measure directly
whether individuals are happy and satis-
fied with their lives. However, the World Values
Survey has included questions relating to the respondents’
perceived happiness and overall satisfaction
with life.
Based upon the most recent survey data, there
are no statistically significant differences in reported
happiness or life satisfaction between
high- and low-tax countries. On average, the
percentage of citizens in low-tax Anglo-American
countries who report they are very happy is
slightly higher than the percentage in high-tax
Nordic countries (39.5% versus 34.1%), but the
number who report they are satisfied with their
lives is slightly lower (86.7% versus 88%). Canadians
report they are among the happiest citizens
of industrialized countries. Also, on these kinds
of surveys the Dutch (Netherlanders) consistently
report being the happiest people and the most
satisfied with their lives, and yet the Netherlands
is, of course, a relatively high-tax country.
Opportunities to Participate
in Collective Decision-Making
Numerous indicators might be used as measures
of the vibrancy of democratic institutions
in a country. We report on two here. First, citizens
are more likely to participate in collective
decision-making if they feel their government is
honest. Citizens in the Nordic countries, on average,
feel that their countries are less corrupt
than their counterparts in the Anglo-American
countries, and the difference is statistically
significant. Anglo-American countries score an average
of 8.4 on a perception of government corruption
scale (from 0 [most corrupt] to 10 [least corrupt]),
whereas Nordic countries score 9.3.
Second, engaged citizens in a democracy presumably
deliberate about political issues with
their friends and colleagues. In Anglo-American
countries, on average, about 13% of people
report they had frequent discussions of politics
with friends, while in Nordic countries
about 18% report frequent discussions of politics
with friends.
Environmental Sustainability
Constructing composite environmental indicators
has become a growth industry, but a country’s
rank on them is often determined by geography
or other characteristics beyond the control
of the country’s government, by the method used
to aggregate individual indicators, by the comparability
of the data, and by the purpose of the
evaluation.
The composite index in Table 16 is taken from
a Canadian study that used OECD data to rank
the environmental performance of countries. On
average, the Nordic countries rank significantly
higher than the Anglo-American countries:
on average, the Nordic countries rank 13th (even
though Norway ranks 25th, considerably pulling
down the Nordic countries average rank); while
the Anglo-American countries rank 24th. The
United States ranks lowest among the high-income
industrialized countries (in 30th place).
Inter-Nation Equity
The inequalities between individuals around the
world are staggering. The richest 5% of people
receive one-third of total global income, more
than the poorest 80%. High-income countries
should care about the development of low-income
countries, for a number of reasons. First,
as a matter of their own self-interest, in a globalized
world high-income countries cannot
insulate themselves from the insecurity, public
health crises, violence, and economic volatility
that constantly threaten low-income countries.
Second, as a matter of basic fairness, no
person should be denied the chance to live free
of poverty and have access to services such as
health and education that are essential to hutable man development. Third, high-income countries
should promote the same social and economic
values they pursue in their own nations,
such as human dignity and basic levels of material
well-being, throughout the world. For these
and other reasons, citizens of wealthy countries
have recognized a responsibility to assist those
in poor countries.
The most straightforward index of a country’s
development effort is its total foreign aid as
a percentage of the donor country’s GDP. Countries
with higher taxes are presumably better
able to provide assistance to low-income countries.
One might also suppose that more caring
countries domestically are likely to be more caring
globally. The evidence bears out these intuitions.
On average, high-tax Nordic countries
provide more foreign aid than low-tax Anglo-
American countries. The Anglo-American countries
give on average only 0.28% of their gross
national income (GNI) for official development
assistance; the Nordic countries give an average
0.71% of their GNI, more than double that of
the Anglo-American countries. Of the high-income
industrialized countries, the United States
gave the least development assistance as a percent
of its GNI.
A much more sophisticated measure of a
country’s commitment to development would
take account of its foreign aid as well as the full
range of its policies towards low-income countries:
including trade, investment, migration, environment,
security, and technology. The Centre
for Global Development ranks the 21 richest
nations for each of these policy areas and then
combines the results into a Commitment to Development
Index. Even on this index, the Nordic
countries score significantly higher than the
Anglo-American countries (an average of 6.1
versus an average of 5.2). Canada scores higher
than the U.S. and is in line with Finland. On
the 2005 index, Denmark tops all countries with
a score of 6.7.
Economic Goals
Equity versus Efficiency
One of the fundamental tenets of classical economics
is that there is a trade-off between equity
and efficiency. The pursuit of social goals must
come, to some extent, at the expense of economic
goals. Although some studies purport to
show that government spending hampers economic
growth, in recent years a growing body
of literature has concluded that there is no necessary
trade-off to be made between economic
efficiency and equity.
Policies furthering social justice are likely
to contribute to efficiency and growth, for a
number of reasons: spending on education and
health care contributes to a better educated and
healthier work force; the increased economic
security of workers enhances their capacity to
adjust to change, bear more risk, acquire more
specialized skills, and pursue investment opportunities;
social justice policies can channel and
mitigate industrial conflict in periods of structural
adjustment and foster political stability and
social cohesion; a smaller range of wage dispersion
encourages structural change and thus productivity
growth; and a more equal society bears
fewer of the costs of social stratification such as
increased health costs, crime control costs, and
the cost of inner city decay.
The above review of social indicators suggests
that high-tax countries have been better
able to achieve their social objectives than lowtax
countries. The following review of economic
indicators suggests that high-tax Nordic countries
have not suffered any significant economic
costs in the pursuit of a more just and equitable
society.
High Standard of Material Living
The most common way of measuring the material
well-being of citizens of a country is simply
by dividing the country’s gross domestic product
(GDP) by its population. Countries can then be compared by converting their GDP per capita
to U.S. dollars on the basis of their purchasing
power parity.
By this measure, Luxembourg is the wealthiest
country in the world with an astonishing
2004 GDP per capita of US$57,500. It is worth
noting that the wealthiest country in the world,
by far, also has a tax level much higher than the
OECD average. Taxes in Luxembourg are about
42% of GDP.
Although the difference is not statistically
significant, the high-tax Nordic countries have
a higher GDP per capita than the low-tax Anglo-
American countries. In the Nordic countries, the
GDP per capita is $32,825; in Anglo-American
countries it is slightly less at $32,083.
Next to Luxembourg, the United States is the
wealthiest country in the world; its GDP per capita
is $39,700. Canada’s GDP per capita is $31,500,
marginally below the Nordic and even the Anglo-
American average. Although the United
States is both a low-tax and wealthy country, it
is important to note that across the high-income
OECD countries there is no association between
tax levels and material well-being.
Although GDP per capita is the most frequently
used measure of well-being, there are
many problems with this measure.
First, GDP measures the market values of activities
carried on in the country without regard
to whether they contribute to material well-being.
In the United States, for example, to the extent
its GDP is measuring the value of activities
such as the cost of incarcerating prisoners, of
police and private security guards, and of inef-
ficiently delivered health care services, it is not
necessarily a good measure of the material wellbeing
of Americans.
Second, a country’s GDP is a function not
only of the productivity of workers, but also of
how many hours they work. Workers in Nordic
countries have been able to produce goods and
services per capita that slightly exceed the value
of the goods and services per capita produced by
workers in Anglo-American countries, yet this
seriously understates how much better off they
are since they are able to produce these goods
and services while working over 200 hours less
a year. As mentioned earlier, on average American
workers work 274 more hours a year than
workers in Nordic countries.
Third, and most importantly, the simple measure
of GDP per capita reveals nothing about how
income in the country is distributed, and therefore
who is benefiting from the wealth produced
in the economy. It is an average figure that is
arrived at simply by taking the total wealth of
the country and dividing it by the total population.
It would remain the same whether all of
the wealth in a country was distributed to one
person or equally across all persons. Presumably,
in judging the economic success of a country,
what matters is the material wealth of the
typical or median family (a real family), not the
average family (a statistical construct). One reason
why the average GDP per capita is so high
in the U.S. is that the U.S. has a relatively small
number of extremely high-income individuals.
Thus the U.S. GDP per capita is an unreliable
measure of the material well-being of the typical
(median) American family.
High Rates of Economic Growth
Over the past 15 years, the American economy
has grown faster than most others (as measured
by GDP per capita). Yet it has not been the fastest growing economy in the world; that honour goes
to another Anglo-American country, Ireland.
From 1990 to 2004, the Irish economy has
grown at a staggering rate of 6.6% a year. Ireland
has always been a relatively low-tax country, but
from 1994 to 2003 its tax level declined even further,
from about 35% to about 30% of GDP. Ireland’s
low general tax level, along with its low
corporate tax rate of 10% on the manufacturing
profits of foreign multinationals, has led tax-cutters
in Anglo-American countries to urge their
governments to follow the Irish tax model.
However, there is little reason to suppose
that tax cuts had much to do with the Irish economic
miracle. Ireland reaped the advantages
of huge European Union subsidies, particularly
in the late 1970s and in the 1980s (reaching 6%
of GDP), and even in the early 1990s. Ireland invested
those subsidies in infrastructure, including
free higher education. It had an Englishspeaking,
well-educated, under-utilized labour
force. It aggressively courted foreign investment
through industrial development agencies. It was
perfectly poised to take advantage of the American
boom in information technology at a time
when American multinationals were looking for
places to invest overseas for export to the European
market. Once it had attracted a number of
information technology firms, there was a wellknown
agglomeration effect of industrial concentrations
that contributed to spin-off growths
and attracted more firms.
Furthermore, Ireland is not really a good exemplar
of the Anglo-American model. In the late
1980s and throughout the 1990s, it had high levels
of employment protection and a highly coordinated
system of wage-setting that kept wages
down. It seems reasonably clear that the Irish
miracle is due to a unique set of circumstances
that cannot be duplicated in other countries
simply by trying to imitate its beggar-thy-neighbour
corporate tax rate strategy. Even if such a
strategy worked, it would only work for a very
small number of other countries.
From 1990 to 2004, the average annual growth
rate of GDP per capita was 3.6% in Anglo-American
countries and only 2.3% in the Nordic countries.
This is one of the most frequently referredto
facts in arguing that European countries are
going to have to adopt the Anglo-American economic
model if they hope to increase the prosperity
of their nations. The fact that the U.S.
growth rate over this period has been 3.1% and
Canada’s has only been 2.8% is also frequently
referred to in urging that Canada must reduce
its tax level to U.S. levels. Yet there is a lack of
evidence linking lower taxes in Anglo-American
countries to higher rates of economic growth.
In fact, there are many reasons why these comparisons
do not lead to the conclusion that hightax
countries should follow the example of lowtax
countries in order to foster higher rates of
economic growth.
First, the difference in economic growth
rates over this period between Nordic and Anglo-
American countries is not statistically significant:
it is likely to be a chance occurrence.
In addition, the association between higher economic
growth and lower tax levels is weak. Second, the differences are highly dependent
upon what base year is used for the purpose of
drawing the comparison. For example, in a more
recent period, from 1995 to 2004, the growth rate
in GDP per capita in both Canada and the United
States was the same: 3.4%. And over this period,
high-tax Finland outgrew both countries,
with a rate of growth of 3.7%.
Third, the past 50 years have demonstrated
that periods of economic growth tend to be
highly cyclical. For example, only 20 years ago
many economists were predicting that Germany
and then Japan should be the economic models
to follow.
Finally, almost all of the wealth created in the
United States over the past 20 years has benefited
the very rich. The real income of the typical
worker has hardly changed at all.
High Rates of Productivity Growth
The wealth that a nation produces is determined
not only by how many hours workers work, but
also by how productive they are when they are
working. As noted above, American and Anglo-
American workers generally work many more
hours than European workers. However, European
workers are generally more productive than
Anglo-American workers.
The average Nordic country worker is substantially
more productive than the average Anglo-
American worker, although the difference
is not statistically significant. On average, Nordic
country workers produce goods and services
valued at $44.1 an hour, while Anglo-American
workers only produce goods and services
valued at $38.2 an hour.
American workers tend to be very productive,
on average producing goods and services worth
$46.3 per hour. However, it might be noted that
they are not nearly as productive as workers in
Norway, who produce goods and services worth
$56.6 per hour, or even French workers who produce
goods and services worth $47.7 per hour.
With the strong pick-up in economic growth
in the United States, particularly since the mid-
1990s, after 50 years of catching up to the United
States, European countries now find themselves
falling behind. In the United States, from
1995 to 2004, the average annual growth in GDP
per hour worked was 2.5%. Indeed, this was the
average of the Anglo-American countries. Over
the same period, the annual average growth in
GDP per hour worked in Continental European
countries was only 1.5%. Clearly, if this difference
persists over a number of years, it will
make a large difference in living standards. However,
it is odd to attribute the lack of productivity
growth in Europe to high tax levels, as many
business commentators do. For one thing, Sweden,
the country with the highest tax levels in
the world, experienced productivity growth over
this period at almost the same level as the United
States (an annual rate of 2.4% versus 2.5%).
Moreover, although the average growth in GDP
per hour worked from 1995 to 2004 was lower
in the Nordic countries than in the average Anglo-
American countries (2.5% versus 2.1%), the
difference is not statistically significant; it could
have been due to chance.
Price Stability
There are good reasons for believing that higher
taxes might enhance economic stability. First, the
higher levels of government spending that result
from higher taxation tend to act as an automatic
stabilizer, reducing the impact on production
and employment of fluctuations in other elements
of demand. Second, if the tax system is progressive,
this might act to dampen fluctuations. Finally,
it may be expected that, if the distribution
of personal income is more equal because of high
taxes and a generous transfer system, personal
consumption will fluctuate less over the business
cycle. Lower-income families are more likely to
consistently spend their income, and thus contribute
to stable aggregate demand, than higherincome
families who might veer between bouts of cautionary savings and credit-financed consumption
binges.
Although not a particularly good measure of
economic stability, it is noteworthy that, in the
most recent year for which there are comparable
data, the inflation rate in the average Anglo-American
country was 2.8%, while it was only 0.8% in
Nordic countries. The inflation rate was 3.3% in
the United States in this period, and only 0.4%
in Finland. The difference is statistically signifi-
cant. In addition, the association between lower
inflation and higher tax level is strong.
Sustainable Debt Levels
On average, Anglo-American countries had a
surplus of 0.1% of GDP in 2004, but the Nordic
countries had a much larger average surplus of
4.1% of GDP. The higher Nordic percentage is
partly attributed to the 11.4% surplus of Norway.
Still, other Nordic countries also outperformed
most of the Anglo-American countries, as Finland
had a surplus of 1.9% of GDP, Denmark had
a surplus of 1.7% of GDP, and Sweden had a surplus
of 1.4% of GDP. Among the Anglo-American
countries, New Zealand, Ireland, Australia,
and Canada were the countries in the black,
with a surplus of 5.5%, 1.4%, 1% and 0.7% of GDP,
respectively. But the U.S. and the U.K. were in
the red, with a deficit of 4.7% and 3.2% of GDP,
respectively.
Although the Nordic countries, on average,
carry a higher debt level than the Anglo-American
countries, Finland carries a lower debt level
than the U.S. and Canada. The data show that
Australia, New Zealand, and Ireland each has a
much smaller national debt than Canada, the
U.S. and the U.K., with Australia’s accounting for
about 18% of 2004 GDP and the other two countries
totalling 29% each. In contrast, the Nordic
countries’ debt levels are more even.
Viable International Balance of Payments
Current account balance reflects a country’s
transactions with other countries. On average,
the Nordic countries had a current account surplus
of 7.4% of GDP in 2004, compared to the
3.2% deficit of Anglo-American countries. The
difference is statistically significant. The association
between current account surplus and tax
level is moderate. Canada had a surplus of 2.3%
of GDP in 2004, compared to a 5.7% deficit of the
U.S. and a 5.1% surplus of Finland. High and Stable Rates of Employment Growth
The one economic measure on which the Anglo-
American countries have significantly outperformed
the Nordic countries is employment
growth. In 2004–2005, they had an employment
growth rate of 2.5%, compared to the Nordic
countries where the employment growth rate
was only 0.9%.
The unemployment rate in Anglo-American
countries in 2004 was lower than that of
the Nordic countries (5.2% versus 6.4%), but not
significantly lower. Among the unemployed, on
average, about 18%–20% are unemployed for a
year or more in the Nordic and Anglo-American
countries.
The labour force participation rate in Nordic
countries was higher than in Anglo-American
countries (77.8% versus 75.4%). The labour participation
rate of men was marginally higher in
Anglo-American countries (82.4% versus 80.6%),
but the labour participation rate of women was
significantly higher in Nordic countries (75.9%
versus 68.6%).
High Rates of Savings and Investment
The rate of household saving in the Nordic countries
is higher than that in the Anglo-American
countries. In Nordic countries, households save
on average 6.1% of their disposable income, while
in Anglo-American countries they save only 2.9%
of their disposable income. Net national savings
rates are also higher in Nordic countries than in
Anglo-American countries (11.6% versus 5.9%).
In addition, the fact that the Nordic countries,
on average, have a higher national savings rate than the Anglo-American countries is statistically
significant.
The percentage change in real total gross
fixed capital formation is higher in Anglo-American
countries than in Nordic countries (8.2%
versus 5.6%).
Anglo-American countries have been able to
attract a greater amount of foreign investment
than Nordic countries. Foreign investment was
3.7% of 2004 GDP in Anglo-American countries,
but only 0.9% in Nordic countries. Although Canada’s
inward foreign direct investment accounted
for only 0.6% of GDP in 2004 and is lower than
the 0.9% of the U.S., Finland’s 2.5% is sharply
higher than that of the U.S. Measured by the
inward FDI performance index, of which over 1
means that a country attracts more inflow of investment
than its size warrants, Anglo-American
countries on average attract more investment
than Nordic countries. Their average score was
2.3 compared to only 0.8 for the Nordic countries.
Canada’s score is higher than that of the
U.S., but lower than that of Finland.
Innovation
Innovation is a main driving force of long-term
economic growth. As indicated in Table 29, as
innovators the high-tax Nordic countries outperformed
the low-tax Anglo-American countries.
The UNCTAD Innovation Capability Index
consists of the unweighted averages of two indexes.
One is the Technological Activity Index,
which is made up of research and development
personnel per million people, U.S. patents granted
per million people, and scientific publications
per million people. Another is the Human Capital
Index, which is made up of the literacy rate
as a percent of population, secondary school
enrolment as percent of age group, and tertiary
enrolment as percent of age group. On average,
the Nordic countries scored 0.951, higher than
the 0.892 of the Anglo-American countries. The
difference is statistically significant. The association
between the index and tax level is modest.
Canada scored lower than the U.S., but Finland
scored higher than the U.S. Research and Development
High-tax countries appear well placed to capitalize
on opportunities for future economic growth
and productivity. The average Nordic country
spends significantly more than the average Anglo-
American country on research and development
(3.4% of GDP versus 1.7%), and has significantly
more researchers per 10,000 of workers
(11.6% versus 7.3%).
Utilization of Information Technology
The level of ability to make good use of information
technology is another proxy for future economic
growth and productivity. On average, the
Nordic countries appear to be more prepared for
the Information Age than the Anglo-American
countries, as measured by both the Network Readiness
Index and broadband subscription.
Developed by the World Economic Forum,
the Network Readiness Index measures the degree
of preparation of a nation or community to
participate in and benefit from information and
communication technology developments. The
index is composed of three component indexes
that assess the environment for information
and communication technology offered by a given
country or community, the readiness of the
community’s individuals, business and governments,
and the usage of information and communication
technology among these stakeholders.
The Nordic countries rate higher than the
Anglo-American countries on both the Network
Readiness Index (1.61 vs 1.43), and have
significantly more broadband subscribers per
100 inhabitants (15.8 vs 9.5). The U.S. appears to
be more network ready than Finland and Canada,
as shown in the latest Network Readiness
Index, but Canada had more broadband subscribers
per 100 inhabitants in 2004 than Finland
and the U.S.
Competitive Economy
The business press routinely bemoans the alleged
lack of competitiveness of the Canadian economy,
again usually by comparison to the United
States economy. It is unclear whether the concept
of competitiveness has any sensible meaning
when applied to national economies; certainly countries are not competing with one another
in the same way that private firms compete;
nevertheless, a cottage industry has sprung up
measuring the competitiveness of national economies.
Basically, what is usually being measured
is the extent to which a country is implementing
policies that are likely to encourage economic
growth. There is, of course, a vast literature
and considerable disagreement over what causes
economic growth; therefore, these measures
necessarily embody contested ideas about what
makes countries prosperous. To a great extent
they likely reflect economic policies that the constructors
of the index favour. Nevertheless, they
are routinely referred to in debates over whether
Canada is achieving its economic goals.
Every fall, the World Economic Forum, a business-
dominated, Geneva-based, private organization,
releases its Global Competitiveness Report.
The report contains a comprehensive index
that measures the competitiveness of countries
based upon around 150 variables, including each
country’s macroeconomic performance, the quality
of its public institutions, and the level of its
technological readiness. On its index of growth
competitiveness, the high-tax Nordic countries
are significantly more competitive than the lowtax
Anglo-American countries (an average score
of 5.66 versus 5.35). Consistent with the claim
made in this paper, the World Economic Forum
concluded that “There is no evidence that relatively
high tax rates are preventing these countries
[the Nordic countries] from competing effectively
in world markets, or from delivering to
their respective populations some of the highest
standards of living in the world.”
The low-tax United States ranks as the sixth
most competitive economy in the world, but the
high-tax Finland was the second most competitive
country in the world. In addition to Finland,
two other Nordic countries also rank in
the top five most competitive countries in the
world, with Sweden as third and Denmark as
fourth. Norway was ranked 12th, and Canada
does not rank among the top ten most competitive
countries in the world (with its ranking of
16th in 2005–06).
Among the “global competition” entrepreneurs,
Richard Florida has been one of the most
successful one. His books, including The Flight of
the Creative Class: The New Global Competition
for Talent (2005), have been bestsellers. His basic
point is that the success of countries in the global
economy will be determined by whether or
not they are able to attract knowledge workers
and innovators who constitute the creative class
such as scientists, engineers, managers, professionals,
and artists. His research shows a clear
correlation between creativity and competitiveness.
He claims that, “wherever talent goes, innovation,
creativity, and economic growth are
sure to follow.” In order to determine which
countries are likely to be most successful at attracting
and nurturing the creative class, he developed
a Global Creativity Index, which rates
countries along three axes: talent, technology,
and tolerance.
Based on this index, over the next few years
Nordic countries are more likely to attract and
nurture the innovators that drive development
than Anglo-American countries. The average
Nordic country scores 0.675 on the Global Creativity
Index, while the average Anglo-American
country scores 0.565. All four Nordic countries
rank in the top 10 countries, while among
the Anglo-American countries only the United States — which ranks 4th behind Sweden and Finland
— ranks in the top 10. Canada ranks 11th.
Comprehensive Measure of Well-Being
Over the years, several comprehensive indexes
that combine social and economic indicators have
been developed and used to compare human development
across countries. We conclude this
review of social and economic indicators with
a reference to the comprehensive index that has
achieved the most notoriety in Canada over the
past decade: the United Nation’s Human Development
Index (HDI). This index, which has been
published since 1990 by the United Nations Development
Program in its annual report, is well
known in Canada since it ranked Canada as having
reached the highest human development of
any country in the world for seven consecutive
years, from 1994 to 2000 inclusive.
The HDI measures the average achievements
in a country in three basic dimensions of human
development, all of which are assumed to be essential
in order to expand people’s choices: a long
and healthy life, as measured by life expectancy
at birth; knowledge, as measured by adult literacy
rate (with two-thirds weight) and the combined
primary, secondary and tertiary school gross enrolment
ratio (with one-third weight); and a decent
standard of living, as measured by GDP per
capita at purchasing power parity in $US.
The UN index has been critiqued from every
angle: conceptual issues, choice of dimensions,
choice of indicators, data measurement and error,
aggregation issues, and its use in analysis.
However, most significantly for our purposes,
the index does not discriminate much between
the human developments achieved in industrialized
countries. For example, almost all of the
top 20 industrialized countries are ranked as
having adult literacy rates of 99%.
The HDI value for each country indicates how
far the country has to go to attain certain defined
goals: an average life span of 85 years, access to
education for all, and a decent level of income.
The closer a country’s HDI is to 1, the less the remaining
distance a country has to travel. Only
0.029 separates the first 20 countries. Nevertheless,
it remains a frequently cited benchmark of
human development around the world.
Norway is now ranked first on the HDI, Canada
is ranked 5th, and the United States is ranked
10th. The average HDI value of Nordic countries
is slightly higher than the HDI value of Anglo-
American countries (0.952 versus 0.948).

To What Kind of Country Do Canadians Aspire?

In their attack on taxes, neoliberals argue that
the programs taxes finance are ineffective in
achieving their objectives, and that taxes have
huge economic costs. This comparison between
high- and low-tax countries would suggest the
opposite. Not only do government social programs
appear effective in achieving their objectives
but also taxes appear to have little, if any,
economic costs.
It does appear from this data that the social
contract struck by the citizens of Nordic countries
— and the mix of markets, families, civil society,
firms, and government used in the pursuit
of their social and economic objectives — has been
dramatically more successful than that struck by
citizens of Anglo-American countries.
A very famous U.S. jurist, Justice Oliver Wendell
Holmes, once remarked, “Taxes are what we
pay for civilized society.” The comparisons made
in this paper between high- and low-tax countries
suggest that he was probably right.