Wednesday, January 04, 2006

Taxes, savings, and the labour market

Here's a sentiment you'll occasionally see.
In a Nordic Welfare State, you get free healthcare and education and a safety net and so on, but because the taxes are so high, the people there don't have a lot of money to spend themselves.
Now, admittedly, taxes have so far only gone down in Small Country, but this sounds suspicious.

The thing is, taxes are invisible. I know that the government takes ~60% of what I make (plus 18% of what I spend), but the way it's structured, I never see that money to begin with. The difference between the figure in my contract and the figure in my bank account is 23%, but once I sign the paper, I only think in terms of real earnings - the other figure is irrelevant.

Effectively any and all negotiations about salary are based on the actual pocketed earnings. A strong economy can support strong taxes because the end figure is high as well. So you don't have to spend any money on health insurance and college funds for the kids - most people still don't think about how much the government takes, they think about how much they get and how much they spend.

High taxes, if used wisely (and they have to be, otherwise the government won't hold), stimulate the economy. This increases pocketed earnings. Nobody is going to work for less money than they need to have a nice lifestyle, so nice that they will give up eight hours of their day for it. No matter how high the taxes are - a person's pocketed earnings still have to be fairly high.

The system balances out. Needs and ideas of what constitutes a decent living standards are roughly the same in any First World nation. In terms of what people get to take home, adjusted to purchasing power parity, there is no major difference between the US and Sweden. (You'd be surprised at the posh cars you see in Stockholm, for example, even though in absolute figures cars are ridiculously expensive compared to Montana.) Except in a high-tax country, you also have good healthcare, good education and good public transport.

Notes after having discussed this on the Circle Jerk board:

1) Yes, high taxes do stimulate the economy if properly used. The classic example is Norway, using huge profits it's getting from the oil industry (through income tax not least) to fund construction of industries that require massive entry costs but will sustain the economy should the oil run out. A better one perhaps is that of Small Country itself, where there is no corporate tax on reinvested profit. Foreign companies move their development work here because a subsidiary does not have non-reinvested profit (it sells the product to the parent company for a price equal to operating costs plus what it needs to expand), and local companies prefer to reinvest most of their profits and just have the owners set themselves high salaries. The budget gets its money from personal and value-added tax. Everyone is happy.

2) Yes, 60% tax. Sounds enormous, doesn't it? Well, you can get income tax back on tons of things - student loan and mortgage interest for example, and there's a minimal figure (around 2/3 of the minimum wage) that is income tax free. Because we have a very efficient computerized system in place, taxes are no hassle at all - the returns are filled out online in ten minutes, and returns are in your bank account within days. Essentially you can think of tax as finance payments. The bank takes of money out of your account automatically every month for car payments, mortgage payments, etc. Taxes are just finance payments on doctors treating you, professors teaching you and your kids so they can get good jobs, and some hapless folks piping raw sewage out of your apartment.

3) No, it's not all going on unemployment benefits. I've said before that Small Country is very laissez-faire; our welfare system is quite modest. You can't really live off of benefits. Every single American to whom I've described our setup has admired it - particularly the republicans.

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