The normal way to do cross-country comparisons of tax burdens is to look at taxes as a percent of GDP, or else to maybe look at public spending as a percent of GDP since the volume of spending determines the ultimate level of taxation that will be necessary. Since taxes as a percent of GDP are low in the United States compared to other developed countries, cross-country analysis leads some to believe that higher tax rates would be desirable or viable in the United States. Greg Mankiw doesn’t like that conclusion, because he thinks high tax rates depress growth, so he suggests that we try another way of comparing tax burdens:

The most common metric for answering this question is taxes as a percentage of GDP. However, high tax rates tend to depress GDP. Looking at taxes as a percentage of GDP may mislead us into thinking we can increase tax revenue more than we actually can. For some purposes, a better statistic may be taxes per person, which we can compute using this piece of advanced mathematics:

Taxes/GDP x GDP/Person = Taxes/Person

Here are the results for some of the largest developed nations:

— France: .461 x 33,744 = 15,556
— Germany: .406 x 34,219 = 13,893
— UK: .390 x 35,165 = 13,714
— US: .282 x 46,443 = 13,097
— Canada: .334 x 38,290 = 12,789
— Italy: .426 x 29,290 = 12,478
— Spain: .373 x 29,527 = 11,014
— Japan: .274 x 32,817 = 8,992

Mankiw concludes that “the bottom line” is that the United States isn’t actually a low-tax country. But while I’m sure Mankiw believes the conclusion that raising taxes isn’t as viable as I (or, say, Paul Krugman) think, I seriously doubt that he believes this mode of analysis is correct. After all, why should the bottom line relate to the United States at all? Does Mankiw really think that Italy has more scope to increase taxes and the size of its public sector than does the United States? Or consider that in Slovakia per capita GDP is just $20,000. By Mankiw’s logic, Slovakia could raise taxes up to 65 percent of GDP and it would still count as a country with a below-average tax burden!

Common sense is that if you’re worried about the impact of taxes on growth, then when you’re worried about is the scope of taxation relative to the total amount of economic activity taking place. For Slovakia to try to raise as much revenue as we have in the United States would involve potentially ruinous levels of taxation. Conversely, for the American government to raise as much revenue per person as they have in France would be relatively easy.

I think that if you want to reach the conclusion that taxes as a percent of GDP understates the extent of government involvement in the economy, the most promising line of argument is to note that there’s a substantial “shadow” welfare state of tax preference and regulatory mandates out there.

Big Ben (wikimedia)

I think Luigi Zingales is Italian, which might explain why he doesn’t seem to understand why the Founders established a capital in Washington, but Greg Mankiw who links to it has no such excuse and anyone ought to be able to see how illogical this is:

The biggest threat of all to the Big Apple’s financial supremacy, however, comes from Washington. The Founding Fathers wisely decided that the nation’s political capital should be separate from its financial capital (in both senses of the word).

As Ryan Avent points out the combo arrangement, though not what we do in the United States, is very common. Surely Professor Mankiw has heard of London, Tokyo, Paris, etc.

But as someone interested in cities, it is interesting to think about the different ways in which this works. One model, seen in France and the UK, is of a single dominant city. Another model, seen in Italy, is where your capital is also your largest city (Rome), but the main financial and business center is elsewhere (Milan). Then you have your scenarios, seen in the US and Canada, where a capital is established someplace a bit random specifically to avoid choosing between major cities. This tends to lead to capital cities with a reputation as “boring.”

It’s interesting that in the United States it’s extremely common to see this done with state capitals. It’s very rare to see the Boston/Providence scenario where the state capital is put in the state’s major city. You also see some of the Austin/Olympia model where the state capital is also a college town. But the most common thing seems to be the Albany/Sacramento model of putting the state government in some pretty random town that rapidly attracts a reputation (whether deserved or not I couldn’t say in the case of most places, but Albany is pretty terrible and August, ME is far down my list of nice spots in Maine) for being unpleasant.

A curious anecdote from UC Davis Economics Department Chair Greg Clark:

Recently a group of economists affiliated with the Cato Institute ran an ad in the New York Times opposing the Obama’s stimulus plan. As chair of my department I tried to arrange a public debate between one of the signatories and a proponent of fiscal stimulus — thinking that would be a timely and lively session. But the signatory, a fully accredited university macroeconomist, declined the opportunity for public defense of his position on the grounds that “all I know on this issue I got from Greg Mankiw’s blog — I really am not equipped to debate this with anyone.”

I would suggest that before signing any public statements about a significant policy issue you should at least read more than one blog. I’ve been following blogs by Mankiw, Brad DeLong, Paul Krugman, Mark Thoma, Tyler Cowen & Alex Tabbarok, Duncan Black, and Andrew Samwick all on at least a daily basis along with regular supplements from many other sources. Curiously, Mankiw won’t even say whether or not he believes the Obama recovery plan to be superior to the main Republican alternatives or to the alternative of doing nothing. I hypothesized once that his curious behavior was driven by a desire to be a useful GOP foot soldier without actually saying Obama’s plan is worse. Whether or not that’s his intention, he seems to be having that effect.

Greg Mankiw writes in defense of impracticality. And I wholeheartedly agree—I think it’s great for well-informed people to write about abstract policy ideals. At the same time, if you’re going to comment on public affairs, it seems worthwhile to comment on what’s actually happening. There are, right now, four ideas that have substantial support in congress. There’s the House stimulus bill, the Senate stimulus bill, the Jim DeMint alternative that consists of large permanent tax cuts, and there’s the idea of doing nothing. I agree with Mankiw—and with Paul Krugman, and with everyone else—that none of these options represents ideal policy. But given that fiscal stimulus is done through congress and these are the ideas congress is taking seriously, I would say that my preferences are, in rank order:

1. The House bill.
2. The Senate bill.
3. Do nothing.
4. The DeMint alternative.

Based on what his ideal policy would be, it seems to me that Mankiw probably, like me, prefers the Democratic bills to doing nothing and prefers nothing to the DeMint plan. But Mankiw hasn’t come out and said that. Instead, he’s blogged about his ideal bill and linked-without-comment to lots and lots of stimulus opponents. And I haven’t seen him offer any commentary or links on the main Republican alternative. One interpretation is that this is Mankiw being loyal to the abstract purity of the economics discipline. But it’s unlikely that anyone so committed to the abstract purity of the discipline that he wouldn’t offer an opinion on legislative options would have served as Chairman of the CEA. More plausibly, as a former CEA Chair who hopes to work again in Republican Party politics, Mankiw is hesitant to offer an honest opinion of the congressional GOP’s legislation or the relative merits of their ideas and the congressional Democrats’ ideas.

As a blogger, I can’t help but respect the sheer impracticality of Greg Mankiw’s stimulus ideas:

I would institute an immediate and permanent reduction in the payroll tax, financed by a gradual, permanent, and substantial increase in the gasoline tax. I would make the two tax changes equal in present value, so while the package results in a short-run budget deficit, there is no long-term budget impact. Call it the create-jobs, save-the-environment, reduce-traffic-congestion, budget-neutral tax shift.

I recognize that some state governments are now struggling in light of the macroeconomic crisis. For the next two years, I would let each state governor have the authority to divert a portion of the payroll tax cut in his or her state and take the funds instead as state aid. This provision would essentially be giving governors the temporary authority to impose a payroll tax on his or her citizens, collected via the federal tax system. Those governors who think they have valuable infrastructure projects ready to go would take the money. When designing a fiscal stimulus, there is no compelling reason for one size fits all. Let each governor make a choice and answer to his or her state voters. It is called federalism.

In addition to being wildly impractical, this is a pretty good idea. Relative to, say, the House bill it’s probably less effective short-term stimulus on a dollar-for-dollar basis. But the definitely temporary nature of the deficit spending makes it better for the long-run, and the swap of payroll taxes for gas taxes would be good for long-run growth completely apart from the economic crisis. Those superior long-term features mean you could probably boost the topline cost significantly higher than the House bill does to compensate for the somewhat lesser efficacy of the stimulus.

But in addition to being a pretty good idea, it’s wildly impractical. I actually think that in general political commentators spend too little time talking about impractical ideas. It’s important to expand the conversation and also important for commentators to not overestimate their efficacy in impacting short-run events. But a fiscal stimulus measure is a situation where time really is of the essence and it would be pretty irresponsible for the President or his team to send congress a proposal that so outside the ballpark of what congress is prepared to consider. I would hope that as a former top White House aide Mankiw could appreciate that point—public officials have a certain responsibility to be dull and practical.