Buiter on Taxes

William Buiter:

The reality that you cannot run a West-European welfare state (with decent quality health care, decent pre-school, primary and secondary school education for all), rebuild America’s crumbling infrastructure, invest in the environment and fulfill your post-imperial global strategegic ambitions while raising 33 percent of GDP in taxes, has not yet dawned upon the Obama administration or the American people at large.

I am sympathetic to this line of analysis. I think we should be reducing defense expenditures as a share of the economy, and I think progressives are going to have to find a way to increase taxes beyond what Obama is currently contemplating. That said, it’s worth emphasizing that this kind of talk is a bit loose. Consider these countries’ tax share of GDP:


One point is that there’s a great deal of divergence among the tax levels in different countries that are “run[ing] a West-European welfare state.” Another point is that all the Anglophone countries are relatively low tax compared to the other countries in a way that suggests relatively deep cultural/institutional factors are at play. Realistically, the issue is not whether we’re going to adopt the Danish or French social model it’s whether we might become more like New Zealand or Canada. Last, it’s crucial to recognize that though all these countries save Canada have more taxes than the U.S. and all do a better job of providing “decent quality health care” to all their citizens, they don’t actually accomplish this through higher tax rates. These countries all spend less on health care than we do, basically by centralizing control over financing, eliminating a lot of insurance company functions, and squeezing providers.

In health care terms, in other words, the issue is not so much that we can’t afford to cover everyone as it is that we lack the political capacity to crush the various interest groups (not just insurers, but pharma, doctors, device makers, hospitals, etc.) and pay them less money.

Last to a certain extent tax measures are substitutable for non-tax measures. Instead of an individual mandate to buy health insurance combined with subsidies, we could give free basic insurance to everyone and increase taxes on the top 50 percent of the population to pay for it. Instead of a “pay or play” fee on employers, we could relieve employers of any responsibility for health care and increase payroll taxes. Similarly, instead of “spending money” we can “issue tax credits.” It would probably be more efficient to rely more on tax-side strategies and less on regulatory strategies to finance the kind of social services we want, but insofar as U.S. political culture remains rabidly taxophobic it’s still possible to enlist financial resources to meet policy objectives.