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Countries where people pay the most tax

Jayson Coomer

 ·11 Oct 2015

In his lecture on 3 October, economist Thomas Piketty basically argued that “You can’t keep complaining about government inefficiency – because, really, what other option is there?”

Well, I think that’s worth looking at. Because in some countries, avoiding tax is essentially a form of civil protest; and to me, that seems entirely appropriate.

Example: if the Jews under the Nazi government decided to evade their taxes, would we have called called that “immoral” – their decision to not fund the institutions that were being primed for their genocide?

I think not.

At the same time, you have to draw a line somewhere. You can’t just be all “I’m totally discriminated against for being white/rich/privileged” and then absolve yourself of the social imperative to pay tax.

Now I realise that the libertarian group will call almost any form of taxation “expropriation” – but practically speaking, there are some public goods that people expect to be provided by the State.

Changing that is a pretty drastic reform process, so in the interim, declaring that “I’m not paying tax because I never asked for street lighting to be provided” is a bit like saying “I’m not paying for all the channels that DStv provides because I didn’t ask for the History Channel”.

Sometimes, it’s just part of the package, and you can’t always pick and choose like that. So you can either keep the DStv package (ie. citizenship), or you can go and find a television provider that suits you better (ie. emigrate to somewhere that’s a better fit).

Here is a graph that I spent a solid amount of time building on Excel: total taxes collected as a percentage of GDP, going back to 1965, based on data from the OECD

(Click to enlarge)

I specifically chose “Total Tax Collection as a % of GDP” because I don’t like data sets that talk about “highest marginal tax rates”. Speaking as an accountant, let me say that those numbers are meaningless.

You can have a really high marginal tax rate (such as “80%”), but because of the allowable deductions, the effective tax rate is rarely higher than 20% – which makes your country a lot nicer than a country with a tax rate of 25% that is strictly enforced without any permissible deductions.

So going back to the graph, some points:

1. The Scandinavian countries collect massive amounts of their annual GDP in tax (between 40% and 50% of GDP).
2. The United States, comparatively, collects about 25% of GDP in taxes.
3. Chile and Mexico are the OECD countries with the lowest tax collections.

If you’re looking for the non-OECD countries, have a look at this wikipedia page. Some observations from there:

1. South Africa collects about 27% of GDP in taxes (higher than the US).
2. The countries of the Arabian peninsula have some of the lowest tax collections in the world (but you don’t seem too many of them on the ‘tax haven’ radar).
3. The balance of the low-tax collecting countries seem to be made up of the war-torn and the developing-extremely-slowly.

Incidentally, having high taxes collections doesn’t quite seem to impact economic activity in the way that we’d expect. Many of those top tax collectors are “model” economies.

So I guess the question is: are the Scandinavian countries just better at policing their tax policies? Because most of the OECD countries have gone through multiple different taxation regimes since 1965, and yet those Scandinavian countries just seem to be better at it.

I’m not sure that we’ll have an answer to that question, but I think that there are other explanations that might fit better. Some articles that might be worth reading:

• Sweden: where tax goes up to 60%, and everyone’s happy paying it. (from the Guardian)
• What Countries get for their high taxes (from Investopedia)

So two observations:

1. There definitely seems to be a cultural aspect here, where the Scandinavians are more inclined to be communal than individualistic, which does make tax collection “for the people” a more viable sell.
2. But more importantly, the Scandinavian governments just seem to do governing better.

Which actually brings me back to where I started. One of the big reasons for tax evasion is simply poor governance. If you have a State that is supportive, reasonable and relatively well-managed – then your citizens are going to have less issue with paying their taxes.

And when your State is disjointed, inefficient, and treats everyone as tax evaders until proven innocent, then you’re going to get more…um…”civil protest”. Like in Chile and Mexico, or those war-torn economies.

And doesn’t that make sense though?

If your DStv bundle has a lot of great channels, then you don’t mind paying a little more for it, even if there are a host of unwanted channels in the mix. But if you have one or two okay-ish channels, with a lot of adverts, and the rest is just a bad wash, then you’re far more likely to say “I refuse to pay for this, sorry”.

It’s just a thought.

Published with permission from Rolling Alpha. Read the original article here.

Rolling Alpha posts about finance, economics, and sometimes stuff that is only quite loosely related. Follow him on Twitter @RollingAlpha, or like his page on Facebook at www.facebook.com/rollingalpha. Or both.

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