The Price of Civilization_ Reawakening American Virtue and Prosperity - Jeffrey D. Sachs [94]
Budget Lessons from Abroad
All of this discussion prompts a crucial question: how do Canada, Denmark, Norway, Sweden, and other countries manage to educate their young, fight poverty, modernize their infrastructure, enjoy a life expectancy well above America’s, and still maintain a budget that is more in balance than America’s? After all, in 2010, the United States had the second-largest budget deficit as a share of GDP among the high-income countries, ahead of only Ireland (see Figure 11.3). The social democratic economies of northern Europe, where government plays a much larger role in the economy, had deficits under 3 percent of GDP in Denmark, Finland, and Sweden, with a surplus of 10 percent of GDP in Norway, achieved mainly by saving a considerable fraction of its oil and gas revenues for the benefit of later generations.
Figure 11.3: Budget Deficit in OECD Nations as Percentage of GDP, 2010
Source: Data from OECD.
The answer, of course, is that the other countries tax their citizens more heavily in order to supply more public goods, including, in the case of Scandinavia, universal access to health care, higher education, and child care and support for families with young children. The comparison in tax collections is shown in Figure 11.4. The United States has the second lowest tax revenues as a share of GDP among all of the countries shown, just slightly larger than Australia. We see that the countries in deepest budget crisis in 2010 were not those with among the lowest nor the highest government spending, but those with the lowest tax revenues: Greece, Ireland, Portugal, Spain, the United Kingdom, and the United States. All these countries are running enormous budget deficits. They seek to provide public services and income transfers but are not willing to pay for them through public revenues.
Figure 11.4: Tax Revenues as a Percentage of GDP for OECD Nations, 2009
Source: Data from OECD Statistics Database.
To understand America’s budget predicament, it is useful to examine the changes in tax revenues as a share of GDP that have taken place in the United States and other high-income countries since the early 1960s. Half a century ago, both the United States and European countries had a similar level of total taxes relative to GDP, roughly 30 percent (counting national, state, and local taxes). In the United States, that level has remained roughly unchanged for five decades. In Europe, taxes as a share of GDP have risen by around 10 percentage points on average. These changes are shown in Figure 11.5, which measures the rise in revenues relative to GDP, comparing 1965 and 2009. In the United States, there has been essentially no change in the tax-to-GDP ratio since 1965. In Europe, the tax-to-GDP ratio has risen in all countries, by 5 to 20 percentage points of GDP. Europe has used that rise in tax revenues to pay for a more extensive range of public services, as shown in Figure 11.6: education, family allowances, universal health care, and modernized infrastructure. It has also used the higher revenues in general to keep the budget deficit under control.
Figure 11.5: Change in Tax-to-GDP Ratio Between 1965 and 2009 for OECD
Source: Data from OECD Statistics Database.
The divergence between the United States and Europe reflects a divergence both of fiscal means and of fiscal ends. Though Europe generally has higher tax rates on all kinds of income, the biggest difference with the United States is that European countries all have a value-added tax (VAT) as a cornerstone of the budget. In Europe, the VAT routinely collects