The Centre for Independent Studies have produced another paper on taxation (PDF file). Youâ€™ll never believe it, but this one concludes that Australians are taxed too highly â€“ a finding nearly as unexpected as if the Institute of Public Affairs had come out arguing for deregulation of the labour market, or the Australia Institute had come out saying that we should spend more on social services.
This paper starts off by saying that when comparing Australian tax rates to those in other OECD nations, we should weight each country by their population or the size of its economy. In fact, it doesnâ€™t just start off with this point, it finishes with it. â€œWeight by sizeâ€ is just about the only point that this paper makes. Despite â€“ or perhaps because â€“ of its trivial simplicity, the paper has managed to garner some good media coverage this week. Perhaps we can all learn something from that.*
The CIS argues that unweighted comparisons ignore the â€œgorilla in the roomâ€: the United States. But it never stops to ask why you would or wouldnâ€™t weight the US according to its population or the size of its economy. To continue the analogy, imagine that youâ€™re looking at a roomful of monkeys, chimpanzees and gorillas. If weâ€™re interested in how each of them behave, why would we weight our findings in favour of the big ones?
OK, so the CIS may be making a more subtle point. Letâ€™s suppose that the reason youâ€™d weight by population size is because tax systems represent an aggregation of popular opinion.** But this is going to have a â€œsupermajority problemâ€. Like the winner-take-all US electoral college, weighting the US by its population assumes that all Americans want Americaâ€™s small tax system. At best, this must be an oversimplification.
The CIS points out that the OECD is a pretty arbitrary bunch of countries, including Mexico but not Chile, the Slovak Republic but not Singapore. So it then goes on to argue that we should compare ourselves with our trading partners â€“ an argument nicely demolished by Nicholas Gruen in a piece due out shortly in the Courier Mail (Iâ€™ll link to it when it appears).
The bottom line? Among those countries with per-capita incomes in the same ballpark as Australia, these 17 countries have higher tax/GDP ratios: Sweden, Denmark, Belgium, Finland, Austria, France, Norway, Italy, Luxembourg, Netherlands, Iceland, Germany, Greece, UK, Spain, New Zealand, Canada. And these 5 countries have lower tax/GDP ratios: Switzerland, Ireland, US, Japan, Singapore.
* Next time I relegate a discussion of weighting to a data appendix, Iâ€™m going to consider whether in fact I can produce a separate paper on the topic.
** I canâ€™t think of a sensible rationale for weighting countries by GDP â€“ something else the CIS do.