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Professor Greg Mankiw of Harvard is generally conservative, but hasn't gained a reputation of being totally foolish, so I have to assume that his blog entry today was accidentally posted a day early.

The biggest problem with any analysis of taxation is that it is useless if the analysis doesn't also include avoided costs. It is further trivialized if there is no meaningful comparison. Mankiw decided to go with both:

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

The bottom line: The United States is indeed a low-tax country as judged by taxes as a percentage of GDP, but as judged by taxes per person, the United States is in the middle of the pack.

What's the point? What purposes would be better for this metric?

Let's add a few countries just to see how helpful this is:

China .170 x 6,500 = 1,105

Russia .369 x 15,600 = 5,756

Saudi Arabia .053 x 23,388 = 1,240

I suppose it is possible that there are times when such analysis is useful, but it is necessary to explain those limitations at the time you present it. Even a blog post should not be another candidate for inclusion in How to Lie with Statistics, Second Edition.

What else makes these comparisons silly? One is that Mankiw and any number of other writers about political economy is that they ignore Milton Friedman's dictum that spending is taxation. If a country supposedly has a 25% tax rate but routinely runs a 5% deficit, that tax rate is misleading. Another, if a country owns its own natural resources and hires the management out because it expropriated them decades ago, the taxes will look a lot lower than if they just tax the companies that are taking out the natural resources. The actual economic consequences may be identical, but the "oh-my-god-scary" tax portion can change radically. Simplistic comparative analysis is almost invariably misleading. Mankiw did everyone a disservice today.

Originally posted to freelunch on Wed Mar 31, 2010 at 09:12 AM PDT.

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Comment Preferences

  •  How much wood would a woodchuck chuck? (3+ / 0-)

    It's not only economics that turns to nonsense when it's oversimplified.

    The US Senate is begging to be abolished. Let's fulfill its request.

    by freelunch on Wed Mar 31, 2010 at 09:12:40 AM PDT

  •  The Joke Is (1+ / 0-)
    Recommended by:

    That "taxes per person" is meaningless without two other factors.  First is GDP, which Mankiw has discarded.  Second is some way to measure the median rather than the average taxes paid.

    Mankiw is not stupid -- he just thinks his job is to service economic elites rather than provide a useful service to the people.

    Adam and Eve had Iraqi birth certificates.

    by bink on Wed Mar 31, 2010 at 09:16:16 AM PDT

    •  Yes, there are no simple comparisons (0+ / 0-)

      As you say, median comparisons are necessary, decile analysis would be even more useful. Mandated fees? Need to be matched to comparable taxes.

      If the UK is paying 90% of its health care costs with taxes but we pay 50%, but must also pay a mandated fee for the nongovernmental portion, how is it useful to leave that out. Details matter.

      The US Senate is begging to be abolished. Let's fulfill its request.

      by freelunch on Wed Mar 31, 2010 at 09:21:52 AM PDT

      [ Parent ]

  •  WHo? What? Why? Where? When? (0+ / 0-)

    Coming Soon -- to an Internet connection near you:

    by FischFry on Wed Mar 31, 2010 at 09:16:35 AM PDT

  •  Thanks for the analysis... (0+ / 0-)

    I do read Mankiw's blog from time to time, but hadn't seen today's entry. I am far from a trained economist- just a layman with interest in the subject. My assessment of Mankiw is - I guess -  similar to yours: he's a smart and insightful guy but occasionally appears to be driven by a political agenda which seems to lead him to abandon fundamental principles of thorough analysis. Have you read the brief paper he recently wrote laying out his "just deserts" theory of taxation? What did you think of that?

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