Monday, July 28, 2008

Would You Be Willing To Pay 60% Tax For a Higher Level of Social Equality?

The Scandinavian countries are well known for their high living standards, equal opportunities and overall well being. It comes with a hefty personal financial price which I believe is well worth the investment.

The Naeroyfjord, Norway

The Scandinavian nations: Sweden, Norway, Finland, Denmark and Iceland are well known for their citizens’ well being, overall quality of life and high living standards. These countries have been constantly rated at the top of various top ten lists such as best countries to live in, best education, most content nation and more. The UN has rationally rated Scandinavian counties as some of the “best place(s) to live in” next to Canada, the US and other European countries.

The secret of the Scandinavian model has long been sought after by various countries jealously eyeing the Nordic success stories. I believe the secret is pretty straight forward. The question is, are we willing to pay the “price” and adopt similar values as a society?


The Secret to the Scandinavian Success Story

The Nordic success story is, in my opinion, a combination of several key factors:

1. Correct priorities - A correct set of priorities set by the government which in turn is properly translated to budget allocation.

2. Convenient Geopolitics – The gods of geopolitics seem to favor the Scandinavian states offering them little in the way of geopolitical challenges. Since the Second World War I believe no major conflict has taken place on Scandinavian soil. I’ve heard of occasional arm wrestling with the Russians over North Pole territories but not much more. I believe these countries do face challenges in the future, mostly domestic due to increased immigration but still they have it easy (compared to the USA for example, really without going into politics).

3. A more social and less self centered state of mind – from the occasional online chat or acquaintance I’ve received this important impression. I truly believe Scandinavian citizens hold the sacred capitalistic values some of us may hold less dear. I believe they have adopted and are educated to a more thoughtful and social state of mind which creates a better understanding of living in and as a part of society.

The Importance of Social Equality

Each value system holds certain values very dear. More capitalistic countries stress entrepreneurship, ones right to ones properties, monetary success while more social societies stress equality, equal opportunities and a more solid welfare system.

As Aristotle wrote the golden path usually lies in the middle. The question is where does this middle lie?

The morality of both capitalism and socialism has been debated upon greatly. Each system has its philosophers justifying the principles and values at its core. My personal preference is that all my fellow citizens will be entitled to what have become the basic human rights in modern societies. Among these are healthcare, a home, food, education and most importantly equal opportunities.

Inequality is often measured by distribution of income as a proxy. The latter is measured using the Gini Coefficient which measures statistical dispersion of income in different percentiles of the population. The following is a map showing the value of the Gini coefficient for different countries. The lower the coefficient the better:

Source: Wikipedia


A lower Gini coefficient indicates more equal income or wealth distribution, while a high Gini coefficient indicates more unequal distribution. I must add that having a low coefficient is obviously not enough as it might simply state most of a certain country’s citizens are poor (China, for example). The combination of a low coefficient and high GDP per capita is more prominent in Scandinavia and Europe.


The Scandinavian Welfare System

The Scandinavian welfare system would be constituted as a wonder in most modern countries. The welfare system is made to take care of the inhabitants of the country “from the cradle to the grave”. Such a strong welfare system guarantees higher social equality and more equal opportunities.


Key benefits the Scandinavian social security offers are:
  • Free and full healthcare, hospitalization and immunization as well as old age nursing.
    Free education and higher education.

  • Long maternity leaves (42 weeks in Norway) with a 100% wage paid for by social security. Additionally the other spouse is entitled to several weeks of leave as well.

  • Generous unemployment compensation and re-training programs.

  • A minimum pension at retirement.

  • Child allowance from the first child.

These social security benefits might invite parasitic individuals to live on the country’s expense. This is where active employment policies and education as well as good old shame come into play. If something is unacceptable in a society than certain individual will be outcast for their behavior.

Naturally such an extensive social security safety net required high government expenditure. Here are some figures, for example, courtesy of Wikipedia: Sweden and Denmark were in 2004 the countries of the European union where the expenses of the public administrations were the highest, with respectively 57.2% and 56.3%, Finland being a little on this side with 50.7%. The Nordic countries are quite near France (53.8%), a country with an extensive public sector, and very distant from the British model, where taxes and public expenditure in general are much lower, but where people are generally expected to manage more of their own affairs for themselves.


The Price: High Taxes


Naturally, these expenses must be funded somehow. Norway is relatively rich in oil but generally speaking Scandinavian countries rely on high tax rates for funding the aforementioned social security and public expenditure.

Individual tax rates can reach as high as 63% in Denmark, 60% in Sweden and 50% in Norway. VAT is also unusually high at 25% for the aforementioned countries. Ranking countries by tax revenues as a percent of the GDP gives even stronger findings: 5 of the first 7 countries are Scandinavian countries with Sweden in first place with 51.3% and Finland closing the list with 42.4%. The UK is in the 16th place with 37% and the US at the 36th place with 27.3%.

Not everyone is willing to make this apparent sacrifice for a higher level of social equality. I’d personally hate to live in a place where my neighbors have a hard time getting the medicine they need. I believe thinking a bit less about ourselves as individuals and investing more in our societies will do all of us a world of good.

The Scandinavian states have done so well because of the unique society they have managed to create where social equality is valued while not taken advantage of. This is a delicate balance hard to find and harder to maintain.

I'd love to hear your thoughts and comments on this post. I’ve felt especially envious while writing it.

Images by: today is a good day

22 comments:

Mental said...

Ahh! I want to say yes, but I don't know that I would like it.

Dan said...

Very interesting perspective. After reading it, I am quite sure that the majority of Americans are not willing to make what they perceive to be a substantial personal sacrifice. Many Americans seem to take intolerant stances towards others, especially when it relates to those seeking societal assistance to get by. Individuals can be rather selfish, believing everyone should be capable of the same successes that they have achieved. In many instances, this is simply not the case.

That said, I believe the author has glossed over one of his own reasons for Scandinavia's social successes - its advantageous geopolitical situation. I don't believe the United States, in its current position, should adopt a Scandanavian-type taxation system. For starters, I don't trust our government to spend it effectively. With our military presence all over the world, a huge chunk of additional government expenditure would go to fighting our wars.

Bottom line, I don't trust my government to spend my money wisely.

milleronic said...

Sign me up! I'm so tired of US social policies, our wasteful, corrupt, and criminal government (can you really justify $500 Billion annually for the f%^&ing Pentagon?) I'd happily pay 60% of my income in taxes for free education, healthcare, etc. Liberty and freedom are not reserved for the corporations, the wealthy, and the privileged few. If I could emigrate to Sweden, I would, in a heartbeat.

Ben said...

After talking to a cousin of mine from Finland as near as I can tell the country works well in spite of the government. They have a very homogeneous citizenry. This leads to a natural balance and "social equality." Their system would never work in America. America has far too diverse a population for any ture sense of equality.

On a different note: If you feel bad about your neighbors financial woes, feel free to directly give them some of your money. Why pay the government to give them some of your (and my) money for you?

Anonymous said...

Free Markets + Low Taxes + Capitalism = great nations.

Jessica said...

You mentioned that "The UN has rationally rated Scandinavian counties as some of the “best place(s) to live in” next to Canada, the US and other European countries." Why would the US and "other European countries" change when they are still better to live in?

LVTfan said...

I'm not enthusiastic about higher taxes on wages or on sales as a way to provide the high degree of social services -- I think they tend to damage the economy, and hurt lower income people, in a wide range of ways, more than they affect higher income people.

But there is another tax base on which a 60% tax might be a very wise and just approach: land value and natural resources. These two are part of what the classical economists called "land." They recognized that land is different from "capital" and that taxing land would not cause a single atom of it to leave town or otherwise disappear, nor would taxing it cause a decrease in its supply.

They also distinguished land as being that which humans cannot create. And since individuals and corporations can't create it, why should they (or anyone other than the community as a whole) be able to collect economic rent from the rest of us who, by our nature, are dependent on land?

So don't change the title to land, simply collect each month (or each quarter, or each year) from those who own land the current unimproved value of it. And then stop taxing that which people create from the land or on the land: crops, buildings, rent attributable to the buildings themselves (as opposed to the locational value), widgets, whatever!

That value is called "economic rent," and it rightly belongs to all of us. It is different from interest (the return to true capital) and wages (the return to labor), which both rightly belong to the individual.

Alaska funds a lot of its state government from oil revenues, and then annually places a large chunk of oil revenue into the Alaska Permanent Fund, which gets invested in a broad range of assets worldwide and provides an annual income of $1100 to $1800 for each man, woman and child -- and will, into the distant future. [And then of course, Alaska's senators bring home a lot of pork spending over and above that, which also helps enrich the landowners of Alaska, particularly in the cities!] Alaska's inequality is among the least in the US.

Collecting a hefty tax on land value, and using that to fund services and infrastructure, leaving wages and sales untaxed, is a way to achieve a higher level of genuine equality. No one will get rich simply collecting the rent on natural resources, and no one will be laboring to enrich a landholder, as happens now. This revenue will get infinitely recycled. And that which the individual does create will be his to enjoy.

The 1879 book, Progress & Poverty, available online at progressandpoverty.org, lays this out. The author, Henry George, dedicated it "to those who, seeing the vice and misery that spring from the unequal distribution of wealth and privilege, feel the possibility of a higher social state and would strive for its attainment."

You can read more about these ideas at wealthandwant.com, lvtfan.typepad.com, or answersanswers.com

I don't think our economy would survive 60% taxes on wages or sales, but I think it, and we, would thrive under a 60%, or even higher, tax on the rent of land and natural resources.

Dorian Wales said...

Thank you all for all your helpful comments. I’m very excited to have genuinely generated such a lively debate.

The mistrust of the government seems to be an inherent part in the debate. It’s a classic chicken and egg case but I defiantly agree governments should be the first to prove their intent in actions rather than words.

The US is most definitely at a geopolitical crux trying to cop the world. I, myself, support the active approach which is the moral obligation of individuals, organizations and even countries with power. I do not wish to enter a political debate but rather stress the difficulties many governments face which eat up a huge portion of their budgets.

Homogenous citizenry is something I lacked to point out and I believe it is crucial for the success of such a paradigm. By homogeneity I’m referring to common values and a common state of mind rather than race, religion or any other different characteristic.

On the matter of privately funded charity – I believe every kind act is good and should be performed by anyone according to his own volitions. But I also believe social equality is a responsibility of the government which often finds it very easy and convenient to rely on various organizations then get the job done properly. Only the government has the power to set correct priorities and make a profound change.

@Anonymous and Jessica – I’ve never implied nor do I think the US is not one of the best places on earth to live in. I was implying that as a citizen of the US I’d like to see a higher level of equality between all my fellow citizens. I also agree free markets and capitalism have proven their worth but I also think extreme approaches tend to lead to dangerous areas. I keep wondering where all the free markets proponents are now when it’s time to pay the price. Why are they hiding behind federal bail outs?

LVTfan makes a great point. Economic rent on natural resources is very wise and economically justified. I’ve left all the links in tact if you wish to further investigate his writings.

Anonymous said...

My first thought, though perhaps not politically correct, is that the Scandinavian system would not work in the US for one reason: our diverse racial, demographic, educational, political, and ethnic backgrounds. Scandinavian nations, as far as I know, are a lot more homogeneously white than the States (we're around 13% African American, a bigger percentage Hispanic, etc), a majority can trace their roots to that region, and didn't start out with as big an income disparity when their current system is implemented.

The biggest outcry in the US over these policies would be "but you're taking my money to give to THEM!" In Scandinavia, where countries are more homogeneous in just about every way, this would be either. The "them" your money goes to are a lot like you. The first impression in the US, despite possibly being untrue or smacking of ignorance, is that your money is going to a poor illegal immigrant or somebody who won't work and collects welfare money, or in the most extreme cases, someone of a different race who is simply not their own race.

That being said I'm proud of my country for the advances it's made in racial and other types of equality over the decades, given the mix of all different races it contains, and the legacy of black slavery. However I still maintain that someone will be less happy about parting with their money for social equality purposes if they feel that it's not helping "their own", but helping some other group they may never meet. I don't think it's necessarily racism, or classism...but whatever you want to call it, I think it exists.

Bootstrap said...

Very interesting and controversial topic. I have a connection with several people who live in Stockholm so have spent some time there - and we have discussed this topic on several occasions. I have two thoughts: 1) there is an unfortunate by product of the high tax rate system. Since most of these taxes are funded by payroll tax on EE's pay PLUS an equal amount footed by the company, it has the disincentive affect of reducing salaries for comparable jobs in other countries - the higher the salary, the bigger the tax bill for the employer and individual. 2) This makes Swedish companies less effective than those in other countries and has the unfortunate affect of moving much of the industry out of the country.

The benefits you mention are real, and valued by the citizens of the country. We could learn from their example, but we need to develop a system that provides a level of benefit that works within our capitalist, free market system which is what makes this country strong.

Shadox said...

No. There is no way I would sign up for such ridiculously high tax rates. I worked my way through law school. I paid for business school myself. I work my a** off every day, often working part of the weekend.

I got to where I am today on the strength of my work, my effort and my family. Why would I be willing to give away the vast majority of my income (60% income tax + 25% VAT starting the first dollar spent buying anything) to pay for things that the "state" thinks are important?

This would be a huge disincentive for me and folks like me. Why make an effort if at the end of the day you pretty much get the same as the next guy who just goes through the motions?

On top of everything, such strong "social protections" can create an excellent incentive to free riders - folks who choose not to contribute but enjoy the social benefits all the same. Combine disincentives for the productive members of society with an incentive to free ridership and you have an economic nightmare on your hands.

Now, clearly, something IS working in Scandinavia. I can't explain why the Nordic countries work like they do, but I have exactly zero interest in trying to get this system working here.

Anonymous said...

No.

I agree with the above comment. I'm not going to work as hard as I do if I know that I won't get to keep 60% of the fruits of my labor.

I think there's an even bigger price to pay. Government is a monopoly and there is no way I will trust a monopoly to deliver the best service or best product.

I give my time to help people with addiction problems instead of just throwing money at the government to help others for me. If you're so interested in helping your neighbor then HELP your actual neighbor!

MrWilson said...

There yes, Here in the USA no. The United States has far too many competing cultures to allow for anything that would resemble or be at the same quality as the Scandinavian system.

orangeto said...

The coveted middle ground is found in Canada.

Christian said...

"Since the Second World War I believe no major conflict has taken place on Scandinavian soil." You forgot about that whole German occupation of Norway and Denmark thing during World War II. My grandfather was imprisoned by the Nazis in Norway.

Dorian Wales said...

@Christian - I did refer to WWII. The Scandinavians are also famous for saving and protecting their Jewish citizens – The more famous of which are Raoul Wallenberg and Per Anger who rescued tens of thousands of Jews from certain death.

stephen said...

I lived in Copenhagen, Denmark for 6 months and it is a wonderful place. At lease in Denmark (ranked the happiest country in the world recently – and the Danes love to note they are happier than the Swedes), the people are happy because they have few worries (healthcare, education, retirement) and they work to live and not live to work. Everyone rides their bike to work or takes the excellent public transportation (if you think the income taxes are expensive, check out the car registration tax in Denmark - it is 180 % of the cars value!).

Unfortunately, I think the other comments about the homogenous populations are right on. That system just would not work in a country as diverse as the U.S. It will be interesting to see what happens with the continued inflow of immigrants (notably Muslims). Not all of the immigrants share the same values as the Scandinavians and it is increasingly causing problems.

R.Bunk said...

Higher Level of Social Equality?

So basically put everyone in the poor house then life sucks for everyone! YAY Trickle Down Poverty!

I prefer, the work hard and earn what you are worth model. Historically it's been proven to spur the most productivity.

The recent meltdown was caused more by bad government policy then a free market economy.

A Real American said...

Look baby,
America cannot be compared to Scandinavia, which is a relatively homogeneous country with a much smaller population.

We are 300+ million strong, with 50 states, overseas territories, and the largest single economy on the planet.

The idea that we can create an efficient, well run federal government to tax and distribute benefits across the nation is absurd.

Furthermore, I would argue that providing such benefits to people, at the cost of taxing productivity, creates an infantile population attached to the teat of state run services.

As a side note- it is like people who envy Japan's high speed train, and wonder why we don't have such transportation in the States. Japan is roughly the size of Virginia, with the population of New Jersey. It is clearly easier to implement such a train in that country.

In short, please for the love of God, keep your damn hands out of my pocket. DON'T TREAD ON ME.

LVTfan said...

to "A Real American" -- from another, by the way --

Japan: 145,840 square miles
Virginia: 39,594 square miles
California: 156,000 square miles
From end to end, Japan is roughly comparable to California, or maybe it is our entire west coast.

Japan's population: 127 million
New Jersey's population: 8.7 million
California's population: 36.5 million

Have you ridden Japan's trains? I have. They put ours to shame. They work. They run on time ... one can expect to make connections that are 3 minutes apart. Yes, 3!

They run through and connect extremely dense urban areas; most of the cities are along the coast, not in the mountainous inland areas.

I agree that we ought not to tax productivity. We ought to be taxing land value, which none of us individually created, and which none of us should be permitted to treat as our own private windfall. Keep individuals' hands off our rightly COMMON asset -- and keep govt hands off our rightly PRIVATE asset -- that which we create (which doesn't include land or other natural resources!)

Adam said...

Please, please, please take an economics class or two and read some Milton Friedman. Economic freedom goes hand in hand with political and civil freedoms. Those who argue against the free market system are at the core of their argument arguing against individual freedom.

LVTfan said...

Read some Henry George if you want to know about truly free markets.