Saturday, June 10, 2006

More on taxes and economic growth

Recently I found the inverse correlation between economic growth and tax misery (as defined by Forbes) to be a statistically significant .44, and .55 when the anomaly of China (okay, a country that comprises over 20% of the world's population is tough to label an anomaly) is removed from the analysis.

Itinerant commentator John S Bolton suggested the relationship might be meaningless and that it would be better if performed exclusively on developed nations:

This correlation needs to have almost all the low-income countries removed, in order to show significance; but what is wanted to be explained how growth can be predicted, with the full variation of factors whcih occur in the world, being allowed to weigh in.
I wish the desired explanation would be revealed!

His contention is that the 'growth' in many destitute countries comes from foreign aid or fluctuations in commodity prices that less developed economies are tied to. But removing the lower income developing countries from the analysis is something I can do (although the poorest country Forbes used is India, and the average national PPP for the index is $22,743). And I'm glad John prodded me into do so.

I cutoff all countries poorer than Russia, judging it to occupy the lower limit of the developed world. With a sample size of only 33 wealthy countries, the inverse correlation jumped to .64 with virtually absolute significance at any confidence level. For something as broad and complicated as global economic growth, that's pretty powerful. Capital of all kinds (investment, human, technological) is becoming easier to shift around the world. Capital-affable places are going to get the most of it.

We should scrap the IRC and adopt a national sales tax. In addition to making the US an incredibly attractive place for investment, it would reduce spending on cheap consumables (which does little for long-term, sustainable economic growth) and encourage saving, and it would make illegal immigration less attractive by forcing migrants to pay based upon consumption rather than the US government's ability to track them and by a credit issued to valid US citizens equal to each person's poverty threshold.

Yes, the black market would be problematic. But it already is. The IRS estimates $290 billion each year in taxes owed are not collected (the 2006 deficit was $372 billion--eliminating the black market would theoretically eliminate more than three-fourths of the current shortfall). Also, collecting for ecommerce presents a challenge.



JSBolton said...

This is a strong correlation; but it tells us about the variation in anti-capitalism among countries which are on the same level of IQ, + or - a few points.
That fits with the big exceptions to the overall IQ/ production per capita correlation: China and E Europe.
It still remains to be seen whether low-IQ countries can establish capitalistic institutions, from their own populations; i.e. not as subject peoples under a benevolent imperialism. that is, without any extraordinary resource endowment.

adog said...

Are you trying to put yourself out on the street?

JSBolton said...

curb your dog

JSBolton said...

I found some figures from Angus Maddison '94 Explaining Economic performance of nations... in Baumol's Convergence of Productivity...
Product per head 1985$ PPE
US 1820-$1219 Australia1820-$1250
US 1913-$4846 '' 1913-$4553
~1 1/2% per capita growth
is not spectacular in comparison to the EAsian countries with stable populations and sometimes averaging over 5% per capita growth for decades
The US had especially low taxes and regulation 1820-1913, yet struggled even to approach 2% growth per person
These were the world's most successful economies in the period compared above

crush41 said...

Interesting. Do you have figures on comparable growth rates for other industrializing nations over the same time period?

Of course a century and a half ago movement was much more restricted. MNCs and huge capital entities were not able to shift from one market to another like they can today with ease.