Higher taxes will destroy our economy

The story that high taxes will ruin our economic prosperity and cause us to fall behind the rest of the world doesn't take into account the fact that we are a low tax nation and that nations with higher tax burdens--a whole lot higher in some cases-- are not terrible places to live...

Jonathan Cohn notes:

Many conservatives insist that at least some painful austerity is necessary for our economic survival. Otherwise, they warn, taxes will grow to unprecedented levels, slowing down the economy. Ross Douthat makes this point today in his New York Timescolumn. Philip Klein made a similar argument last week in the Washington Examiner. 

I respect both writers and realize we have some fundamental, philosophical differences over the appropriate role for the state. But, as an empirical matter, I think the international evidence tell a very different story about taxes and the economy. As you can see from the above chart, which the Center on Budget and Policy Prioritiesconstructed using data from the Organization for Economic Co-operation and Development, the tax burden in the Nordic countries far surpasses ours. In fact, the tax burden in those countries exceeds 50 percent.

That money helps finance a welfare state far more comprehensive than ours, including not just universal health insurance but universal early childhood programs. But the Nordic countries are far from stagnant, innovation-starved backwaters. As economists like Columbia University's Jeff Sachs have pointed out repeatedly, these countries have thrived. In fact, the Nordic formula may actually bolster growth, because the income protection it provides makes the people of Scandinavia more willing to tolerate the dislocations that come with loose labor rules and free trade.

The Nordic countries are far more homogenous than the U.S. and it’s an open question whether a society as diverse and unequal as ours would support such a high tax burden. (This is one of the points Douthat makes in his column.) But even if we do absolutely nothing but let current law stand--in other words, if we let the Bush tax cuts expire, allow the alternative minimum tax to remain in place, allow scheduled reductions in physician fees to take effect, and limit the control of health care costs only to the official projections for the Affordable Care Act--it seems likely that our tax burden would still not exceed what the Nordic countries face today, at least not for another 50 years.*

I'm not saying that the "do nothing" approach, as Ezra Klein calls it, is ideal. Far from it. I’d prefer a more gradual and even-handed approach to reducing health care costs than imposing those physician cuts as scheduled. My ideal plan would look a bit more like the Bipartisan Policy Center’s plan, which certainly includes its share of cost-cutting, and the principles Nobel-winning economist Joseph Stiglitz has outlined. I also could live with a less progressive tax system if (and only if) it was for the sake of financing a more robust welfare state.

But my broader point is that a substantial rise in taxes is not the end of the world, particularly if it is gradual, finances smart investments, and includes reasonable but not draconian efforts to control health care costs.

Paul Krugman chimes in:

You may not approve of a shift that moves America closer to the OECD norm, but that’s not the same thing as saying that it would be inconceivable or disastrous.

Now, higher taxes alone can’t resolve our long-run budget issues, because of rising health care costs, which will eventually swamp even a large tax hike if they continue. But cost-control for Medicare plus tax increases that put us closer to the middle of the pack — although still below average, and well below several successful European economies — is a perfectly feasible answer to our long-run deficit concerns.