Bureaucrats Grinding The Faces Of The Poor

The OECD recently published a paper on taxation and economic development that claimed that the propensity of poor countries to tax less than rich ones is a contributor to their poverty. Thus, by raising taxes to Western levels, they could develop their economies. This view is not surprising from an organization of international bureaucrats, but it is the reverse of the truth. I thus thought it worth setting out the correct picture.

The OECD begins with the statistic that whereas the burden of tax on developed nations is about 33% of GDP, that on underdeveloped nations is only about half that level. It concludes from this that a key to poor countries developing their economies is higher tax collection, which “enables governments to invest in growth, relieve poverty and deliver public services to underpin long-term growth.”

The OECD’s analysis is grounded on an underlying fallacy: poor countries collect less of their national income in tax because a large proportion of their citizens are living at subsistence levels, and hence have no spare revenues to tax. This is why historic rates of tax collection were low; monarchs like Louis XIV and Aurangzeb had a more or less infinite desire for their people’s resources, but no possibility of getting them, even if their tax collection systems had been relatively efficient and uncorrupt.

In the Napoleonic Wars, for example, which lasted over 20 years and required maximum military effort, British public spending never exceeded 34% of GDP, and then only for one year, while tax levels barely reached 20% of GDP. Even at that level, the French economist Jean-Baptiste Say was convinced that British taxes were so high that the country would be hopelessly uncompetitive once peace came. Lord Liverpool’s government were able to stabilize British finances after Waterloo by a massive effort of government economy, but life got very much easier for British statesmen by the mid-Victorian era when public spending including debt payments had shrunk once again to around 10% of GDP.

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Gary Anderson 9 months ago Contributor's comment

Interesting but radical article. Perhaps the OECD understands that nations with higher productivity growth can benefit from higher taxes just like nations with low productivity growth should give tax breaks to lower and middle. But Trump really only did a little of that. He mostly gave tax breaks to the wealthy.