COLUMN-A back-of-envelope evaluation of national tax rates and freedom levels: Ross Kerber

By Ross Kerber

Jan 14 - Last month I spoke with Vanessa Williamson of the Brookings Institution, who made the case for high taxes so governments respond to citizens' needs. She said authoritarians prefer low taxes and less important governments.

I tested if this framing holds true in the real world by comparing global freedoms and tax burdens by country. And yes, it looks like low taxes don't always mean more freedom:

Beware this is a real back-of-the-envelope analysis! If anyone is looking to write or assign a PhD dissertation that could survive peer review I would welcome an update - or links to better work that has already covered the same ground.

Here's what I did: for the vertical axis I looked at data from Freedom House, a well-known U.S. nonprofit.

For the horizontal axis, finding comparable tax figures proved trickier. I would have liked to plug in numbers from the Organization for Economic Co-operation and Development, which tracks countries' tax revenue as a percentage of their gross domestic product and breaks down the types of taxes they impose.

But the OECD's data doesn't include big counties like Russia, China or Saudi Arabia that score low with Freedom House.

Instead I turned to a much broader World Bank data page. I went back to 2023 as the most recent year with near-complete data for big nations, and matched it to Freedom House figures from the same year.

A downside is that the World Bank numbers exclude some types of government revenue like U.S. state taxes and Social Security contributions. So whereas the World Bank lists U.S. taxes at 10.8% of GDP in 2023, the OECD puts the same figure at 25.6%.

I included the nations of the G20 and as many of the next 20 largest economies by GDP for which I could find tax data. (We're still missing you, India!)

I showed my work to several analysts in the field. Here's their feedback via e-mail:

Alan Cole, Senior Economist at the Tax Foundation, noted how Americans have high personal incomes and also pay more in private insurance premiums for benefits that might be routed through the state in Denmark or Sweden.

Meanwhile some poorer states aren't organized enough to sustain higher tax levels, with weak governments and decentralized business communities. Other states, especially ones low on the freedom scale including Russia and China, maintain opaque revenue-generation systems through control of their oil industries, banking systems and other sectors. These may generate extra revenue for governments, but in general they are less efficient and accountable, he said.

"You would much rather have a government with formal tax rules than a government that asserts more arbitrary ownership rights over the economy," Cole told me.

Kimberly Clausing, nonresident senior fellow at the Peterson Institute for International Economics, said "Democracies tend to want a certain level of government services. Private consumption is nice but people also want good schools, roads, and clean water."

Lower tax rates in poorer countries may be more about tax capacity rather than the level of civil rights, she said. "It's a two-way street. In a very poor country, people may focus on getting enough to eat before they invest more in schools or infrastructure."

Richard Morrison, a senior fellow at the Competitive Enterprise Institute: "Low-freedom countries may have low taxes because that's what allows the governing class to buy the allegiance/acquiescence of a populace that didn't actually choose to elect them."

A population's homogeneity and social trust could also play a role, Morrison said, "because of willingness to cooperate with strangers via commercial relationships - and greater willingness to shoulder higher shared tax burdens. Nordic countries famously score especially high on international comparisons of social trust, and that factor could explain a lot about the correlation researchers have noted."