Presidential candidate Mitt Romney has built his campaign squarely on the thesis that cutting taxes will stimulate the economy, unleashing private industry to create prosperity for all. President Obama basically agrees that tax cuts are needed. Both Romney and Obama are pushing for a dramatic cut in corporate taxes (from 35% down to 25%-28% ). Two-thirds of the Obama jobs package consisted of tax cuts. And in balancing the budget, Obama proposes to cut $2.50 in spending for every $1.00 in revenue increases. So there is bipartisan agreement that tax cuts are desirable, even if there is argument over the details.
But there is one problem: The premise is false. Actual data shows that as a general rule, lower taxes make the economy worse, not better. You'd never guess this from the Obama/Romney dialogue.
The level of taxation in a country can be measured by total tax revenues as a fraction of the Gross Domestic Product (GDP). The taxation level in the United States is currently 26.9% (including federal and state, and local taxes). The strongest economy in Europe is the Germans. Their taxation level is 40.6% - much higher than in the United States. That's a hint that higher taxes might not be, in themselves, be so bad for the economy.
The same holds true for other developed nations where taxes are much higher than in the United States: Denmark 49%, Sweden 47.9%, Belgium 46.8%, France 44.6%, Finland 43.6%, Norway 43.6%, and Austria 43.4%.
All these nations are known to have good standards of living. But maybe low-tax nations are doing even better. To fact-check this, we can look the nations that have clearly lower taxes than the United States, say between 17 and 20%. Are the people there benefiting from their low-tax economies? These nations are: Senegal, Mauritius, Gambia, The Bahamas, Chile, Kenya, Cameroon, Azerbaijan, Nicaragua, Vanuatu, India, Burundi, Sao Tome, China, and Thailand. It doesn't take extensive analysis to realize that these nations are not places that the United States wants to imitate.
But there's more. One of the best measures of the success of an economy is the Human Development Index (HDI). The HDI combines life expectancy, education, and income indices to produce a composite measure of how well the people of a nation are doing. The United Nations calculates the HDI periodically to assess economic progress worldwide.
The United States scores 0.910 which is very good among the nations of the world. But three nations score equal or higher: Norway 0.943, Australia 0929, and Netherlands 0.910. All of these nations have tax levels that are significantly higher than the United States (43.6%, 43.4%, and 39.8% respectively).
Here's the sobering truth for those who seek to boost our economy by tax-cutting: Not a single nation that taxes less than the United States manages to outscore us on the HDI.
And those anti-government zealots who want to radically slash taxes should note that these lucky nations enjoy tax rates around 10%: Madagascar, Syria, Gabon, Pakistan, Haiti, and Bangladesh. Ready to move?