Tax cuts as 'stimulus' - a global reality check

Looking at their pay slips, Americans may believe Uncle Sam takes too big a chunk. "Americans carry a heavy burden of taxes," President Bush declared in the speech outlining his tax cut package Tuesday.

By international standards, though, Americans are relatively lightly taxed.

When the revenues from all federal, state, and local taxes are added up, they amount to about 29.6 percent of gross domestic product (GDP), the nation's total output of goods and services.

Among 30 member nations of the Organization of Economic Cooperation and Development (OECD), a club of mostly rich countries based in Paris, only Japan, South Korea, and Mexico have a lower overall burden. The Bush tax cuts of 2001 and, perhaps, this year could reduce the overall US tax burden close to the level of Japan (27.1 percent of GDP) or South Korea (26.1 percent), but not to Mexico's 18.5 percent.

In a world of varying political philosophies and economic realities, there's no agreed-upon way of deciding the fairest way to collect taxes - or the way that will allow for the fastest economic growth.

But a comparison of the US tax system with its global peers can at least offer food for thought. Consider:

• Over the long term, economists have a hard time finding a connection between a nation's overall tax rate and its economic growth rate.

• Many nations have income taxes that, on their face, are less progressive than that of the US. Millions in America pay no income tax at all, though they do pay sizable Social Security taxes. The rich pay the highest rates, though many liberals say Bush's plan favors the wealthy.

• In most cases, other nations have more generous social-welfare systems than the US, effectively making those nations' tax-and-benefit systems more progressive.

Governments of rich countries that tax heavily may cover a universal, government-sponsored health plan, or a more generous social-security system, or even government-subsidized child care. Canadians, for instance, pay 35.2 percent of their income in taxes, but all get free healthcare. In the US, only the elderly and the poor get government-subsidized healthcare.

American conservatives, including the president, hold that small government boosts the pace of economic growth. The administration calls its 10-year, $670 billion tax-cut proposal a "growth package."

"Our first challenge is to allow Americans to keep more of their money so they can spend and save and invest," Mr. Bush said.

Most economists do hold that tax cuts usually have an immediate stimulative impact on an economy running below capacity. But over the long term, the evidence gets murky.

"Almost uniformly, economists have not found any growth effect from tax policy," says William Easterly, a former World Bank economist. Looking at studies of more than 100 nations, there is no empirical data to show that either tax rates or tax revenue levels influence long-run growth rates, he says.

"There is almost no relationship between the size of the government sector and the rate of economic growth," agrees Bernard Wasow, a Century Foundation economist.

But the president's Council of Economic Advisers (CEA) maintains the Bush plan would boost GDP growth between 2003 and 2007 by 0.2 percentage points a year on average. It would generate 2 million to 3 million jobs each year for three years.

A 1996 study by Federal Reserve economist Eric Engen and Dartmouth College's Jonathan Skinner did find that major tax cuts in the US have "modest effects" on growth - between 0.2 and 0.3 percentage points per year. That study, though, assumes cuts in the marginal tax rates (that on the last dollar earned) of 5 percentage points and a reduction in average tax revenues of 2.5 percentage points. Those changes are bigger than the Bush cuts.

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