He’s realised that developed countries tend to have a higher tax share of GDP than poor ones. And thus:
And, as is clear from the line of best fit that Charles has added, the trend is very obvious: as tax rates increase so does GDP. You could argue it’s the other way round but I would very strongly challenge that because government spending is part of GDP and whilst the link between government spending and tax is not direct, what is apparent is that the spending comes before the tax (as I have argued in The Joy of Tax, for example) and so it is GDP that drives the tax flows and not vice versa.
In which case when you have under employment, low productivity and low inflation why on earth would you want a low tax economy?
There’re a number of things he’s missing. Logically, even he’s not saying that higher tax does it. Rather, he’s saying that higher government spending does. It’s still true that tax is the cost of gaining that.
But of course there’s more. Perhaps richer people desire more public goods? Maybe more social insurance? Could be that tax is low in poor places because taxing the people will kill them through starvation? What if there’s some sort of Laffer Curve, or Kuznets maybe, here? Up to some level of GDP then more government – and thus spending and tax – does make the place richer and above that it doesn’t.
For example, the US and UK are richer than France or Finland. So, who is at the sweet spot?
Correlation, as we know, does not show causality…..