Wednesday, September 09, 2009

Tax and child welfare

The OECD has put together a raft of new statistics on child welfare in OECD countries, here.

We thought we would see how these compare against tax. There are several variables we could have chosen on both sides - several on child welfare, on the one hand, and several more on tax, on the other) and therefore a large number of possible combinations. We have decided in this blog to look at child poverty. The graph -- click to enlarge -- is fairly striking (for the source data, go to page 35 of the study)

It slopes downwards; what this tells us is that the higher a country's taxes are as a share of GDP, the lower child poverty tends to be. This is not exactly a huge surprise: taxes can be (and often are) powerful tools for redistribution, so you’d expect higher-tax countries to have less relative poverty (and this is what this data is measuring.)

Interestingly, two of the countries that have lower tax shares in their economies, Britain and the United States, had radically different outcomes in child poverty. While these two countries had tax at 37.1 and 25.4% of GDP respectively, their child poverty rates were 10.1% for Britain -- better than the average for the sample -- while in the United States child poverty rates at 20.6% were only better than Poland, Mexico and Turkey. How to account for such very different outcomes? If the trend is to be taken as a reason, then the US' radically lower tax share is a factor; but in addition Britain's Labour government has, for all its faults, has had a particular focus on child poverty. Programmes like the working tax credit schemes have gone some way towards mitigating poverty caused by low pay, but low earnings growth in recent years threatens to erode the progress made in the early years of tax credit programme.

Every other graph we looked at, using different measures of child welfare, show the same basic trends, although admittedly on several of those the trends were somewhat less stark, with more outliers, and we only looked at a few of the possible combinations. But taken together, higher-tax countries generally tend to have better outcomes on all the measures we studied.

We are not seeking to draw conclusions here about causality, or make policy recommendations – we are just fiddling around with some new data, and putting it into a graph. Nevertheless, it ought to make uncomfortable viewing for those ideologists who insist that tax-cutting is always the answer to the problems of the world.

And the latest data is entirely consistent with other, different but related research, such as this (inequality and social outcomes, described in the book The Spirit Level,) or this -- slightly older Canadian research on OECD countries that looks at a much broader range of indicators, and concludes that

"High-tax countries have been more successful in achieving their social objectives than low-tax countries. Interestingly, they have done so with no economic penalty."

Now it would be extremely useful if we were able to bring data for developing countries into the frame. Unfortunately, there is no useful global database that can be used to do this kind of work. We hope to be able to bring more data to bear on this in the coming months, through this forthcoming project.


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