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The debate over social models goes to the heart of how Europeans want to live - how they balance personal risk and security, what they expect the state to do for them and what they should do for themselves, and whether economic prosperity comes with a social price.

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Part 1: Is free-market Britain fair enough for all?

Part 2: Egalitarian Finland most competitive, too

Part 3: French inch towards social reform

This, IMO, is the central debate about the EU. There can be no denying that the EU exists and will continue to exist (all but most extreme nationalists seem to agree on this). The central question and source of contention is rather: what kind of Europe will it be?

edited to add 2nd link, and again for the 3rd link

[ 26 October 2005: Message edited by: kurichina ]

The caring dimension of Europe: how to make it more visible and more vigorous - Maurizio Ferrera, University of Milan

Why the Scandinavian experience is relevant for the reform of ESM - Joakim Palme, Institute for Future Studies, Stockholm

As part of my Growing Public campaign, I'm going to haul out the following statistics:

Social expenditures:
Finland: 25% of GDP
Canada: 18% of GDP

VAT/GST rates:
Finland: 22%
Canada: 15%

Corporate tax rates:
Finland: 26.0%
Canada: 36%

Investment (dividend) income tax rates:
Finland: 38%
Canada: 56%

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Originally posted by Stephen Gordon:
The business lobby really wouldn't have any problem with this: if the NDP promised to reduce corporate tax rates to Finnish levels - that is, reduce them by about a third - what could they possibly say against that?

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f they can tell head office that the NDP is offering to cut corporate taxes, then that's all that matters. They don't care if social spending is 5% or 35% of GDP, so long as they get their return on their investment.

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I see....*tents fingers*...interesting.

I don't know, Stephen. I don't see our business elite going for this unless a real crisis is looming. Our business press certainly never makes this case very well for progressives, and you'd think they would, wouldn't they?

[ 28 October 2005: Message edited by: Hinterland ]

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For progressives, the big obstacle would be digesting the increase-the-GST and reduce-corporate-taxes pills. Those are both regressive measures (although as I said elsewhere, it's not clear just how regressive corporate taxes are), but that tax mix doesn't penalise economic growth, and it generates revenues that can be used to counter those regressive effects.

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Frankly, I just don't believe that bullshit that taxing profits stunts economic growth more than taxing consumption. Why would it? A tax is a tax, are people so stupid they don't realize it? The only reason it might help is for some easily movable companies (call centers, etc...), but those are not a good thing to base an economy on for western countries with the upcoming challenge from third world countries which low cost of life and therefore labor cost that make it literally impossible for western countries to compete against.

The tax on labour income is higher, yes. And that's certainly part of the package.

[edited to add:]

Top marginal personal income tax rate:
Finland: 56.7%
Canada: 46.4%

(When calculating the tax on investment income, you add the corporate tax rate and then subtract whatever deductions there are for dividend income.)

[ 29 October 2005: Message edited by: Stephen Gordon ]

And interesting discussion, Stephen and all.

Keynes, as I recall, argued that investment was driven, more than anything, by consumer demand. There's no point in investing money in a plant that will make something no one can buy. Therefore, consumption taxes and taxes on the poor/lower middle classes are bad, because they lower consumer demand, whereas taxes on the rich will mostly be taken out of what they would have put into savings.

The assumption that I belive Dr. Gordon is implicitly making is that in a small, export-oriented economy like ours, local demand doesn't really matter since demand from the larger economies of our trading partners will always be far greater than local demand anyway. Therefore, given the complete mobility of capital between countries, you need to cut corporate taxes to attract investment.

So in order to build a welfare state on top of this, you use consumption taxes. This doesn't affect the export oriented investment that you're trying to attract with the low corporate taxes... most of the consumption will occur outside the country anyway. The welfare state will externalize the costs of education, health care, etc, making your country even more attractive for investment.

So, in the end, the investors, be they local or foreign, make a ton of money. The Scandanavian-model country gets a lot of investment, which translates into good jobs. The workers get a welfare state, which they finance through their own wages rather than corporate profits. There would be far more equality amoung the lower and middle classes, which means far less poverty. The rich make out like hotcakes, much as they do under the American/Canadian model.

And Dogbert, that's about right, but there are a couple of things I'd like to clarify:

Keynes' model is not designed to be used as a guide for long-run growth. It's an explicitly short-run model that doesn't make the link between investment expenditure and capital accumulation. Demand manipulation is something we can do to get us to capacity, which is fixed in the short run. Keynes' model says little about where that capacity level came from, or how it can be increased. There's no conflict between using Keynes as a guide for short-run business cycle policy analysis and using a growth model as a guide for tax policy.

It's definately a better development model than what we have have here now in Canada. That said, I don't think it's going to happen, or that it's something that the NDP should pursue.

First of all, it would be electoral suicide. Can you see us running a campaign on "raise taxes on the middle class, raise the GST, lower taxes for corporations"? Sure, people will believe us when we say that we'll make sure it doesn't hurt the poor too hard. They just won't care because it will hit them, personally, in the pocketbook. Those who would support tax hikes because they want a welfare state would likely also be turned off by the unfairness of cutting corporate taxes at the same time. Even right wingers don't talk about their corporate tax cuts; they just do them quietly and rely on a co-operative media to not make a big deal out of them. The NDP doesn't have a co-operative media... typically they'd rather see us burned at the stake, and that's just what they'd do if we tried something like this. I really doubt that saying "but the economists said this would work" or "but this is how it works in Sweeden and they're doing great" is going to help us much.

As both of us have already noted, this bargain does nothing to stop the rich from taking an ever increasing share of the total national income. Some would argue that the rich getting richer doesn't matter so long as the poor aren't getting poorer. That's what make the Scandanavian model better than the current Canadian model, but it still fails on the grounds of fundamental fairness, and we progressives tend to care about that.

I would argue that the fairness issue also has practical implications on the longterm viability of this model. Fundamentally, it's a bargain between the elite and the masses that gives them both what they want. As soon as the elites decide they can make more money under another model, they'll have all the power they need to scrap it. That's effectively what happened to Canada's social democracy, and I see no reason why, if we somehow managed to get this model implemented, it wouldn't happen again.

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Originally posted by Dogbert:

I would argue that the fairness issue also has practical implications on the longterm viability of this model. Fundamentally, it's a bargain between the elite and the masses that gives them both what they want. As soon as the elites decide they can make more money under another model, they'll have all the power they need to scrap it. That's effectively what happened to Canada's social democracy, and I see no reason why, if we somehow managed to get this model implemented, it wouldn't happen again.

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Important point. Which brings us to an additional factor in what makes the Scandinavian model work in Scandinavia, which has little directly to do with money transfers: Institutions.
Thinking that if you just do taxes this way and program spending that way you can get a given result oversimplifies. A place like Finland or Sweden has different rules of the game in ways that affect who gets how much money in the first place, not just how it's transferred. Specifically, they would seem to have much higher union density, stronger labour laws, and rules about sharing decision making power between corporations, government and labour. I think I noticed a mention of no or low minimum wage--but between those institutional factors and generous unemployment benefits, a minimum wage is relatively unimportant--they've probably got rather few people making wages as low as our minimum. It's these sorts of institutional differences that probably do the most to keep income distribution more compressed, not the actual money being moved around by government.

They may also have less media concentration--it would be hard to have more. They may have tougher rules about keeping it that way.

This sort of thing makes a difference. If we leave our current income (and power) distribution in place and just change how money is transferred, I suspect we might find ourselves with rather different outcomes, and rather different medium term political results. That is, if we could somehow wave a wand and put in everything just like Finland taxation-wise and social-transfer-wise, within two governments or so, with a sustained push from the elites, we would still have the taxation changes but the social transfers would have severely eroded.

Meanwhile, on Growing Public--I read the book, largely on Mr. Gordon's recommendation. And I found it interesting. But it's important to note that the guy analyzes a number of different issues in somewhat different ways. There's a common theme, but I found that I almost had to take chapters or pairs of chapters as separate works and assess the arguments individually. Some topics I found his analysis very strong. Others, like the one tackling modern education and what's going on with current rankings among countries, I found quite weak. The one about how the reason countries with strong welfare states didn't stop growing is that they all have this kind of tax structure that promotes growth is . . . interesting, but oddly disconnected from some of the points that I found the most persuasive. He's got a correlation, but I don't see a cause.
Some of the phenomena he analyzes from the 19th century I find interesting in that the causes he comes up with are political ones, to do with who had suffrage or other sorts of political power. Essentially, his conclusion on the rise of poor relief, public education, old age pensions and the like is that where people had the power to insist on policies that benefitted them, those policies came into being. Where elites had the power to insist on policies that benefitted them, that sort of policy happened instead--and just what sort of policy it was depended on the nature of the elites.
Come into the twentieth century, and the analysis gets more conventional, in a sense. And specifically, he posits that the reason all these high-welfare-state countries in Scandinavia and Northern Europe have a relatively regressive tax structure with little corporate tax is that they had no choice but to do so, as otherwise the welfare state *would* have been a drag on the economy and reduced growth. This economic determinism doesn't seem to fit with other chapters, which seem to suggest that policies frequently came into being for political reasons, irrespective of their impact on growth. It seems to me those accounts would indicate that if the politics pushed for it, it would be perfectly possible for both welfare transfers and "bad" taxation policies to be instituted at once, even if they did slow growth. In which case it would be possible to point to the cases where it had happened. And I don't really understand why conversely in smaller-welfare-state countries they should uniformly have decided that a wasteful, growth-slowing tax regime was OK, because the number of billions of dollars involved was somewhat smaller. I mean, these countries still have significant taxation, and spend a lot of thought and energy trying to optimize it. I find it difficult to believe that because lower welfare transfers make it slightly less crucial, *none* of them adopted the proper style of regressive taxation with low capital taxes? Why wouldn't they, if it's still better? And, I can readily envision other explanations for the correlation.

For instance, I could tell this story: It may have historically been the case that in all the developed countries there has been some counterbalance between elites and working/middle class interests, and it has not been possible for either faction to get everything their way. So, where the working classes have successfully pushed for strong welfare state measures and maintained strong labour unions, elites have tended to hold the line on taxation, keeping it relatively regressive. Where the working classes have concentrated on progressive taxation, elites have been more successful at claiming that this balances economic opportunity and so welfare transfers are less needed.

Or I could tell this story: Given that most of the strong-welfare-transfer sample are fairly close together and have had quite a bit of political and intellectual influence on one another, what has actually happened is largely a matter of agreement and cross-pollination among policy-setting intellectual elites. This also explains why we see to a fair extent two groups characterized by two separate cultural-institutional heritages, the Anglo-Saxon group and the continental group. So on one hand we have Britain, the US, Canada, New Zealand and Australia with strong similarities. And on the other we have Scandinavia and much of Northern Europe.

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Originally posted by skdadl:
Wonderful archive, kurichina. Thank you very much.

And interesting discussion, Stephen and all.

But ... economic efficiency ... social programs ... as always, I'm left with this nagging feeling that we're leaving something out.

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Not too off-topic, I hope, but are co-operatives taxed in the same manner as corporations?

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The tax policy divide (currently in Canada) is between for-profit organizations and not-for-profit organizations, rather that between co-ops and corporate structure.

The whole discussion of how labour can be used seems to me to be missing concern for human volition, as in "I like to carve wood."

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...if Ms. Sirelius does well in her career, she will pay more than 45 percent of her personal income toward taxes. But she does not object. "I feel that is what keeps our society and country running," she explains. "We can't keep the welfare state running unless everyone pitches in and helps with the costs."

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I simply can't imagine very many Canadians looking upon their taxes in that light, especially after all the anti-government propaganda that's taken place. I think that level of trust can also come from Finland's rank as "least corrupt", something that Canada certainly can't share.