Will a change in tax policy immediately help the economy?

Why do Americans think that they are taxed heavily? As a Canadian, I did not understand how Americans could come to this conclusion. A friend of mine pointed out that Americans feel over-taxed not relative to other nations, but in general. After all, the United States was formed by rich people who did not want to be taxed without having a voice in its spending. I suppose I should not be surprised.

As an economics student, I thought I would put this observation to the test. To start, let’s take the top 10 countries by GDP (as of 2009):

United States - $14.1 trillion
Japan - $5.07 trillion
China - $4.99 trillion
Germany - $3.33 trillion
France - $2.65 trillion
United Kingdom - $2.17 trillion
Italy - $2.11 trillion
Brazil - $1.57 trillion
Spain - $1.46 trillion
Canada - $1.34 trillion

(GDP Numbers here: http://en.wikipedia.org/wiki/List_of_countries_by_GDP_(nominal))

Now, let’s calculate a "tax rate" by finding the ratio of government revenue to GDP, and compare it with the spending of the government, expressed as a percentage (let’s call it the spending rate):

United States - Revenue: $2.09 trillion (14.8%) / Spending: $3.40 trillion (24.1%)
Japan - Revenue: $1.84 trillion (36.3%) / Spending: $2.25 trillion (44.4%)
China - Revenue $1.15 trillion (23.0%) / Spending: $1.27 trillion (25.5%)
Germany - Revenue: $1.40 trillion (42.0%) / Spending: $1.54 trillion (46.2%)
France - Revenue: $1.23 trillion (46.4%) / Spending: $1.44 trillion (54.3%)
United Kingdom - Revenue: $926 million (42.7%) / Spending: $1.15 trillion (53.0%)
Italy - Revenue: $960 million (45.5%) / Spending: $1.07 trillion (50.7%)
Brazil - Revenue: $464 million (29.6%) / Spending: $553 million (35.2%)
Spain - Revenue: $516 million (35.3%) / Spending: $649 million (44.5%)
Canada - Revenue: $606 million (45.2%) / Spending: $678 million (50.6%)

(Government Revenue/Deficit Numbers here: http://en.wikipedia.org/wiki/Government_budget_by_country)

The numbers above show two important facts: (1) the United States taxes its productive sector the least; and (2) the United States spends, as a measure against its productive sectors, the least by percentage. So, this affirms my belief that Americans are taxed less than other top 10 GDP nations. Note that my results conflict with those found by the Heritage Foundation, a conservative lobbying group. (You can find their results on this list: http://en.wikipedia.org/wiki/List_of_countries_by_tax_revenue_as_percentage_of_GDP )

So, what might this mean? Let’s look at the economic growth of the nations in 2009 and 2010, as found by the International Monetary Fund and CIA World Fact Book, respectively:

United States: -2.63% / +2.80%
Japan: -5.22% / 3.00%
China: +9.096% / +10.10%
Germany: -4.72% / +3.30%
France: - 2.55% / +1.60%
United Kingdom: -4.90% / +1.60%
Italy: -5.04% / +1.10%
Brazil: -0.19% / +7.50%
Spain: -3.72% / -0.40%
Canada: -2.46% / +3.00%
World: - - - / +4.60%

(Numbers from this site: http://en.wikipedia.org/wiki/List_of_countries_by_real_GDP_growth_rate )

There appears to be no correlation between economic growth and disparity between revenues and expenditures of the government. Here’s a comparison of the two differences, expressed as percentage differences, of taxing and spending, and growth, respectively:

United States: -9.30% / +5.43%
Japan: -8.10% / +8.22%
China: -2.50% / +1.00%
Germany: -4.62% / +8.02%
France: -7.90% / +4.15%
United Kingdom: -10.3% / +6.50%
Italy: -5.20% / +6.14%
Brazil: -5.60% / +7.69%
Spain: -9.20% / +4.12%
Canada: -5.40% / +5.46%

The numbers suggest that changes to tax policy have little or no effect on economic growth as a whole. If the difference between the taxing and spending rates shrink, that does not mean that growth will increase. If the difference between the two rates expand, that does not mean growth will decrease. Thus, changing federal taxing and spending policy will not necessarily result in a change in economic growth in the short run.

Even if there is no difference in the short run, this does not mean that it will not affect the economy in time. China has had positive growth for years, and has also ensured that its spending does not grossly exceed revenue. If we are to follow that model, the U.S. needs to think about either cutting spending or raising and enforcing taxes.