What we can learn from the Nordic Model
Keith Richards seems to be a personified refutation of the laws of human biology. After decades of self-abuse, Richards is still alive and kicking, and in better shape than many contemporaries who have lived ascetic lives. Yet nobody has ever argued that embarking on a Richards-lifestyle was a “recipe” for staying fit, or at least no detriment to that aim.
In the economic policy debate, the same logic is sometimes employed. Friends of big government often present the economic success of Sweden and Denmark as the “proof” that high taxes do not hamper wealth creation, and can even be conducive to it provided the money is well spent.
There is no point in denying it: Sweden and Denmark are prosperous, well-run economies. They do have their economic ailments; but they fare generally better than otherwise similar economies on the continent, where the state is also huge but well below Nordic dimensions. So is the tax burden unimportant after all?
Probably not. In a recent paper, two economists have estimated several countries’ “Laffer curves” for the taxation of labour and capital. According to their estimates, Sweden and Denmark are already above the revenue-maximising point for the taxation of capital, and just short of it for the taxation of labour. By permitting growth in the tax base, cutting capital taxes would be a free lunch for their governments, while cutting labour taxes would be a super-saver menu (and it goes without saying that from a classical liberal viewpoint, maximal tax revenue is hardly a desirable aim). Swedes and Danes may withstand high levels of taxation with the resilience of Norse warriors, but they are not impervious to it either.
An alternative interpretation of the Nordic countries’ success is that they compensate for their high tax burden by performing exceptionally well in other areas. In the latest Index of Economic Freedom, Sweden and Denmark beat the United States in seven out of ten categories. Scandinavophiles are strangely selective in what they perceive to be the essence of the Folkhemmet-model. They are very keen on importing Scandinavian levels of taxation, but you never hear them talking about Sweden’s light levels of business regulation, or Denmark’s liberalised labour market. But this is tantamount to advising an up-and-coming guitarist to adopt Keith Richards’ lifestyle, instead of studying his guitar tabs.