I wrote the other day that Americans, regardless of all the bad policy we get from Washington, should be thankful we’re not stuck in an economic graveyard like Venezuela.

But we also should be happy we’re not Europeans. This is a point I’ve made before, usually accompanied by data showing that Americans have significantly higher living standards than their cousins on the other side of the Atlantic.

It’s now time to re-emphasize that message. The European Commission has issued its annual report on “Taxation Trends” and it is–at least for wonks and others who care about fiscal policy–a fascinating and compelling document.

If you believe in limited government, you’ll read the report in the same way you might look at a deadly traffic accident, filled with morbid curiosity and fear that you may eventually suffer the same fate.

But if you’re a statist, you’ll read the report like a 14-year old boy with his first copy of a girlie magazine, filled with fantasies about eventually getting to experience what your eyes are seeing.

Let’s start by giving the bureaucrats some credit for self-awareness. They openly admit that the tax burden is very onerous in the European Union.

The EU remains a high tax area. In 2012, the overall tax ratio, i.e. the sum of taxes and compulsory actual social contributions in the 28 Member States (EU-28) amounted to 39.4 % in the GDP-weighted average, nearly 15 percentage points of GDP over the level recorded for the USA and around 10 percentage points above the level recorded by Japan. The tax level in the EU is high not only compared to those two countries but also compared to other advanced economies; among the major non-European OECD members for which recent detailed tax data is available, Russia (35.6 % of GDP in 2011) and New Zealand (31.8 % of GDP in 2011) have tax ratios exceeding 30 % of GDP, while tax-to-GDP ratios for Canada, Australia and South Korea (2011 data) remained well below 30 %.

Here’s a chart from the report showing that taxes consume about 40 percent of economic output in EU nations. And while Americans correctly view the internal revenue code as very burdensome, taxes “only” consume about 25 percent of GDP in the United States.

Other nations with comparatively modest tax burdens include Canada (CA), Australia (AU), South Korea (KR), and Switzerland (CH).

But it’s important to understand that not all nations in the European Union are identical.

Just as there are high-tax states and low-tax states in America, there are high-tax countries and low-tax countries in Europe. Surprisingly, France was not the worst nation.

…the ratio of 2012 tax revenue to GDP was highest in Denmark, Belgium and France (48.1 %, 45.4 % and 45.0 % respectively); the lowest shares were recorded in Lithuania (27.2 % of GDP), Bulgaria (27.9 % of GDP) and Latvia (27.9 % of GDP).

I’m surprised, by the way, that Sweden isn’t among the highest-taxed nations. I guess they’ve made even more progress than I thought.

Now let’s drill down into the report and look at some of the specific data. You may want to stop reading now if you get easily depressed, because it’s time to look at a chart showing what’s happened to income tax rates. Specifically, this chart shows the average top tax rate on personal income, both for Eurozone (nations using the euro currency) and European Union nations.

As you can see, the average top tax rate has jumped by almost four percentage points for euro nations and by about two percentage points for all EU nations.

This is very unfortunate. Tax rates were heading in the right direction when there was vigorous tax competition inside Europe. But now that high-tax nations have been somewhat successful in forcing low-tax jurisdictions to become deputy tax enforcers, that positive trend has halted and policy is moving in the wrong direction.

But not in all regards.

Tax competition also has been compelling governments to lower corporate tax rates. And while that trend has abated, you can see in this chart that politicians haven’t felt they have leeway to push rates higher.

Though I am very concerned about the OECD’s campaign to undermine corporate tax competition. If they’re successful, there’s no doubt we’ll see higher corporate tax rates.

Let’s now look at some more depressing data. This chart shows that a continuation in the trend toward higher rates for value-added taxes (VATs).

I’ve warned repeatedly that the VAT is a money machine for big government and the EU data certainly support my position. But if you want evidence from other parts of the world, there’s some IMF data that clearly shows how politicians use the VAT to expand the burden of government.

Last but not least, let’s now draw some conclusions from all this information. At the beginning of the post, I mentioned that Americans should not copy Europe because bigger government translates into lower living standards. Simply stated, there’s a negative relationship between the size of government and economic performance. So let’s look at another piece of data to emphasize that point. The bureaucrats at the OECD just did a report on the U.S. economy and they produced a chart showing that the current recovery is very anemic. We haven’t recaptured lost economic output, which normally happens after a downturn. Indeed, we haven’t even returned to normal growth levels.

But that’s not news to regular readers. I’ve shared powerful data from the Minneapolis Federal Reserve showing the failure of Obamanomics.

What is noteworthy, though, is comparing Europe to the United States. As you can see from these two charts, euro nations have flatlined. And if you look at the vertical scale, you can see that they were growing a lot slower than the United States to begin with.

In other words, we’re not doing very well in the United States. But compared to Europe, we’re Hong Kong.

Two final caveats: First, I always like to stress that economic performance is impacted by a wide range of policies. So while I think that rising tax burdens and higher tax rates are hurting growth in Europe, there are other factors that also matter.

Second, any analysis of fiscal policy should also include data on the burden of government spending. After all, a nation with a low tax burden will still suffer economic problems if there’s a large public sector financed by red ink.

And one big warning: Obama wants to make America more like Europe. If he succeeds, we can expect European-style stagnation.

On Friday, I waded into the heated debate regarding the D.C. Council’s tax reform package. I noted that the proposal is far from perfect, but it is a good first step towards reforming D.C.’s burdensome tax structure.

Shortly after I released my post, councilmember and mayoral candidate David Catania proposed a compromise: He would maintain the current sales tax exemption for the fitness industry. In exchange, he would change the way the corporate income tax rate is cut.

The original D.C. Council proposal would cut corporate income tax rates from the current 9.975 percent to 8.25 percent in 2019. Catania’s plan would also cut the corporate income tax rate to 8.25 percent, but it wouldn’t reach that level until 2020.

The chart below shows the two competing proposals.

In addition to taking a year longer to reach 8.25 percent, Catania’s plan includes higher tax rates in each and every year. Under this proposal, all corporate businesses would pay higher taxes in order to maintain the sales tax exemption for the fitness industry.

When I made this point a few days ago, supporters of Catania’s amendment said that my characterization wasn’t accurate. But Catania’s own press release on the issue acknowledges that businesses will pay more under this proposal. It says “the difference in the average annual tax savings for small businesses between the current version of the FY15 budget and the Catania Amendment amounts to just $15 or $1.25 per month. When factoring in all businesses—including the very largest—the difference in the total average business tax savings is only $346 annually or just $28.83 per month.”

I don’t have a strong view as to whether these increased taxes are a good swap for maintaining the current sales tax exemption. But I do know that even a D.C. corporate tax rate of 8.25 percent is still far above the U.S. state average of 4 percent.

Why are some nations rich and other nations poor? What has enabled some nations to escape poverty while others continue to languish?

And if we want to help poor nations prosper, what’s the right recipe?

Since I’m a public finance economist, I’m tempted to say a flat tax and small government are an elixir for prosperity, but those policies are just one piece of a bigger puzzle.

A country also needs sensible monetary policy, open trade, modest regulation, and rule of law. In other words, you need small government AND free markets.

But even that doesn’t really tell us what causes growth.

In the past, I’ve highlighted the importance of capital formation and shared a remarkable chart showing how workers earn more when the capital stock is larger (which is why we should avoid punitive double taxation of income that is saved and invested).

But that also doesn’t really answer the question. After all, if a larger capital stock was all that mattered, doesn’t that imply that we could get prosperity if government simply mandated more saving and investing?

There’s something else that’s necessary. Something perhaps intangible, but critically important.

Deirdre McCloskey, in a video for Learn Liberty, says that ideas and innovation drive growth.

This is a great video for many reasons, but two points strike me as very important.

First, Deirdre is saying that economic liberty matters, but that modern prosperity also was enabled by a change in the culture. People began to appreciate and respect entrepreneurs. You could call this a form of social capital (and I think such cultural norms are critically important for a thriving society).

And entrepreneurs are the innovators who figure out ways of mixing capital and labor in ways that generate ever-larger amounts of economic output, so they play a critical role in boosting prosperity.

Second, she reminds us that poverty is the normal human condition and that the modern era truly is an amazing change. Indeed, I was so shocked by her numbers that I had to investigate to see if she was exaggerating.

She wasn’t. Using the Angus Maddison data set, I looked to see if Deirdre was right about world prosperity resembling a hockey stick.

Sure enough, there was an amazing increase in prosperity beginning about 1800, just as she explained. Indeed, she could have said that people lived on less than $2 per day for much of recorded history.

Here’s the data for world per-capita economic output over the past two thousand years.

Wow. Unlike the make-believe hockey stick used by global warming alarmists, this one is real. And it shows that the economy definitely isn’t a fixed pie if the right policies – and the right attitudes – prevail.

So what’s the moral of the story?

Perhaps the most obvious lesson is that we should respect and appreciate entrepreneurs and other wealth creators.

Unfortunately, we live in an era where politicians would like us to believe that the economic pie is fixed and that it’s the job of government to re-slice the pie with class-warfare tax policy and lots of redistribution.

But when they re-slice the pie, they also change the size of the pie. And not in a good way.

Last August, I shared a list of companies that “re-domiciled” in other nations so they could escape America’s punitive “worldwide” tax system.

This past April, I augmented that list with some commentary about whether Walgreen’s might become a Swiss-based company.

And in May, I pontificated about Pfizer’s effort to re-domicile in the United Kingdom.

Well, to paraphrase what Ronald Reagan said to Jimmy Carter in the 1980 presidential debate, here we go again.

Here’s the opening few sentences from a report in the Wall Street Journal.

Medtronic Inc.‘s agreement on Sunday to buy rival medical-device maker Covidien COV PLC for $42.9 billion is the latest in a wave of recent moves designed—at least in part—to sidestep U.S. corporate taxes. Covidien’s U.S. headquarters are in Mansfield, Mass., where many of its executives are based. But officially it is domiciled in Ireland, which is known for having a relatively low tax rate: The main corporate rate in Ireland is 12.5%. In the U.S., home to Medtronic, the 35% tax rate is among the world’s highest. Such so-called “tax inversion” deals have become increasingly popular, especially among health-care companies, many of which have ample cash abroad that would be taxed should they bring it back to the U.S.

It’s not just Medtronic. Here are some passages from a story by Tax Analysts.

Teva Pharmaceuticals Inc. agreed to buy U.S. pharmaceutical company Labrys Biologics Inc. Teva, an Israeli-headquartered company, had an effective tax rate of 4 percent in 2013. In yet another pharma deal, Swiss company Roche has agreed to acquire U.S. company Genia Technologies Inc. Corporations are also taking other steps to shift valuable assets and businesses out of the U.S. On Tuesday the U.K. company Vodafone announced plans to move its center for product innovation and development from Silicon Valley to the U.K. The move likely means that revenue from intangibles developed in the future by the research and development center would be taxable primarily in the U.K., and not the U.S.

So how should we interpret these moves?

From a logical and ethical perspective, we should applaud companies for protecting shareholders, workers and consumers. If a government is imposing destructive tax laws (and the United States arguably has the world’s worst corporate tax system), then firms have a moral obligation to minimize the damage.

Writing in the Wall Street Journal, an accounting professor from MIT has some wise words on the issue.

Even worse, legislators have responded with proposals that seek to prevent companies from escaping the U.S. tax system. The U.S. corporate statutory tax rate is one of the highest in the world at 35%. In addition, the U.S. has a world-wide tax system under which profits earned abroad face U.S. taxation when brought back to America. The other G‑7 countries, however, all have some form of a territorial tax system that imposes little or no tax on repatriated earnings. To compete with foreign-based companies that have lower tax burdens, U.S. corporations have developed do-it-yourself territorial tax strategies. …Some firms have taken the next logical step to stay competitive with foreign-based companies: reincorporating as foreign companies through cross-border mergers.

Unsurprisingly, some politicians are responding with punitive policies. Instead of fixing the flaws in the internal revenue code, they want various forms of financial protectionism in order the stop companies from inversions.

Professor Hanlon is unimpressed.

Threatening corporations with stricter rules and retroactive tax punishments will not attract business and investment to the U.S. The responses by the federal government and U.S. corporations are creating what in managerial accounting we call a death spiral. The government is trying to generate revenue through high corporate taxes, but corporations cannot compete when they have such high tax costs. …The real solution is a tax system that attracts businesses to our shores, and keeps them here. …The U.K. may be a good example: In 2010, after realizing that too many companies were leaving for the greener tax pastures of Ireland, the government’s economic and finance ministry wrote in a report that it wanted to “send out the signal loud and clear, Britain is open for business.” The country made substantive tax-policy changes such as reducing the corporate tax rate and implementing a territorial tax system. Congress and President Obama should make tax reform a priority.

Here’s some info, by the way, about the United Kingdom’s smart moves on corporate taxation.

For more information on territorial taxation, here’s a video I narrated for the Center for Freedom and Prosperity.

And here’s my futile effort to educate the New York Times on the issue.

And if you want some info on the importance of lower corporate taxation, here’s another CF&P video.

P.S. You may be asking yourself whether it would have been better to say that America’s corporate tax is “sadistic” rather than “masochistic.”

From the perspective of companies (and their shareholders, workers, and consumers), the answer is yes.

But I chose “masochistic” because politicians presumably want to extract the maximum amount of revenue from companies, yet that’s not happening because they’ve set the rate so high and made the system so unfriendly. In other words, they’re hurting themselves. I guess they hate the Laffer Curve even more than they like having more money with which to buy votes.

The U.S. government is driving some of its most productive citizens abroad. The only beneficiaries are countries such as Singapore and Switzerland, which offer sanctuary to Americans fleeing avaricious Uncle Sam.

Three years ago Eduardo Saverin, one of Facebook’s founders, joined 1780 other Americans in renouncing their citizenship. Heading overseas allowed him to reduce the federal government’s take when his company went public.

Just 231 people gave up their citizenship in 2008. Last year the number was 2999. The first three months of 2014 was 1001, up from 679 for the first quarter of last year. 

Tax flight is not an option for most people. However, the rich have more choices internationally. And they increasingly are telling Uncle Sam goodbye.

So are big corporations, such as Pfizer, which is seeking to buy the British pharmaceutical company AstraZeneca. The acquisition would allow Pfizer to move its headquarters to the United Kingdom, which employs a “territorial” tax system, with taxes collected only where the income is earned, in contrast to Washington’s worldwide levy. 

About 50 firms have moved their headquarters over the last three decades, half of them since 2008. Last month the Obama administration decried the practice and proposed to increase the share of foreign ownership required for inversions.

Traditionally the entrepreneurial and productive wanted to come to America. Many still do. But the choice is no longer so clear-cut. 

Some lawyers admit that they counsel foreign businessmen to consider carefully before seeking American citizenship. Washington’s increasingly greedy and petty behavior appears to be having an impact. Hong Kong tax attorney Timothy Burns argued: “Fifteen or 20 years ago there was a big rush to make sure your kids became U.S. citizens, for access to U.S. schools for example. Now we’re seeing just the opposite.” 

There are high, progressive rates at home on top of a comically complicated tax code. The U.S. alone among major industrialized states taxes Americans living overseas. America also is one of the few countries to use worldwide corporate taxation—claiming a cut of money earned everywhere, no matter how little a connection to the U.S.

Moreover, as I point out in my article on fee​.org: “U.S. citizens overseas must file foreign bank account reports, backed by big civil and criminal penalties. In 2010 Congress passed the Foreign Accounts Tax Compliance Act, which attempts to turn every foreign financial institution into an IRS agent. The results are significant compliance costs and fearsome legal risks.”

Increasingly banks and other companies are telling Americans to go elsewhere. Complained tax attorney Brad Westerfield, the rules have “become so complicated—the increased filing obligations over the years. You see more people giving up their citizenship or relinquishing their Green Cards.”

Not that it’s easy to escape. Washington hits up departing wealthy citizens for a tax on unrealized capital gains. Yet Senators Chuck Schumer and Bob Casey have introduced legislation to double the levy to 30 percent for those leaving America.

Of course, most people are likely to think about more than money before giving up their citizenship. But current policy creates powerful pressure for some. Increasing tax flight should serve as a wake-up call for Washington politicians. Unfortunately, they insist on blaming everyone but themselves. Heading overseas to save money is “immoral,” asserted Sen. Charles Grassley (R‑Iowa).

But what is moral about the looting and pillaging that goes on every day in Washington? Politicians are among the greediest people in America, acting at the behest of the envious who are determined to use government to live at everyone else’s expense. Today’s political overseers promise much, take more, and deliver little. 

America once was a land of opportunity. As it loses that distinction more people are tempted to go elsewhere. Instead of seeking to punish those who desire to move, policymakers who are real patriots would change the punitive policies which are pushing people abroad.

Imagine how weird it would be if the Cato Institute and Americans for Tax Reform praised Barack Obama for fiscal responsibility. And think how inconceivable it would be for the Heritage Foundation and the National Taxpayers Union to applaud Tim Geithner for economic stewardship.

The Canadian version of that happened while I was at the conference of the World Taxpayers Association in Vancouver two weeks ago.

The event was organized by the Canadian Taxpayers Federation and the main speaker was Paul Martin of the Liberal Party, who served as finance minister from 1993 to 2002, and then as prime minister from 2003 to 2006. I should add, for context, that the Liberal Party in Canada is not a classical liberal party with a track record of free markets and small government.

But Paul Martin was honored because he was responsible, while finance minister, for one of the best records of fiscal restraint of any policymaker in recent history (click here for international comparisons).

I’ve pointed out that the burden of spending fell under Bill Clinton, and I’ve even acknowledged that the federal budget hasn’t grown much under Obama, at least once you get past his first couple of years. But Paul Martin was far more frugal. And since Canada has a parliamentary system, there’s no ambiguity about who deserves credit. He restrained spending when his party had control.

What happened to generate the good results? For all intents and purposes, he imposed a spending freeze. And I’m talking a nominal spending freeze, not the kind of fake fiscal discipline you get when politicians make “cuts” off an inflated baseline. Because the budget was successfully restrained, that addressed both the problem of too much spending and the symptom of red ink.

In his speech, Martin won me over when he bragged that the burden of government spending fell to its lowest point in 50 years. My man-crush on him became even more pronounced when he said his administration allowed agencies to ask for more funds, but only if they identified offsetting cuts elsewhere. What a novel concept! A government that actually looked at tradeoffs and prioritized outlays. Sort of like a household or business.

I asked the former prime minister a couple of questions. I was specifically interested in why the Liberal Party didn’t behave like other left-wing parties and raise taxes to enable bigger government. Martin said there were some in his party who wanted that approach, but that there were two reasons why he instead chose to follow good policy.

First, enough people understood that Canada has a spending problem rather than a revenue problem. And second, there was concern that financial markets would react poorly if policymakers simply pushed for higher taxes and ignored the size of government. I wish the average Republican had the same sophisticated understanding of fiscal policy.

No wonder Canada got such good results. They imposed austerity on the public sector, rather than trying to squeeze the private sector (a distinction that seems to escape Paul Krugman).

To give you an idea of what Paul Martin accomplished, here is a video, prepared by the Canadian Taxpayers Federation, that features laudatory comments by representatives of major market-oriented think tanks. At the risk of stating the obvious, I don’t think there will ever be a video like this about Obama.

The video is very well done, even though I think it focused too much on red ink and not enough on the real accomplishment of spending restraint. On that issue, Chris Edwards has produced some very good data on what’s happened to the burden of government spending is his home country. And for further information on the topic, here’s my video on international examples of spending restraint. Canada, you’ll notice, is one of the prominent case studies.

P.S.: If you know any Keynesians, you can have some fun by asking them why Canada’s economy grew when the burden of government spending was reduced.

P.P.S.: It’s also very impressive that Canada has one of the lowest levels of welfare spending of any developed nation.

P.P.P.S.: No wonder Canada now ranks above the United States for economic freedom, and the freest jurisdiction in North America is actually a Canadian province.

P.P.P.P.S.: To end on a humorous note, Canada should fortify its border to avoid an influx of American leftists.

An important local story in Washington, D.C. this week is the D.C. City Council’s proposed tax overhaul package. The package would restructure the tax code and reduce revenue by $67 million a year. Unfortunately, special interests may be poised to defeat generally good, pro-growth reform.

The proposal passed 11–2 on its first reading. It was the byproduct of months of study and debate. Under the plan, income tax rates would be cut, which would benefit middle-income residents. The standard deduction would be increased, particularly benefiting lower-income residents. The DC Fiscal Policy Institute estimates that middle-income families with incomes between $50,000 and $75,000 would save an average $400 annually.

It also would lower the corporate tax rate from 9.975 percent to 8.25 percent by 2019, while cutting the “death tax” and eliminating some wasteful tax credits.

These changes would provide much needed relief to D.C. residents and businesses, and make D.C. a little more competitive with its neighbors.

To partly offset the loss in revenue, the city council decided to expand the sales tax base to include some currently untaxed services, such as carpet cleaning, beautician services, and storage facilities. It would keep the sales tax rate at 5.75 percent, lower than Maryland and Virginia. 

However, one particular service industry is trying to sink the entire deal. The sales tax base expansion would include fitness services, such as gym and yoga studio memberships. One gym, Vida Fitness, is leading the charge against the “D.C. Fitness Tax,” urging customers and D.C. residents to sign a petition opposing treating fitness services like most other retail goods and services. Contrary to what Vida Fitness and others say, this isn’t a new tax only affecting their industry; it is simply the expansion of the general sales tax base to include their industry’s products.

I’m not in favor of new taxes, but it is also not fair that gyms are exempt from sales taxes that hit most other retailers and their customers. As Wes Rivers of the DC Fiscal Policy Institute described it, “D.C. residents already pay sales tax on exercise equipment, running shoes, and yoga mats.” Twenty-two states include fitness services in their sales tax bases.

Middle-income residents will save more in income taxes than people will pay in increased sales taxes on gym memberships. Many of those taxpayers likely belong to gyms and yoga studios, so Vida Fitness’ opposition may hurt its customers more than it helps.

The city council should go further in cutting tax rates, but this package is a good first step. It moves D.C.’s tax code a little away from the income tax and towards the consumption tax, which is a more fair and efficient tax structure. Hopefully, policymakers won’t let special interests derail a generally pro-growth reform in D.C.