Political debates about taxes often revolve around a simple question: Should they be higher or should they be lower? Economist Thomas Piketty argues that this conversation draws the spotlight away from a much more important topic: How do you spend taxes once you’ve collected them? Poorer European countries like Romania and Bulgaria, which have relatively low tax rates, do not necessarily struggle because their governments don’t tax enough. Likewise, Sweden and Denmark are not successful states merely because the tax rate is 50 percent of GDP or higher. What sets these nations apart are the values which inform their tax spending. Sweden and Denmark thrive because they invest so much in education, public infrastructure, and other building blocks for growth and prosperity.
Thomas Piketty: Will lower tax lead to higher growth for lower growth? You know, it really depends what's the level of tax you start from in what country and it really depends what you do with your tax revenue. In Europe, it's interesting because we have 28 different countries in the European Union with very different level of taxation. Now the countries with the lowest tax level, countries like Bulgaria or Romania, where the total tax revenue is 20 or 30 percent GDP, whereas the richest countries like Sweden or Denmark have 50 percent of GDP in tax revenue. So if it was enough to have low tax in order to be rich, then Bulgaria and Romania would be richer than Sweden and Denmark and apparently this is not working this way. Probably because what Sweden and Denmark do with their high tax revenue is to invest them in education, in public infrastructure. So if you do useful things with your tax revenue, in fact it can be very good for growth and you need public infrastructure; you need public investment in education in order to grow. Now of course, if you don't to do all these good things with your tax revenue, then higher taxes can certainly be bad for growth. So it all depends what you do with your tax.