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Speak English, lower taxes
Megan McArdle writes:
It is hard for high levels of taxation to survive a right of exit; Europe has mostly been protected (so far) by its many languages, which make it harder to move. But as the EU increases labor mobility, expect to hear more about harmful tax competition.
The story is about skilled Danes leaving the country so as to avoid higher taxes. The last time I was in Denmark I was struck how many service workers could not speak Danish (will a Spaniard or Hungarian really learn that language?) and in the workplace communicated in English. Greater policy competition is one of the most important results of so many Europeans speaking good English. High taxes and differential incomes, in turn, increase the incentive for people to learn good English, thereby creating a self-reinforcing dynamic. I've long thought that Europe will become more like the United States than vice versa, most of all through mobility and diversity, but I don't think that is a very popular view.
Posted by Tyler Cowen on December 28, 2007 at 09:32 AM in Political Science | Permalink
Comments
Tyler -- you are right. Euro politicians have taken their citizens for granted as a source of taxes, soldiers and workers. Some evoked real/fake nationalist emotions to keep their citizens on-side, but as the wages of peace have multiplied, Euro people have begun to see their neighbors as more than just holiday spots: The bleeding-edge emigrants have visited with limbs intact -- setting an example for others to follow. Hopefully, policies aimed at retained the most mobile and valuable workers on the margin will benefit those unwilling to pay the costs of moving out. This is an optimistic view, but expect some nationalist backlash against "cowards" who leave...
Posted by: David Zetland at Dec 28, 2007 10:06:40 AM
Tyler, Danish workers that don't speak Danish have nothing to do with Danes leaving the country. The Danes like many low birth rate modern states feel the need to fill the gap with immigration.
Danish is not that popular of a world language. Not in the way English or even Spanish is. Therefore, beggars can't be Choosers.
Posted by: mark at Dec 28, 2007 10:22:10 AM
Slightly off topic, but that website on the difficulty of languages you linked to is a joke. To take an example just from the intro: "Chinese speakers will probably pick up Japanese faster than people whose first language uses the Roman alphabet. In fact, Chinese has no grammatical system per se, which makes it easier to learn than many Western languages once you have memorized the basic characters."
1. Chinese does indeed have a grammatical system, as anyone who has studied the language at all could tell you. I thought the absurd notion that you could learn Chinese by memorizing "the basic characters" died out a hundred years ago. Apparently not.
2. Chinese and Japanese are in completely different language groups. They are as closely related as Chinese and English (and less closely related than, say, Japanese and various Turkic languages). It is as difficult for a native Japanese speaker to learn to speak Chinese as it is for a native English speaker to do so. As written Japanese has used Chinese characters as one of its character systems for over a thousand years, it is easier for someone who reads Japanese to learn to read some forms of Chinese, especially the classical written language.
3. Any site that is about languages and conflates written scripts and spoken language (see #2 above), should really be ignored.
The state department ranks languages based on difficulty for native English speakers and does it well. The rankings are based on the hours of classroom instruction needed to reach given levels of proficiency. Danish is actually one of the easiest languages for a native English speaker to learn (and probably close for native Spanish speakers, but probably not for native speakers of Hungarian). See "http://www.nvtc.gov/lotw/months/november/learningExpectations.html"
Posted by: Christopher at Dec 28, 2007 11:05:43 AM
there has been free mobility of labour between the Nordic countries for more or less the last hundred years, which rather puts a hole in this theory doesn't it?
Posted by: dsquared at Dec 28, 2007 11:50:59 AM
Hmmm. I find it very hard to believe many skilled Danes are leaving the country because of the taxes. Denmark is a tiny country and it is natural that a lot of people cannot find the opportunities they want there. If you're born in Wisconsin and want to be an actor you move to LA, or if you want to be a tech entrepreneur, you go to Silicon Valley. The point is you can do most things within the same country. Danes will leave for other places because that's where the skills they have are valued most. It's not about money.
Will Europe become more like the US than visa-versa? On a trivial level certainly. The US will never adopt a welfare state model to rival even the British version - which is the weakest one if we ignore Ireland and the newbies. That said, things will have to get very bad indeed for us to give up our welfare states. If the US goes into a prolonged downturn now and Europe keeps its head above water rather than following the US down, the 25% wealth gap between the US and EU15 will be narrowed considerably. It's hard to see us giving up our holidays and job security for 10% rise in purchasing power.
Posted by: Finnsense at Dec 28, 2007 11:54:43 AM
Hmmm. I find it very hard to believe many skilled Danes are leaving the country because of the taxes. Denmark is a tiny country and it is natural that a lot of people cannot find the opportunities they want there. If you're born in Wisconsin and want to be an actor you move to LA, or if you want to be a tech entrepreneur, you go to Silicon Valley. The point is you can do most things within the same country. Danes will leave for other places because that's where the skills they have are valued most. It's not about money.
Will Europe become more like the US than visa-versa? On a trivial level certainly. The US will never adopt a welfare state model to rival even the British version - which is the weakest one if we ignore Ireland and the newbies. That said, things will have to get very bad indeed for us to give up our welfare states. If the US goes into a prolonged downturn now and Europe keeps its head above water rather than following the US down, the 25% wealth gap between the US and EU15 will be narrowed considerably. It's hard to see us giving up our holidays and job security for 10% rise in purchasing power.
Posted by: Finnsense at Dec 28, 2007 11:55:30 AM
Finnsense:
But do you think the Scandinavians can keep up their model of high taxation running a welfare state for too long?
I've heard the opinion that the unique racially homogeneous demographic (almost bordering on clanship ) of Denmark etc. over the centuries made it possible to tax people so much without invoking huge resentment.
People don't seem to mind high taxes so much when they see the money helping "one of their own". But immigration breaks it down. I wonder if this is a tested theory....?
Posted by: Raul at Dec 28, 2007 12:02:43 PM
Raul,
Do you know for how long various US commentators have been
asking your question? Probably since well before you were
born.
Finnsense,
Now, now, we have learned on other threads that a small
country that has equal flows of people in and out with a
large country is a terrible place to live. Obviously
Denmark is a hellhole of people in agony over their
high taxes.
Posted by: Barkley Rosser at Dec 28, 2007 12:09:42 PM
Increasing tax competition can be mostly offset by greater transnational institutional power...like, say, the EU. If the EU gains greater latitude over taxation policy over the next 30 years, which isn't entirely outside the realm of possibility, then individual European nations will have less ability to compete via taxation policy. Competition will still exist, as the factors that are driving it will still be there, but it'll be along different lines.
Also: "People don't seem to mind high taxes so much when they see the money helping "one of their own". But immigration breaks it down. I wonder if this is a tested theory....?"
If I recall correctly, Thoma posted some studies on this a few months back. The consensus of them was that they are indeed true.
Posted by: Robert Olson at Dec 28, 2007 12:33:45 PM
Another bit of evidence that the wisegeeks site is a joke is when it says "On the other hand, German and Russian languages use a punctuation system said to be among the most difficult ones in the world." I'm not even sure what it would mean to have the world's most difficult punctuation system, but it certainly isn't true for German: German punctuation is perfectly straightforward and I've never before heard anyone (native speaker or not) comment on its difficulty.
Posted by: Anonymous at Dec 28, 2007 12:45:16 PM
Barkley Rosser:
Sure; probably before I was born! And so, the consensus is.......what? I was only curious.
Posted by: Raul at Dec 28, 2007 1:07:32 PM
as a native russian speaker, i can attest that russian punctuation is insane. back in the high school, when was the last time i had to care about it, i had very different interpretations of the same rules from different teachers.
Posted by: mishka at Dec 28, 2007 1:08:29 PM
"Danes will leave for other places because that's where the skills they have are valued most. It's not about money." How do the Danes get compensated for their skills, if not money?
Posted by: Tom at Dec 28, 2007 1:44:19 PM
I'll echo Tom's thought, but in the other direction. How in the world is Denmark, and its companies, going to attract skilled foreigners with punitive income tax rates?
At the same time it will be losing skilled workers, especially over time as people get more comfortable with the idea of living outside one's own country.
I think of it like West Virginia. The highly skilled have a huge tendency to leave, while virtually no one with skills migrates there. Over time this spells trouble for any territory with that characteristic.
Similarly, with West Virginia still in mind, there is a chicken and egg type of problem with businesses choosing locations to expand to. The businesses tend go where the workers have the skills, and the workers with the skills tend to go where the businesses are.
Finally, this will all come to a head in my opinion when the post WWII baby boom generation starts retiring en masse. No country's government and health pension system can handle that kind of demographic change, something will have to give. Any country that tries to tax its way out its unfunded obligations will likely fail, whilst those countries that try the opposite tack may well find a Laffer effect of sorts as the highest earning, highest skilled workers choose not to be suckers that are bled dry by punitive taxation head to relative tax havens.
Posted by: happyjuggler0 at Dec 28, 2007 2:25:28 PM
Contra others posting here, I'm skeptical of this theory. I'm shocked that in America we see so LITTLE interstate migration. Sitting here in New Jersey, with punitive property taxes and some of the worst business regulation in the country, there remains a pile of highly-skilled workers.
Some of this is non-monetary motivations, such as staying near family and friends, etc.
Perhaps some of this is just the flip side of happyjuggler0's chicken and egg problem. The people would like to leave, but do so in much less volume because the jobs are here; and vice versa for the businesses.
One would expect this throttling effect to eventually work itself out, but perhaps it prolongs the death throes of the state, allowing it to dig itself into a deeper hole.
Posted by: CWuestefeld at Dec 28, 2007 2:38:34 PM
"How do the Danes get compensated for their skills, if not money?"
My point was that if you want to be at the bleeding edge of many things, Denmark is not the place to be. Footballers don't go to the UK from all over the world just for the higher salaries. They go to play at the highest possible level.
"How in the world is Denmark, and its companies, going to attract skilled foreigners with punitive income tax rates?"
There are a lot more skilled workers in the world than there are countries with forgiving tax rates. For what it's worth I would gladly raise my kids in Finland for half the salary I would get in the UK. If you make your way to any of the Nokia buildings in Finland, you will find that they are full of skilled foreigners.
Posted by: Finnsense at Dec 28, 2007 2:46:22 PM
"There are a lot more skilled workers in the world than there are countries with forgiving tax rates."
Oh... is the rule one skilled worker per country?
Posted by: Cliff at Dec 28, 2007 3:05:23 PM
Denmark is hardly unusual in West Europe for the number of native Europeans deciding to pick up and emigrate. Holland has experienced a steady, increasingly large outflow of middle class Dutch the last decade as conflict, violence, criminality, and growing Muslim fundamentalism have been on the increase. Germany is not far behind. French Jews, deciding there's no future for them in a country racked by ethnic violence and growing anti-semitism, have been emigrating by the tens of thousands to Israel for several years now. Click here for fairly up-to-date data: http://www.hudson.org/index.cfm?fuseaction=publication_details&id=4948&pubType=HI_Articles
Some of those picking up have been moving to Britain and Ireland, mainly for jobs and may return to their countries of origins. But many too simply want to leave what they regard as an increasingly older, rapidly changing West Europe marked by these tensions, conflicts, slow economic growth except in Scandinavia and Ireland, declining native-European populations, growing Muslim immigrant communities hard to integrate, and --- contrary to what Europeans and Americans believe --- generally worse violent crime: rape, assault, armed robbery, homicide (the one exception), suicide, and mugging. That trend has been captured ever since the late 1980s by UN surveys of crime victims carried out four times by a Dutch university team, with collaborators world-wide. Australia was ranked the worst in such violent crime; Britain second (with a rapidly growing honmicide rate too); the US 15th out of about 22 industrial countries; France and Germany ranked noticeably worse than the US, and Italy too. In London these days, you are 5 times more likely to be mugged on the streets than in New York.
Were there more risk-taking Europeans full of initiative and ambition, emigration out of the Continent would no doubt be soaring. Instead, though it's on the upswing, almost all the risk-takers seemed to leave by the tens of millions in the 19th and early 20th century. The remaining, probably Jews and others deemed fit for extermination by the Nazis (and their widespread European collaborators), were largely killed off in WWII in genocidal rage.
What remains is a rapidly aging European population, increasingly risk-averse, who largely resists the changes needed to switch their economies from making things to creating, using, and manipulating information and innovating new high-tech businesses whose productivity surges are diffused throughout the national and regional economies. The US has largely managed this epochal transition; only three or four very small EU countries --- all under 10 million each (Sweden, Denmark, Finland, and Ireland) --- have come close.
The Buggy Professor, AKA Michael Gordon
http://www.thebuggyprofessor.com
Posted by: michael gordon, the buggy professor at Dec 28, 2007 3:07:45 PM
To Raul and happyjugglar,
Well, the point is that this is not a new issue at all. The Nordic
countries have for decades had higher tax rates than anywhere else
and also very high rates of Anglophonia, making it relatively easy
for them to migrate to the US or UK or other lower tax locations that
have a high demand for high skilled workers. And, indeed, lots of US
commentators have been going on and on for decades now about how at any
minute the whole region (or at least especially naughtily high tax Sweden)
is going to just implode at any minute if it does not wise up and get into
a race to the bottom of world tax rates with Reagan and Thatcher and
Switzerland and Hong Kong, and Guatemala, and Malawi, and, well, and it
has not happened so far.
Not only that, the high tax rates are popular in both Sweden and
Denmark. How do we know this? The main reason that referenda in
both countries to join the euro have been rejected has been exactly
the fear that this would subject them to greater pressure to conform
to the lower tax levels and lower levels of welfare states that one
finds in the rest of the Continent, even as both of those are viewed
as also wickedly and horrifyinly high by most US commentators. Instead,
as Buggy Professor notes, they are one of the few areas where growth is
doing just fine, thank you, despite the horrors of their high tax rates
(eeeeeek! run for your life!!!).
And Finnsense is also right. These countries are magnets for highly
skilled workers and continue to perform at the top in terms of generating
R&D and innovation. The scare stories amount to a lot of deluded
propaganda from people who simply cannot deal with the fact that these
places are doing very well, as well as pretty much any places on the planet.
Actually, I really am waiting for some of these clowns who were rattling
on about the impending death of the Swedish welfare state back in the 1970s
and even earlier, to publicly fess up that they were just plain wrong. But
then they might not be allowed back onto the editorial pages of the WSJ...
Oh, and just as a reminder from another thread: the net flow of migration
between the US and Sweden is that more people are going to Sweden from the
US than the other way around, and I doubt those emigrants from the US are
a bunch of illiterate Muslims or whomever, almost certainly high skilled.
Posted by: Barkley Rosser at Dec 28, 2007 3:38:59 PM
"The scare stories amount to a lot of deluded propaganda from people who simply cannot deal with the fact that these places are doing very well, as well as pretty much any places on the planet."
So what's your explanation? Taxes don't matter?
Okay, you seem to be right. Sorry, supply-siders. But what does matter? What does Sweden have that stagnant economies don't?
Posted by: Steve Miller at Dec 28, 2007 3:56:24 PM
Steve Miller,
Try to liberate your mind from the prison of political correctness and the answer will be obvious.
Posted by: Peter Schaeffer at Dec 28, 2007 4:04:09 PM
I have never been accused of being politically correct.
Posted by: Steve Miller at Dec 28, 2007 4:08:18 PM
It will be interesting to see how the Nordic countries fare over the next half century. I have family in Sweden, a Thai women that a Swedish guy met on holiday and took back to marry and start a family. Sweden has been very generous to her, including free training to become a pharmacist. She's smart and speaks English (as well as Swedish and Thai). She does say that she and her children have faced more racism lately than when they first moved there 15 years ago. Her fellow classmates at pharmacy school in particular were resentful (she went to school after just raising kids for the first decade she lived in Sweden).
Will resentment of the welfare state being offered to non-Swedes like her grow? Seems plausible. She went from a rural Thai village to middle class Swedish life, a dramatic improvement except for the weather.
A friend of mine is Finnish-American, but he goes back to Finland regularly. He describes Finland men as the most openly racist people he's known. I know his own mother strongly objected to him dating an Italian woman on the grounds that only northern europeans are really white. I realize Finland is the typically the outlier among the Nordic countries, and perhaps my friend's family is just unusually racist.
Posted by: jim at Dec 28, 2007 4:50:46 PM
I'm a Dane and about to leave Denmark. Taxes are a big part of it. And I'm not alone. Young people with a higher education are leaving. And we do speak English. Not perfectly, but if you live in an English-speaking country for a while, you'll be able to improve your ability to speak the language.
Finnsense do you work for free? Do you really think that salaries don't matter?
Posted by: A Dane at Dec 28, 2007 5:50:19 PM
As a Dane only a few years away from graduation I thought I might as well leave a comment, especially as I don't think I'll be staying in Denmark after graduation. Some random observations that might be of interest:
a) I agree with Tyler that the language barrier is smaller than it used to be and labor mobility has increased much over time. An important fact to keep in mind when having this discussion is that, at least in Denmark, the language barrier is in general decreasing in income/productivity - that is, the taxpayers the Danish government would most like to keep in the country are at the same time the ones most likely to leave.
b) A lot of Danes are quite happy with the high taxes, there's no way around this fact. But then again, quite a few of those working very hard are not very happy with the high tax rates. Point being that what the median voter thinks is not all that interesting here, they are not the ones moving. It is true that there are also in the top of the income scale some Danes who claims that they have no problem paying very high taxes, but there are a lot of discontent Danes up there too, even if most of them stay in the country.
The way I see it (or rather, a much simplified version of the argument) is this: There's a big difference between a marginal tax rate of around 40 and a marginal tax rate of 60-65+. One might argue that you get something in return for the higher taxes, but the validity of this argument decreases with the age of the taxpayer in question. The Danish system is not, the way it works to day, fiscally stable in the long run, something that the Welfare Commission (Velfærdskommissionen) spent a great deal of trouble telling us two years ago, when they finally released their conclusive report that had been underway for more than 4 years. What happened after the release of the report, the reactions to it and the consequences it had, incidentally illustrates very well one of the main problems with the Danish consensus-approach. So what happened? Pretty much nothing. Our PM went out the same day and said that all the suggestions relating to taxes and user pay would not be included in the political welfare negotiations that were to follow the release of the report, which pretty much undermined the whole purpose of the report. In the end, only a few of the 50 economic reform suggestions that the commission had presented were implemented.
c) One of Barkley Rosser's main points in his responses above is that it goes quite well in the Scandinavian countries. He's right of course, it goes quite well, at least compared to our neighbours. However, we don't know how much better it might have gone had the taxes been lower.
d) The Danish welfare state is bad for innovation and entrepreneurship. OECD recently ranked Denmark 12 out of a sample of 25 countries in a study on entrepreneurship. Foss and Bjørnskov had an article in Public Choice on the same subject not long ago.
Posted by: US at Dec 28, 2007 6:12:39 PM
