What Is The True Tax Rate? And What Is The Best Single Tax or Pair of Taxes to Boost Growth Rates?

A guest article by Joseph Friedlander

  • Article summary:  
  • The true all inclusive tax rate of GDP may be harder to calculate than it appears and higher relative to the ‘real’ economy outside the world of government funded NGOs and contractors. 
  •  Readers are invited to give their take on the question: Should government expenditures be included in GDP or not (if not it hugely inflates the true tax rate because the GDP is by definition smaller.)  
  • Also readers are invited to pick a single pair of taxes to substitute for the current nearly untrackable complex of taxes in an ideal future.

Although Next Big Future focuses on future tech, part of the story on the rate of deployment of those future technologies depends on how much money governments have to spend (tax revenues, defense budgets) and private parties (industry, entrepreneurs, you) have to spend.  (After tax disposable income)

So on occasion there is an economic discussion as to what kind of future might result from what kind of governmental change. In this case, tax structures.

The net amount of tax paid of course varies with the individual because circumstances are different. But the all inclusive tax burden of GDP per country should be a number that is easy to calculate and it is not.

There are many issues involved in such a calculation, including the fundamental issues of ‘what is government vs. the private sector?’  I personally have over the years arrived at a conclusion that if a given allegedly private firm or foundation that has above say 10 or 20 percent of its’ cumulative business with any branch of government (or any other allegedly private firm or foundation that effectively is a branch of the government) it too is effectively a branch of the government to the percentage of its’ involvement.

What this means –if my hypothesis is correct– is that as government influence spreads throughout an economy it saps the vitality of that economy by introducing what you might call sloppy habits or warped perspective on what are acceptable products. 

 (An example in the aerospace industry they keep the government and civilian departments separate because the cost-plus mentality leads to massive losses when you are selling for the open market. Other examples would be education systems in which the children comply with all government and union directives but learn no marketable skill; or what the late Neil Craig called ‘fakecharities’–(ie heavily or entirely funded by government which then proceed to sit on each other’s boards,  grant each other grants with government money they lobbied for using other government funds, and for window dressing spend 10-20% of their efforts on their alleged reason for being. )

Neil Craig cites this report as evidence

(1) Sock Puppets – How the government lobbies itself and why 
… when government funds the lobbying of itself, it is subverting democracy and debasing the concept of charity. It is also an unnecessary and wasteful use of taxpayers’ money. By skewing the public debate and political process in this way, genuine civil society is being cold-shouldered.
Sock Puppets: How the government lobbies itself and why, by Christopher Snowdon, shows that:
In the last 15 years, state funding of charities in Britain has increased significantly. 27,000 charities are now dependent on the government for more than 75 per cent of their income and the ‘voluntary sector’ receives more money from the state than it receives in voluntary donations.
State funding weakens the independence of charities, making them less inclined to criticise government policy. This can create a ‘sock puppet’ version of civil society giving the illusion of grassroots support for new legislation. These state-funded activists engage in direct lobbying (of politicians) and indirect lobbying (of the public) using taxpayers’ money, thereby blurring the distinction between public and private action.
State-funded charities and NGOs usually campaign for causes which do not enjoy widespread support amongst the general public (e.g. foreign aid, temperance, identity politics). They typically lobby for bigger government, higher taxes, greater regulation and the creation of new agencies to oversee and enforce new laws. In many cases, they call for increased funding for themselves and their associated departments.
Urgent action should be taken, including banning government departments from using taxpayer’s money to engage in advertising campaigns, the abolition of unrestricted grants to charities and the creation of a new category of non-profit organisation, for organisations which receive substantial funds from statutory sources.
 Friedlander here again. Why should having one huge customer distort the entire economy? It sounds confusing but think:  In a hypothetically totally private market, if you had a lot of small customers and one huge customer, you would be very focused on keeping that huge customer because his business could easily mean the difference between profit and loss in any given year.  How much more so when you have to comply with that customer’s regulations (mil-spec or otherwise) and he can in extremis  throw you into jail for violation of any of his rules.  A sufficiently big mass on a playing field will cause a sinkhole on the playing field. A yet bigger mass will cause a runaway singularity 
in that playing field and it’s collapsar time. https://en.wikipedia.org/wiki/Collapsar
The real economy vanishes and people desperately tread water to survive.

Why does this issue of what is private and public matter  in relation  to the true tax rate relative to GDP? Simply because of a recursion problem involving the question,

What is the true size of government?

and the other question,

 Should government expenditures be included in the true tax rate?

Because, obviously, if you exclude gov + contractors+ NGOs + everyone on the public dime from GDP calculations (at least the percentage of funding they get from the government) the GDP is a lot smaller.

And if you recalculate the tax rate to reflect that change you get a far higher number on the truly productive part of society (Note that my intent is not to insult anybody working for the government, merely that if you don’t have an actual productive part of the economy that manufactures office supplies and building materials and other things that can also pay NET taxes to the government you in the end will not be able to build government offices or even run them– the lies run out when the real money does– see the above link about Zimbabwe.)
 Should government expenditures be included in GDP or not? (if not it hugely inflates the true tax rate because the GDP is by definition smaller.)
  In the 1930s and 1940s, when the modern system of national income and product accounts (NIPA) was being developed, the scope of national product was a hotly debated issue. No issue stirred more debate than the question, Should government product be included in gross product? Simon Kuznets (Nobel laureate in economic sciences, 1971), the most important American contributor to the development of the accounts, had major reservations about including all government purchases in national product. Over the years, others have elaborated on these reasons and adduced others.

Why should government product be excluded? First, the government’s activities may be viewed as giving rise to intermediate, rather than final products, even if the government provides such valuable services as enforcement of private property rights and settlement of disputes. Second, because most government services are not sold in markets, they have no market-determined prices to be used in calculating their total value to those who benefit from them. Third, because many government services arise from political, rather than economic motives and institutions, some of them may have little or no value. Indeed, some commentators—including the present writer—(Robert Higgs_ )ultimately went so far as to assert that some government services have negative value: given a choice, the people victimized by these “services” would be willing to pay to be rid of them.

When the government attained massive proportions during World War II, this debate was set aside for the duration of the war, and the accounts were put into a form that best accommodated the government’s attempt to plan and control the economy for the primary purpose of winning the war. This situation of course dictated that the government’s spending, which grew to constitute almost half of the official GDP during the peak years of the war, be included in GDP, and the War Production Board, the Commerce Department, and other government agencies involved in calculating the NIPA recruited a large corps of clerks, accountants, economists, and others to carry out the work.

After the war, the Commerce Department, which carried forward the national accounting to which it had contributed during the war (since 1972 within its Bureau of Economic Analysis [BEA]), naturally preferred to continue the use of its favored system, which treats all government spending for final goods and services as part of GDP. Economists such as Kuznets, who did not favor this treatment, attempted for a while to continue their work along their own, different lines, but none of them could compete with the enormous, well-funded statistical organization the government possessed, and eventually almost all of them gave up and accepted the official NIPA..the issues that had been disputed at length in the 1930s and 1940s did not disappear. They were simply disregarded as if they had been resolved, even though they had not been resolved intellectually, but simply swept under the … rug. In particular, the inclusion of government spending in GDP remained extremely problematic….To resolve this question, I have computed what I call gross domestic private product (GDPP), which is simply the standard real GDP minus the government purchases part of it. 

If government expenditures were not purely consumptive but net productive they could in theory fill a vital role in the economy and help boot economic growth but that is a different post involving production of capital goods– not consumption of vast resources providing  mostly political net value for same.

One anecdotal example on the local government level I can offer is that often the local businessman of the year will be honored by the same government that is his biggest customer. His economic success is real but not indigenous in the sense that who knows if the private market would have booted his business to the same way that big government contracts did.  Example would be a office supplies contractor who sells to many government agencies, a car dealer (who sells to the same) and so forth. This banquet is held at a restaurant but none of those people would have gone to that restaurant on their own dime. I argue that if that restaurant has a large part of its’ business be from the government it too not only effectively represents government expenditure to that extent, but is in effect a branch of the government, however subordinate to that percentage. In relation to this in the USA Tax Freedom Day

Every dollar that is officially considered income by the government is counted, and every payment to the government that is officially considered a tax is counted. Taxes at all levels of government—local, state and federal—are included.

Note however that if the true tax rate is higher because a lot of unofficial taxes are ‘off the books’ and the true payments are higher because of fees, regulations, AND the taxpaying sector is smaller– that would be a huge discrepancy from the official statistics.

If the 75-80% true tax rate people are right,  Tax Freedom day would not be in the official April-May range  which implies a 33-40% rate but in the financial chill of September or October.

Look up the official statistics here for where you live https://en.wikipedia.org/wiki/Tax_Freedom_Day#United_States


 Recall also that for example a 75% tax rate as paid by a corporation or person (if you count all tax inputs at any level, including customs on the raw materials, sales taxes, income taxes, and so on) does not show up as 75% of GDP because income is just a subset of GDP.

There is an additional subtle point. Unless government expenditures are TRULY productive they are worse than equivalent malinvestments from the private sector (yet far easier to make)   Why?  Because a fool and his money are soon parted, and he goes into bankruptcy and is removed from making further bad financial decisions.  A government and its’ money spent foolishly just leads to sunk cost fallacy, doubling down and a runaway cycle (not necessarily rapid–it can take generations) of tax increases and private sector shrinkage. Also, as detailed here,
 assuming government wastes at least 50 percent of the resources expended, the net benefit to consumers of government production would be zero.

Now  we list some anecdotes from various bloggers.

This blogger quoted below is of the opinion that future has already been spent– although he does not explicitly say so he implies that stronger taxes and regulations sapped the potential growth (to say nothing of fostering malinvestment)


“What would our GDP or “income per capita” be if we had continued to grow at 4%?”

Had we continued our traditional, old school, EVIL and OPPRESSIVE 1950’s economic growth, our GDP would NOT be the paltry $14 trillion it is today (in 2005 numbers), it would be closer to $26 trillion.

We take the roughly 310 million Americans in the country today and that translates into a real GDP per capita of about $84,500.  However, that figure is in 2005 dollars.  I was surprised to find out based on the CPI how much inflation has occurred since then (despite what the government tells us) and apparently the US dollar has inflated by about 18%.  You adjust for that and what do you get?


Did I say $100,000 as just a guess?

All these economic problems we have with debt and social security and economic growth and student loans, etc. etc. – All these problems would be washed away if we had maintained our previous economy growth rate.
 A country that is no longer growing or prospering, but is stagnant and on the derivative value of 0, entering into decay… 

Another writer on the internet, FH Cofer of Georgia, wrote: a multi-million dollar government study identified that 23% of whatever you buy is tax (which disagrees with Scientific American which computed it to be 34% of the GDNP for the year 2000).

(Cofer, by the way is the author of the CLAMPIT proposal for a single sales tax in the USA. More on this below. )

It can also be the studies mentioned by Cofer indicate the tax portion of the PRICE you pay, but to get the money after-tax to pay that price in the first place you need pay tax. This gets very recursive, for by their very design the taxes are considered much better when too hidden for the voters to get worked up about. For example before 1943 and tax withholding the practice was you wrote a check to the tax authorities. Certainly that was the case in the 1920s. That was the biggest check most people wrote in a year and there was usually a high tide of public resentment about then.  By contrast the ideal system keeps money flowing in and the people calm

Other estimates of the true tax rate are rather higher.  One European researcher added to it the costs of interest which themselves are dictated by government fiscal policy.

According to Margrit Kennedy, a German researcher who has studied this issue extensively, interest now composes 40% of the cost of everything we buy. http://www.webofdebt.com/articles/rights.php
Few realize that this (inflation-JF)  is just another form of
taxation through which governments manage to
overcome the worst problems of an increasing
interest burden. —Margrit Kennedy

 That sounds quite high to me but I don’t have to accept her whole work to at least have an alert that there might be something of interest in it–such as inflation itself constituting a hidden tax. .
 But where does inflation come from if not by governmental powers directly acted on https://en.wikipedia.org/wiki/Deficit_spending or delegated? https://en.wikipedia.org/wiki/Monetary_inflation

The high estimate I have ever seen of the true tax rate comes from L. Neil Smith’s 7/8ths estimate.  (from a now defunct web pagehttp://down-with-power.com/secede.html)
 Taxes consume half of what we earn. Taxes
double the price of everything we buy. And regulations double the
price all over again. We all live on on eighth of what we earn.

(87.5% !  Of which elsewhere he explained that  75% was actual taxes piling up, disguised and undisguised, and the rest hidden costs of compliance which most studies don’t count as a tax.  But it is certainly an expense imposed by the unfunded mandate of the tax simply existing.)

Mike Darwin on his Chronopause Blog estimates true tax rates are up to 70%– 

I was alerted to the work of the economic analyst (and economist) Michael Mandel’s in the form of his seminal article“Why the Jobs Crisis is Actually an Innovation Crisis”

 I had to see, interface with, and become familiar with the manufacturing processes of businesses of many kinds. I toured Dow Chemical’s Zionsville research and production facilities, and spent countless hours learning to do tissue culture there when I was 12-13 years old, in 1966-7.  So, Mandel and Cowen are clearly wrong about the increase in productivity being slowed to the extent they assert. They are, however, absolutely right that the average man on the receiving end of this technological bonanza has been seeing increasingly flat gains in personal wealth, and now is seeing net losses. That is real. But what they are failing to see, and the question they are failing to ask is, “why did this happen and where did all the wealth from that increased productivity go?” Somebody undoubtedly got richer!

The answer is in my 2008 CCM-L post: this wealth was stolen by hidden taxation and largely hidden (and unappreciated) inflation coupled with irrational and unsustainable expenditures in areas such as health care and Defense. My rough guess is that conservatively, 60 to 70% (more now) of each individual’s productivity is taken from him before he ever gets his paycheck. The decaying, and now failing infrastructure in the US is proof positive that this wealth isn’t going to fund basic and ‘good’ things government can do – such build and maintain roads, dams, utilities, land reserves –  and maintain basic public health. INSTEAD, IT IS BEING STOLEN AND WASTED.

historically nation-states (and empires) collapse when the taxation burden on their populace exceeds ~30% of the GDP, or its equivalent. So, it would seem simple enough to look at the taxation rate and come up with a number as to how close to that historical margin we are at any given time, assuming, of course, that this number still applies, because in the past, peoples’ incomes were just barely enough, or a little more, than was required to keep them alive, or in a modest (very modest by today’s standards) zone of comfort…So, 30% taxation on total earned income almost certainly does not equal the breaking point for parasitic load today, because that breaking point probably represents the fraction of earned (and available) income you have to take from a population before they start to be acutely uncomfortable, begin to be unable to buy necessities AND become fearful about their prospects for long term stability, and even for their personal survival. The huge absolute growth in wealth has thus destroyed the utility of this at least 2,000-year-old indicator for predicting how much theft is intolerable to the continued functioning of the socioeconomic system.

From a site called Jim’s Blog evidence points that Mike Darwin is right from a commentator named Alrenous.  

Alrenous says:
2012 May 1 at 6:25 pm
Oh hell, I’ve been an idiot.

Official tax rates are ~35% of GDP. But what is GDP? It includes the government paying the money out again. That’s 2/3rds right there.

So even official statistics confirm that prices are dominated by taxes, often upwards of 70% of any outlay ends up in government hands.

I was initially skeptical of my 4:1 estimate because it was so high, but every analysis I’ve seen confirms it. This is the first of two I’ve seen confirming it just this week.


Jim, the host of the blog, gives a specific example of a 75% tax rate. (Not to be confused with a whole GDP rate)

Unfortunately the U.S. corporate tax rate is 39.2%. Now you have $60 800 000 in net income. If you are in the state of California, they want 8.84 percent corporate tax. So now you have 51 960 000. OK, this gets split between the various investors, the founding employees, and you, all whom are probably paying at the maximum marginal tax rate. So after it is paid out, the feds want 35%, and California wants 10%, so now that is down to 28 000 000 or so. And then you spend it, and there is sales tax, so now that is down to 26 000 000 or so.

Thus, three dollars for the taxman, one dollar for you.

Of course, should your plan fail, and everyone lose their money, that is your problem, not the government’s.

The late Neil Craig  http://neilsindex.blogspot.co.uk/ also wrote

…the current state parasitism where tax takes about 50% of the economy and regulatory controls (nuclear regulations, housing restrictions, environmentalism etc) destroy at least 50% of the possible economy reducing what people really get to 25% of the optimum. http://a-place-to-stand.blogspot.co.uk/2012/01/couple-of-interesting-articles-at-next.html

Next question:  Is the present system of taxes ideal for stimulating productive economic activity? I would argue not. 
Here is a list of 65 classes of taxes (by no means comprehensive) come up with by Michael Snyder,  of http://theeconomiccollapseblog.com/
http://theeconomiccollapseblog.com/archives/65-ways-that-everything-that-you-think-that-you-own-is-being-systematically-taken-away-from-you  The tone may be a bit distraught but the general point should be obvious:  Some people in the government may feel that ordinary people should not be overwhelmed or feel preyed upon when there are too many TYPES of taxes to keep track of.  

But many people in fact do feel that way, and it definitely can effect economic productivity if by no other mechanism than demoralization and hopelessness.
Hopelessness is the opposite of optimism so it is no surprise that government economists looking for ways to stimulate optimism by government expenditures will accumulate data points in favor of their cause.

But will these same government economists  even consider the possibility that the economic world they helped make by their previous recommendations  has reduced millions of formerly productive people to a state of economic lethargy?
History argues not.

 All this is assuming that the tax burden is not high enough to actually take a toll of personal savings, capital accumulation and the source of startup funds.  
 But apparently that is happening as well according to Charles Hugh Smith http://www.oftwominds.com/blogdec15/entrepreneurism12-15.html and as the same author demonstrates,  mandated expenses have all the value of  a tax for depleting startup capital http://charleshughsmith.blogspot.co.il/2015/08/our-government-destroyer-of-jobs.html

I have been monitoring the implosion of the real economy and was searching for evidence to collaborate my suspicions when I ran  across an episode of Modern Marvels (or a similar show which I cannot find the link to) where they build an office building at vast expense to have it occupied by–some LA transportation bureaucracy full of officers monitoring each other’s compliance with mandates–and I would bet having nothing to do with road building.  A microcosm of diverted wealth.

 The funny thing during the episode was a subcontractor of over a century in business went out of business while the construction was being filmed.  But the government cannot go out of business. And if new business formation is made harder by the above trends, you would tend to get a runaway dynamic or singularity of  more government spending to counter the effects of the previous government spending and a shrinking private sector more heavily taxed which then shrinks further…

And in relation to government buildings I cannot count the times I have noticed that a firm that must impress its clients (law firms, PR people, publically held corporations all of which as we have seen above may be effectively part of government at least partially) –they will have a fancy office but most offices of the small private sector are older and beat up. They pay the taxes for the government office, which nearly invariably look better than theirs.

Now we come to the last question of the title.

The rules of this game are:  You can take the entire mess of taxes that exists on your national and local level and you pick a single (or double) tax to replace it. What is the rate you would impose?

You do not get to say in addition to present tax structure, I think we need a carbon tax, or a tax on (fill in the blank). You get to pick one or two taxes, say why and how much,

What would be the best single tax or pair of taxes to promote vigorous economic growth, and why?  Or if you are not sure, what are the most destructive taxes you can think of.
Why this simple system, which will appear too simple to many people?

Because if you cannot know by heart how much tax you are paying it is difficult to make informed economic decisions in real time and that will certainly affect productivity.

My nominees— a form of Sales single tax invented by Frank H Cofer of Georgia called CLAMPIT.  I would pair it with a tariff to stop a surge in imports (because foreign governments often refund VAT to exporters and that would be a huge subsidy to foreign imports coming into the USA)

Some people are for a property tax/sales tax combo:

Robert Heinlein, as reported by Neil Craig in his blog came up with the following tax system,a  federal head tax paid by the states and a self-assessed property tax::

Taxation is low, simple-and contains a surprise. The Federal government is supported by a head tax paid by the States, and is mostly for military and foreign affairs. 
This state derives most of its revenue from real estate taxes. It is a uniform rate set annually, with no property exempted, not even churches, hospitals, or schools-or roads; the best roads are toll roads. The surprise lies in this: The owner appraises his own property.
There is a sting in the tail: Anyone can buy property against the owner’s wishes at the appraisal the owner placed on it. The owner can hang on only by raising his appraisal at once to a figure so high that no buyer wants it- and pay three years back taxes at his new appraisal.

Readers–what pair of taxes would you choose in place of the present system? And should government expenditures be included in GDP or not?  Make your comment below. 

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