Tuesday, December 27, 2011

Lower Tax Brazil Overtakes Higher Tax Britain

Now Number Six

Brazil has apparently passed Great Britain to become the sixth largest economy in the world measured by GDP, according to this article in the UK Guardian.  (The United States is first, followed by China, Japan, Germany and France.)  Of course, Brazil's population of 203 million is more than three times that of Britain, with the result that Britain's per capita GDP is more than triple that of Brazil.  The Guardian article mentions several factors that it says account from Brazil's strong GDP growth relative to that of Britain.  For instance, Brazil has been exporting heavily to China, itself a rapidly growing economy.  Moreover, the banking and credit crisis in Britain, Europe and the United States has slowed the British economy as well as that of some of its trading partners.

The Guardian story leaves out another possible explanation for the divergence between British and Brazilian growth rates, namely, tax policy.  For, as previously reported on this blog, Brazil's top income tax rate is less than 30 percent, compared to a top rate of 50 percent in Great Britain.  (The top British rate, it should be noted, is the fourth highest in Europe, behind only Sweden, Denmark and the Netherlands.  In 2009, by contrast, Britain had the 13th highest rate in Europe.)  While Brazil has relatively high payroll taxes, one source reports that its tax to GDP ratio is nonetheless significantly lower than that of Britain's.  According to a previous article in the Guardian, some economists in Britain have contended that Britain's high tax rates are rendering the country less competitive internationally and slowing its growth.  Brazil's most recent triumph may be "exhibit A" supporting this assertion.  Nations rarely tax their way to prosperity.