GDP And How Taxes Make You Happy

If asked, our economic selves would say we would be happiest living in a country with a healthy economy, whilst paying little or no tax at all.

But wealthy countries with a high income tax, such as the Scandinavian and Benelux countries as well as Austria and Switzerland, have both the highest tax rates AND the happiest citizens in the world. Why? The high taxes pay for a good education, transport and healthcare system for everyone, and so makes for contented citizens. In comparison, ultra-low or zero-income tax countries such as the UAE, Somalia, Western Sahara, The Cayman islands or Monaco, each come with their own evident drawbacks, ranging from size, excessive heat, ultra-expensive housing or safety. But if this makes you happy…

Collecting Taxes and GDP

For governments to be able to collect robust taxes and to have as well as fund a predictable budget, a strong and stable economic growth is needed. One may say that the transparency of a tax system and the efficiency of a government to collect taxes, are very much an indication of a country with a dependable and healthy GDP. GDP or Gross Domestic Product is the sum of all economic activity in a country: the total of all goods and services produced:

Consumer spending + investment + Government spending + Net exports, abbreviated as:


Consumer spending (C)

Simply put, these are the things on which we spend our money, such as coffees, clothing, haircuts, eating out and groceries. In most Western (mature) economies consumer spending is at least 40-50% of total GDP. So, what we do and buy has a direct effect on the economy.

Investment (I)

This is what businesses are spending. This could be buildings, equipment, machinery or staff. Big consumer tickets, like buying a house, also qualify as an investment for GDP purposes. Investment in staff and machinery will lead to a higher productivity and this level of investment is also an important gauge of confidence in an economy.

Government spending (G)

This is the money spent by governments on infrastructure. This can be money spent on hospitals, schools, roads, bridges, railways and defense. In some countries half or more of GDP is based on government spending (France for example).

Net exports (NX) = Exports minus imports

Net exports indicate the value of what we buy from abroad against what we sell to other countries. Net exports can boost GDP significantly. Countries like China or Germany, the manufacturers of the world, have a large component of net exports as part of their GDP.

Economic ‘boom and bust’

Positive GDP means people are ‘productive’. The high productivity brings more money into the system and leads to more consumer and business spending and thus increases the tax revenue for the Treasury. Money the Treasury can spend on things that benefit the population of its country. Economies with stable, steady rates of growth (economies can’t function with wild GDP swings), will see average wealth, living standards and education levels rise (at least if the government spends wisely, but this is another topic all together).

Negative GDP: if growth for two successive quarters is negative, this is technically a recession.Recessions may be caused by a number of factors such as a drop in exports, rising unemployment and/or lack of consumer confidence and reduced spending. The Treasury will immediately see a reduced cash-in as VAT receipts, corporate and personal tax receipts decrease.

When growth is slowing or decreasing for a prolonged period of time, such as after the Great Crisis of 2008 or going through a big shock like the pandemic, tax receipts will be much reduced whilst the government most likely will have more significant outgoings.

Although taxation provides about 30-45% of the overall income for the Treasury, it has other tools in its arsenal to manage a country’s finances. An obvious way for governments to save money is by not spending it. The government may cut or decrease funding to schools, hospitals, social care and community projects. This form of austerity was used by many countries after the 2008 crisis and it had a devastating effect on many communities.

Another, widely used way to bolster a government’s finances, is to borrow money. The Treasury does so by issuing government bonds for any period of time, varying from 2 to 40 years or sometimes even longer (so called perpetual bonds). It will pay an annual interest rate (coupon) and these bonds are snapped up and held by large banks, pension- and investment funds.

Lastly, governments – when faced with a reduced income – can raise taxes if there is room to do so. They can choose to raise corporate taxes and/or personal taxes. When GDP is down, raising personal taxes is not considered good policy as it will deter us from increasing our spending, further slowing growth. Governments therefore will look first at increasing corporate tax rates.

In most cases, governments- when in need of large sums of money will use a mix of austerity, borrowing and raising (predominantly corporate) taxes.

Incidentally, the UK government recently raised corporation tax from 19 to 25%, effective from 2023, in order to raise more funds to repay the hefty Covid incurred debt.

GDP growth, the level of taxation and how much disposable income we have, are strongly connected. But it is clear from the world happiness list of countries that low taxes do not equate, necessarily, happiness. But do high, but fair, taxes mean that people are happier? It seems so, at least as long as we are all active and productive economic citizens and share equally in the benefits provided by the wider economy, we are allegedly prepared to pay up. And be surely happier for it.

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