Since the Reagan Revolution, which drastically cut tax rates for wealthy individuals and corporations, we have gotten used to hearing these sorts of announcements from our leaders. Few have dared to argue against tax cuts for businesses and business owners. Questioning whether entrepreneurs really need tax cuts has been like asking if soldiers really need weapons or whether teachers really need textbooks—a possible position, sure, but one that would likely get you laughed out of the room if you suggested it. Or thrown out of elected office.
Taxes in the U.S. have fallen dramatically over the past 30 years. In 1978, the top federal tax rates were as follows: 70 percent for individuals, 48 percent for corporations, and almost 40 percent on capital gains. Americans as a whole paid the ninth-lowest taxes among countries in the Organization for Economic Cooperation and Development, a group of 34 of the largest democratic, market economies. Today, the top marginal tax rates are 35 percent, 35 percent, and 15 percent, respectively. (Even these rates overstate the level of taxation in America. Few large corporations pay anywhere near the 35 percent corporate tax; Warren Buffett has famously said that he pays 18 percent in income tax.) Only two countries in the OECD—Chile and Mexico—pay a lower percentage of their gross domestic product in taxes than we Americans do.
But there is precious little evidence to suggest that our low taxes have done much for entrepreneurs—or even for the economy as a whole. "It's actually quite hard to say how tax policy affects the economy," says Joel Slemrod, a University of Michigan professor who served on the Council of Economic Advisers under Ronald Reagan. Slemrod says there is no statistical evidence to prove that low taxes result in economic prosperity. Some of the most prosperous countries—for instance, Denmark, Sweden, Belgium, and, yes, Norway—also have some of the highest taxes. Norway, which in 2009 had the world's highest per-capita income, avoided the brunt of the financial crisis: From 2006 to 2009, its economy grew nearly 3 percent. The American economy grew less than one-tenth of a percent during the same period. Meanwhile, countries with some of the lowest taxes in Europe, like Ireland, Iceland, and Estonia, have suffered profoundly. The first two nearly went bankrupt; Estonia, the darling of antitax groups like the Cato Institute, currently has an unemployment rate of 16 percent. Its economy shrank 14 percent in 2009.
Moreover, the typical arguments peddled by business groups and in the editorial pages of The Wall Street Journal— the idea, for instance, that George W. Bush's tax cuts in 2001 and 2003 created economic growth—are problematic. The unemployment rate rose following the passage of both tax-cut packages, and economic growth during Bush's eight years in office badly lagged growth during the Clinton presidency, before the tax cuts were passed.
And so the case of Norway—one of the most entrepreneurial, most heavily taxed countries in the world—should give us pause. What if we have been wrong about taxes? What if tax cuts are nothing like weapons or textbooks? What if they don't matter as much as we think they do?
I'm sure I've already pissed off some people with that question—and not just the rich ones. It's hard these days to say anything positive about taxes without being accused of economic treason. President Barack Obama's health care plan and his proposal to allow certain Bush tax cuts to expire in 2012—a move that would cause the top marginal tax rate on individuals to go up by 4.6 basis points, to the rate that prevailed in the late 1990s—have caused the administration to be eviscerated by business groups and their allies. "We are essentially undoing the very thing that has made America exceptional: the free enterprise system," wrote congressional candidate (and now a Republican congressman from New York) Richard Hanna in a letter published by the National Federation of Independent Business. "We can no longer devalue the energy of the entrepreneur this way." Newt Gingrich, a presidential hopeful and the former Speaker of the House, has called Obama's presidency the first step toward "European socialism and secularism," which he has suggested is a greater threat to our country than Islamic terrorism.
The idea that Americans should be more terrified of Norwegian economists than of al Qaeda bombmakers is pretty nutty, but I couldn't help wondering: How bad would European socialism really be? What if President Obama's health care and tax policies—which so far have been modest by European standards—are just the beginning? What if his proposal to allow the income tax rate on the richest Americans to rise by several basis points is just the first step? What if, say, by some crazy backdoor dealing involving Joe Biden, Nancy Pelosi, and the Ghost of Ted Kennedy, liberals manage something more sweeping: taxes of 50 percent, a government-run health care system, an expansion of Social Security, and sweeping regulations on business?
In other words, instead of some American version of European socialism, what if we got the genuine article? What if the nightmare scenario were real? What if you woke up tomorrow as a CEO in a socialist country?
To answer this question, I spent two weeks in Norway, seeking out entrepreneurs in all sorts of industries and circumstances.I met fish farmers in the country's northern hinterlands and cosmopolitan techies in Oslo, the capital. I met start-up founders who were years away from having to worry about making money and then paying taxes on it, and I met established entrepreneurs who every year fork over millions of dollars to the authorities. (Norway's currency is the kroner. I have converted all figures in this article to dollars.)
The first thing I learned is that Norwegians don't think about taxes the way we do. Whereas most Americans see taxes as a burden, Norwegian entrepreneurs tend to see them as a purchase, an exchange of cash for services. "I look at it as a lifelong investment," says Davor Sutija, CEO of Thinfilm, a Norwegian start-up that is developing a low-cost version of the electronic tags retailers use to track merchandise.
