How high is the tax burden? The most common way of comparing different countries is to look at how much of the total economic value created in each country – that is, the GDP – goes to taxes. In the UK the tax rate is 33 per cent of GDP. This is considerably less than in Denmark (47 per cent), but however lower than in the US or South Korea (24 per cent). Measuring the tax rate as a share of GDP is often the basis of international comparisons, research and ultimately the policy debate regarding the scope of the public sector. However, the measure is misleading.

Firstly, government spending tends to be considerably higher than the tax rate as share of GDP, since government often have other revenues in addition to taxes (such as income from government firms) and since many governments keep borrowing to spend more. A perhaps more important reason, which many fail to take into account, is that all of the economic value created cannot be consumed.

A significant chunk of the GDP (typically 15 per cent) must each year be used to compensate for wear-and-tear occurring in factories, buildings and other capital assets. These funds are not available for consumption, either in the private or public sector. Another common adjustment to GDP is to subtract the income payable to the rest of the world and add the corresponding items receivable from the rest of the world. After adjusting for both foreign incomes and wear-and-tear, we are left with the measure net national income. This can be seen as the funds available in each country for consumption and investments.

Milton Friedman often argued that we must measure GDP as a share of net national income. The reason can easily be seen in the figure below. This more correct measure shows that the true tax rate in the UK is 38 per cent, not the 33 per cent measured as share of GDP. The same logic applies to all modern economies. In Ireland for example, the tax rate is 39 per cent of net national income, much more than the 27 percent of GDP that is often used to describe the countries tax policy. In Finland 52 per cent of available funds go to taxes, not 42 per cent as share of GDP. Taxation, measured correctly, is simply higher than many believe.

Average data for 2010-2013. Source: OECD and own calculations.

Dr. Nima Sanandaji is a Swedish author and researcher. He has amongst others written the book "Scandinavian Unexceptionalism - Culture, Markets and the failure of Third-Way Socialism" (IEA).