Next week is April 15, the day when most Americans have to file their federal income tax returns. To protest the allegedly high level of taxation in the United States, various right-wing groups are organizing tea parties around the country in the spirit of the Boston Tea Party of 1773.
The irony of these protests is that federal revenues as a share of the gross domestic product will be lower this year than any year since 1950. According to the Congressional Budget Office, the federal government will take only 15.5% of GDP in taxes this year, compared to 17.7% last year, 18.8% in 2007 and 20.9% in 2000.
The truth is that the U.S. is a relatively low-tax country no matter how you slice the data. The following tables illustrate this fact by comparing the U.S. to other members of the Organization for Economic Cooperation and Development, a Paris-based research organization.
As Table 1 shows, total taxation (federal, state and local) amounted to 28% of the GDP in the U.S. in 2006. Only four of the 30 OECD countries had a lower tax ratio. Taxes averaged 35.9% for the OECD as a whole and 38% in Europe. Citizens of Denmark and Sweden paid very close to 50% of their total income in taxes.
Table 1: Total Taxes as a Share of GDP, 2006
Denmark |
49.1 |
U.K. |
37.1 |
Ireland |
31.9 |
Sweden |
49.1 |
Hungary |
37.1 |
Greece |
31.3 |
Belgium |
44.5 |
Czech Rep. |
36.9 |
Australia |
30.6 |
France |
44.2 |
N.Z. |
36.7 |
Slovak Rep. |
29.8 |
Norway |
43.9 |
Spain |
36.6 |
Switzerland |
29.6 |
Finland |
43.5 |
Luxembourg |
35.9 |
U.S. |
28.0 |
Italy |
42.1 |
Portugal |
35.7 |
Japan |
27.9 |
Austria |
41.7 |
Germany |
35.6 |
Korea |
26.8 |
Iceland |
41.5 |
Poland |
33.5 |
Turkey |
24.5 |
Netherlands |
39.3 |
Canada |
33.3 |
Mexico |
20.6 |
Source: OECD
There's a stronger case for the U.S. being a high tax country when looking at the top statutory tax rate on labor income. The OECD calculated the U.S. rate at 41.4% in 2007. As Table 2 shows, this put America right in the middle of the distribution despite a reduction in the top rate from 46.7% in 2000. The reason is that 19 OECD countries have reduced their top rate since 2000; only 3 have increased it.
Of course, the top rate applies only to those with very high incomes. According to the OECD, one would need to make almost 9 times the average worker's wage to pay the top rate in the U.S. In most OECD countries one hits the top rate at an income barely above that of the average worker, which puts workers in other countries in much higher tax brackets than those in the U.S.
Table 2: Top Statutory Income Tax Rate, 2007/2000
Denmark |
59.7/59.7 |
Canada |
46.4/46.4 |
U.K. |
40.0/40.0 |
Sweden |
56.5/55.4 |
Italy |
44.9/46.4 |
N.Z. |
39.0/39.0 |
Belgium |
53.5/63.9 |
Spain |
43.0/48.0 |
Luxembourg |
38.9/47.1 |
Netherlands |
52.0/60.0 |
Switzerland |
42.1/43.2 |
Korea |
38.5/44.0 |
Finland |
50.5/55.2 |
Portugal |
42.0/35.0 |
Hungary |
36.0/40.0 |
Austria |
50.0/45.0 |
U.S. |
41.4/46.7 |
Iceland |
35.7/45.4 |
Japan |
50.0/50.0 |
Ireland |
41.0/44.0 |
Turkey |
35.6/35.6 |
France |
47.8/53.3 |
Greece |
40.0/45.0 |
Czech Rep. |
32.0/32.0 |
Germany |
47.5/53.8 |
Norway |
40.0/47.5 |
Mexico |
28.0/40.0 |
Australia |
46.5/48.5 |
Poland |
40.0/40.0 |
Slovak Rep. |
19.0/35.0 |
Source: OECD
Table 3 presents effective tax rates for an average one-earner couple with two children. It shows American workers paying 11.8% of their income in taxes in 2007. Only five countries had lower tax rates. The average for all OECD countries was 21%--almost twice the rate paid by American workers.
One may wonder how working people manage to pay so much in taxes in other countries. The answer is that they get a lot back from the government in other ways. For example, most other countries have a broad system of family allowances that come in the form of cash payments to virtually all families regardless of income.
Table 3: Personal Income Tax Rate on an Average Worker, 2007
Hungary |
38.7 |
U.K. |
25.4 |
Luxembourg |
15.3 |
Denmark |
35.8 |
Poland |
24.7 |
Portugal |
14.8 |
Austria |
31.8 |
Germany |
23.9 |
Iceland |
14.4 |
Netherlands |
31.7 |
Australia |
23.4 |
Spain |
12.4 |
Belgium |
30.6 |
France |
21.9 |
U.S. |
11.8 |
Turkey |
30.3 |
N.Z. |
21.5 |
Czech Rep. |
10.8 |
Finland |
30.1 |
Italy |
20.4 |
Slovak Rep. |
9.7 |
Sweden |
27.6 |
Canada |
16.9 |
Korea |
9.5 |
Norway |
27.1 |
Switzerland |
16.5 |
Ireland |
5.9 |
Greece |
26.5 |
Japan |
16.3 |
Mexico |
5.2 |
Source: OECD
When these cash payments are deducted from taxes, the effect is to substantially reduce the effective tax rate in almost every OECD country. As Table 4 shows, in many cases the impact of cash allowances is dramatic. The effective tax rate falls to just 2.8% from 21.5% in New Zealand, and in Ireland workers get back more than 200% of their tax payments.
Another way that workers in other countries benefit is in having almost all of their basic health care expenses covered by the government. According to the OECD, 19 of its 30 member countries cover 100% of health care costs, and another eight cover more than 89% of costs. Of the three remaining countries, Turkey covers two-thirds of health expenses, and Mexico pays for half.
In the U.S., however, the government covered only 27.4% of health costs in 2006. And almost all of that went either to the elderly in the form of Medicare or the poor in the form of Medicaid. The American average worker either had to pay for his own insurance in the form of deductions from his pay or go without.
In 2008, employer-provided health insurance reduced the cash wages of American workers by 7.9%, according to the Bureau of Labor Statistics. If businesses didn't have to pay for health insurance, they could afford to pay their workers 7.9% more and be no worse off. If workers paid 7.9% more of their income in taxes to pay for national health insurance, they would also be no worse off.
To a large extent, this is exactly what happens in other countries. Workers see the higher taxes they pay the same way Americans view the deduction from their pay for health insurance--not as money down a rat hole, but as the payment for a tangible benefit.
This isn't necessarily an argument for national health insurance. There are lots of reasons why it may be preferable to maintain the largely private health system we have in America. No one thinks it would be a good idea to pay higher taxes in return for having the federal government provide us with food. Variety and quality would undoubtedly suffer a great deal. The same would be true if the federal government took over the provision of health care.
The point is that one can't look just at the taxes people pay here or elsewhere without looking at what they get in return. It doesn't automatically follow that the places with the lowest taxes are the best places to live and work. This is obvious when we think about where to buy a house. We always look at the quality of local schools as a major factor and are willing to pay higher property taxes in return for good schools. The same is true at the national level as well. Higher taxes may pay for services that people value and thus are not as burdensome as they might appear at first glance.
Table 4: Income Tax Rate Less Cash Transfers, 2007
Turkey |
30.3 |
U.K. |
20.6 |
Australia |
10.0 |
Denmark |
29.3 |
Austria |
19.8 |
Korea |
9.5 |
Netherlands |
26.9 |
Sweden |
19.8 |
Switzerland |
9.3 |
Greece |
26.5 |
France |
17.5 |
Iceland |
6.7 |
Poland |
24.7 |
Japan |
13.9 |
Mexico |
5.2 |
Hungary |
24.4 |
Italy |
12.5 |
Slovak Rep. |
4.4 |
Germany |
23.9 |
Spain |
12.4 |
N.Z. |
2.8 |
Finland |
22.9 |
U.S. |
11.8 |
Luxembourg |
2.8 |
Belgium |
22.4 |
Canada |
10.6 |
Czech Rep. |
-6.3 |
Norway |
21.5 |
Portugal |
10.3 |
Ireland |
-12.0 |
Source: OECD