Chart of the day: America’s small tax revenues

By Felix Salmon
July 31, 2011
Barrie McKenna's great article on US tax rates, and pretty much speaks for itself.

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This chart comes from Barrie McKenna’s great article on US tax rates, and pretty much speaks for itself. While the rest of the developed world has seen its tax rate rise as it got richer, the US stands out as the one country where tax rates have been going down. In the OECD, only Chile and Mexico have lower tax burdens, and neither of them have been decreasing: both have relied very much on state-owned commodity wealth to stand in for tax revenue.

As McKenna reports,

The total tax burden on Americans, as a percentage of gross domestic product, stood at 24 per cent in 2009 – lower than it was in 1965 and still falling. That compares to 31.1 per cent in Canada, 34.3 per cent in Britain, 42 per cent in France, 37 per cent in Germany and 43.5 per cent in Italy. The Japanese, Australians and South Koreans all pay significantly more.

The United States is the only major country without a national value-added tax and its sales taxes are lowest in the OECD. Likewise, U.S. fuel and sin taxes are at the bottom among rich countries. And generous tax breaks mean many businesses and individuals pay few taxes, placing a heavy burden on a relatively narrow tax base…

Bill Frenzel, a former Republican congressman and now a scholar at the Brookings Institution in Washington, agrees no budget fix is possible without tax hikes…

Americans, he said, will never accept the kind of tax levels that exist in most other countries.

“The U.S. has always been a low-tax country,” he explained. “And we like it that way.”

This raises two questions. The first is why America’s taxes are so much lower than anybody else’s. Its system of government, after all, is a pretty standard democracy, so it’s not exactly baked in to the Constitution. The second question is why Americans don’t actually appreciate how low taxes are here. It’s a standard talking point in US politics that taxes are too high, and must be lowered; Republicans are adamant that even modest tax hikes, to levels still well below the rest of the developed world, would be economically devastating.

Right now a deal seems to be getting done in Washington which reduces the deficit by means solely of spending cuts, with no tax hikes at all. That makes no sense: just as it’s right that people should pay a higher tax rate as they get richer, the same is true of countries as well. Instead, the US seems to think that it can work as an advanced democracy while maintaining a tax rate more commonly associated with tinpot basketcases. Up until now, it’s managed to do that by borrowing the difference. But if it wants to try to cut spending to a level commensurate with its tiny tax base, it’ll soon learn how economically disastrous that can be.

(Via Kedrosky)


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Question: The second question is why Americans don’t actually appreciate how low taxes are here.
Answer: It’s a standard talking point in US politics that taxes are too high, and must be lowered;
Answer2: The media are all owned by a dozen or fewer large corporations, and thus have no desire to give airtime to alternative “viewpoints”. Consequently, there is no dispute within the media. (Further, take note of the recent poll results that say that (iirc) 72% of Americans think the rich should be taxed more. Ever wonder why, while watching the owned media, you never become aware of this alternative consensus?

Posted by Foppe | Report as abusive

We have low tax rates because the Republicons are are dedicated to stealing workers retirement funds. The surpluses Clinton left for Bush were enough to pay off the entire US debt by the time that the Social Security/Medicare trust funds would have to be amortized for beneficiary payments, all without having to raise taxes to pay for the amortization of those trust funds. The surplus Bush inherited was made up almost entirely of excess payroll taxes building up the trust funds. Bush took those excess payroll tax receipts and gave them “back” as income tax reductions, heavily weighted to the wealthy–who didn’t create those surpluses in the first place. By doing this, Bush guaranteed that taxes would have to be raised in order to amortize the trust funds. The failure to do so simply permits the Republicons to steal the money contributed by workers for their retirement. Everything about not raising taxes or limiting expenses, is about stealing our money.

Posted by bmz | Report as abusive

Felix, Felix, Felix, you have forgotten the amount of money americans are paying in credit card interest rates. Americans pay close to a trillion dollars a year in credit card interest!

On top of that, the overall tax rate SHOULD DROP as the GDP rises, otherwise the GDP would not rise.

On top of that, a more efficient infrastructure should ALSO result in a lower proportion of taxes versus GDP because efficiency rises.

On top of that, Satellite technology is creating HUGE profit margins for those who are vested in Satellite Technology, which in turn results in less brick and mortar opportunities and taxation opportunities.

gasp, a poorly veiled pro tax increase article if ever I read one.

Posted by SWARMtheBANKS | Report as abusive

The top 10% of Americans pays 45% of all taxes, a higher proportion by far than any other country, while the American top 10% earns only 33% of total income.

By comparison, the 10% of the UK earns 32% of total income and pays only 38% of all taxes. And the UK is one of the more progressively taxed countries. The taxes paid by the top 10% of other European countries are on average around 30% of total taxes. 7134.html

The reason America’s tax revenue as a percentage of GDP is below average is because America’s lack of a VAT means much lower tax rates on the American lower and middle classes. This fact is completely compatible with the Republican’s concerns that taxes are too high for the ~50% of Americans who actually pay any amount of federal income tax.

If the purpose of this chart is to advocate raising taxes on the American poor in order to bring the US up to its OECD peers, feel free to say so.

Posted by LZed | Report as abusive

LZed–the issue in the US is not the top 10%; the Democrats want/need the top 2%(who truly have disproportionate incomes) to pay back the money they stole from the middle class.

Posted by bmz | Report as abusive

@LZ: go fish with your meaningless relative percentages.
45% of 1000$ is still less in taxes than 38% of 2000$ in total revenues, for exmaple, so your comparison is meaningless. (And because anyone up to 33k or so pays basically no federal taxes, the tax base is bound to be smaller.)
Secondly, your figures are wrong: see, e.g. pincomes-2006prel.pdf
The top decile earned 49% of all income in 2006 (top 1% takes 1/3 of that, see PP05us-canada.pdf)
Lastly, the UK is not one of the more progressively taxed countries (presumably those figures are also wrong, though I have no real desire to check). Furthermore, VAT is a regressive tax (doesn’t impact savings, which the rich have disproportionately more of.)
If the purpose of your post was to sow confusion, it shall go no further than inside your head.

Posted by Foppe | Report as abusive

Credit Card Interest rate charges ARE A TAX, and if you don’t believe me, the IRS reserves the right to tax anyone who settles their credit card debt for less than what they owe on the amount that was “forgiven” in the settlement.

Posted by SWARMtheBANKS | Report as abusive

Swarm, if you don’t like paying interest, then DON’T BORROW MONEY!!! It is a very simple solution, really.

Posted by TFF | Report as abusive

To me the highly volatile recent datapoints suggest we in the US rely too much on revenue from capital gains and corporate profits. Consumption and income taxes would not vary nearly as much. Relatedly, I would expect the 2010 number to be a sharp reversion towards the recent mean.

Posted by right | Report as abusive

That graph for federal tax or total tax including state and local taxes?

Posted by Danny_Black | Report as abusive

Maybe I’m wrong here, but maybe it’s because America is the only country there without a govt single payer medical system. Add the US healthcare costs not already covered by medicare and medicaid and see what the numbers are…

Posted by CDN_Rebel | Report as abusive

“Credit Card Interest rate charges ARE A TAX”

Governments levy taxes and not paying them results in jailtime.

Credit card companies levy interest and not paying that results in a taxpayer bailout for them and temporary bankruptcy for you.

Can we get a “report as moronic” button?

Posted by LadyH | Report as abusive

@CDN_Rebel: “[difference is] single payer medical system…add US Healthcare costs…and see what the numbers are”

see: 6/07/health-care-costs-and-the-tax-burde n/

(@DannyBlack – the above URL mostly ties to Felix’s data, and shows charts for OECD total taxes including state and local taxes. It also shows total taxes plus healthcare costs – a very interesting analysis.)

“[A]lmost every other country has some form of national health insurance that covers, on average, 72 percent of all health costs. The comparable figure in the United States is 46.5 percent, and almost all of that is accounted for by Medicare and Medicaid, which largely benefit the elderly and the poor.”

“Average American workers must pay for health care out of their pockets, or through their employers in the form of lower wages. Europeans prefer to pay higher taxes and get government health care for every resident in return.”

“But O.E.C.D. data show that Americans pay vastly more for health care than the residents of any other major country…the governmental share of health spending in the United States is about the same as total health care costs in many other countries..In other words, if we had a health care system like those in most developed countries, we could, in effect, give every American an increase in their disposable income of…about what they pay in federal income taxes – and have health care no worse than they have in Britain or Japan. It would be like abolishing the federal income tax.”

“In the table below, I have added private health care spending as a share of G.D.P. to the tax data in the table above. This puts the United States and other countries on the same footing, by accounting for the fact that they get health care mostly through government while Americans mostly pay for it themselves…In short, a substantial portion of the higher tax burden that Europeans pay is really illusory. They are really just paying their health insurance premiums through their taxes rather than through lower wages, as we do.”

Posted by SteveHamlin | Report as abusive

Outside of the US, the OECD is primarily Europe.

If anybody thinks in 2011 that nations should build themselves on the European model, I am impressed with their ideological loyalty. Europe has had low growth for three decades running, and now they are completely cooked financially. This is our role model?

Europe starts with the most human capital per capita and manages mostly to have less GDP per capita than the US. And this even though Europe has less child-rearing burden, which is output that is not counted officially.

At least America retains the potential to raise revenue into the teeth of a huge 21st century headwinds later on. The present crisis is small potatoes compared with the coming demographic transition worldwide. In the face of that crisis, the European model seems to leave no options at all.

Posted by DanHess | Report as abusive

If you factor in, as you should, state taxes, sales taxes, tolls, FCC line charges, property taxes, and FICA, this article and it’s underlying, smug premise is essentially made meaningless.

The feds engage in deficit spending for 10 years and you think the problem is people aren’t taxed enough?


Consider what it takes for me to get $100 cash. I have to earn roughly 150 dollars to get 100 in my pocket.

If I decide to go out to eat, the post tax $100 is taxed again – how dare I eat. The waiter is taxed on the tip, the restaurant on the bill.

They go to Bank and deposit their post-tax earnings. Bank gives them 1%, uses it as the basis to lend 9x that amount [creating money out of thin air] at a rate of perhaps say 12%.

Bank invests in CDOs, investment loses value, tax payer bails out Bank will 0% money so Bank can lend at 12%.

I appreciate that the rich could potentially be taxed at a more progressive rate, but the basic core issue is deficit spending.

The Left seems determined to make taxes the issue when there is no solid proof that raising taxes leads to a reliable, proportionate increase in revenue.

How about senseless wars? How about entitlement programs which liberals speak about as if they were Constitutional and ethical givens, but which amount to a system whereby retirees take from workers multiples of what they put in.

Yet I can’t opt out of social security? It’s my money, you say? Government knows best, is it?

I work for it, but it’s “selfish” to view it as primordially ‘mine,’ huh?

Even when the same government has taken years of my FICA contributions, spent them, and replaced them with IOUS… from… me? {treasuries have to be paid for through future tax revenue, kids!}

My god, this country is in trouble.

The best lack all conviction, while the worst / Are full of passionate intensity

Posted by An_Gael | Report as abusive

“In the face of that crisis, the European model seems to leave no options at all.”

Cut spending?

Posted by TFF | Report as abusive

@DanHess America’s ‘growth’ model is based on ballooning population growth (if 1% is ballooning..?) whereas European nation have 0% growth. So I’d argue that Europe has a sustainability model with each nation having a solid manufacturing base and pretty good trade balance. America? Has almost NO manufacturing left and an enormous trade imbalance. Maybe some nations in Europe got the kool-aid before they were ready (PIiGs except for Italy) but for the most part I would argue their economic model is more effective and better for standard of life and social awareness. Compare median incomes of Germany, France, UK, etc with America and see who has a REAL better average life…

Posted by CDN_Rebel | Report as abusive

@SWARMtheBANKS, it wasn’t veiled at all.

@LZed, those are the talking points that have been debunked, but i suppose you have your own revenue stream you need to keep coming into your site so they continue to work.

A family making a middle income wage pays higher percentage of total tax than those 10%.

Warren Buffett, who is worth an estimated $52 billion, speaking at a H.Clinton fundraiser said: “The 400 of us [here] pay a lower part of our income in taxes than our receptionists do, or our cleaning ladies, for that matter. If you’re in the luckiest 1 per cent of humanity, you owe it to the rest of humanity to think about the other 99 per cent.”

Mr Buffett said that he was taxed at 17.7 per cent on the $46 million he made last year, without trying to avoid paying higher taxes, while his secretary, who earned $60,000, was taxed at 30 per cent.

Posted by hsvkitty | Report as abusive

America’s low tax rates are extremely progressive–the most progressive in the OECD, according to the NBER. That’s why it feels like taxes are high. Marginal rates are above 50% in many states.

But the progressiveness means that those making less pay less. We also favor capital gains over income in the tax code–taxing labor more than investments, to encourage investment. Perhaps this discourages labor?

Posted by Publius | Report as abusive

SteveHamlin, they compare the quality of health care between say UK and US? Also tax credits in the UK have been shown to have clear cut distortions on people’s behaviour – eg single mums not working more than a certain number of hours because their take-home pay would be less. Thats before you factor in the whole intrusiveness of those credits.

Posted by Danny_Black | Report as abusive

LZed, in the UK you can aggressively avoid tax. Of course, you could decide it is not worth the agro and move somewhere else.

Posted by Danny_Black | Report as abusive

“We also favor capital gains over income in the tax code–taxing labor more than investments, to encourage investment. Perhaps this discourages labor?”

Our policies definitely discourage labor! There are segments throughout the first $200k of earnings in which the marginal tax on labor is over 50%. When you consider that employment often comes with non-deductible expenses, such as child care, commuting, and meals away from home, these tax policies strongly discourage people in these situations from working.

The first (and most common?) occurrence comes with the phase-out of the Earned Income Tax Credit. Between roughly $20k and $35k of income, a head-of-household with one child pays an effective marginal federal income tax rate of 25%-30%. Add 15% FICA tax and 5% state tax, and the marginal benefit of taking extra hours or greater responsibilities to improve from $20k earnings to $35k earnings is just $8k. That is a nice raise, but only if it can be accomplished without incurring additional expenses. Child care, or a $100 monthly bus pass, or $5/day spent on lunch all must be subtracted from that residual $8k.

Another common situation with 50% marginal tax rates occurs for a married couple with two children. Assume a solid middle-class professional, with a $90k primary income. The spouse could get a full-time job earning $60k. Is it worth the trouble? The bulk of those earnings will be taxed at a 50% rate (25% bracket, 5% CTC phaseout, 15% FICA, 5% state). Now subtract $10k (after-school care) to $25k (full-time daycare) for child care, $5k commuting expenses, and $5k additional expenses for services that become necessary in a two-earner household — how much is left? Again, for a household in this situation, it only makes sense to take the second job if it can be done in a way that does not incur the additional expenses. 11-10-LaborTaxation.pdf

We’ve become a nation that works only when it is convenient to do so. We can’t afford to do otherwise!

Posted by TFF | Report as abusive

As for high tax rates “discouraging investment”…

What else are the wealthy going to do with their money? Unlike labor, investing activities do not incur non-deductible costs. My investment income benefits from the low tax rate on capital gains and dividends, however my investment strategy would not change significantly if the preferential treatment were to disappear.

Posted by TFF | Report as abusive

In answer to your question “why America’s taxes are so much lower than anybody else’s” the answer lies in our absolutely myopic, ideologically determined, and, ultimately, extremely expensive way of viewing and dealing with ‘collective goods and services’. (A term which does not even exist in the American lexicon but which is in common use in the other countries you cite). Collective goods and services are those which are paid for indirectly with collectively raised funds. They range from health care and higher education to infrastructure development, private prisons and military procurement. They account for nearly half of ‘private sector’ economic activity in this country. Although American economic thinking continues to view these as ‘market activities’, they actually occupy a territory completely separate from the market in a gray area between the market and the state. The incentives at play are the reverse of market incentives, meaning that costs and prices rise instead of being damped by the market discipline that usually accompanies direct, buyer-seller, transactions. Lacking separate institutional recognition they have none of the checks and balances that apply to both the market and the state and thus the reverse incentives make them extremely inflationary. In all other advanced nations the full array of collective goods and services can be provided for roughly 25-30% of GDP, a far lower percentage than here. This is because, although many have been farmed out to private intermediaries, all retain budgetary and other controls that are administered by the state (retained because, following WWII, the state initially provided them). The difference between our inflated prices for these goods and services and the more controlled price in all other advanced nations is a hidden tax; a tax that we fail to recognize because, rather than being paid to the state, it is paid to those who hold some of the most highly paid jobs and operate some of the most lucrative businesses in this country. This actually renders the American burden for collective goods and services (both government and private nonmarket) much higher than elsewhere. In other words, we do have lower public sector taxes than elsewere, but we also have very much higher private sector ‘taxes’ than anywhere else, which may explain our feeling of being overtaxed.

The answer to your second question follows from the first. If you have figured out how to extract higher revenues by privatizing collective goods and services you are going to fight like hell to retain that franchise and oppose any public alternatives. In truth very little of this actually rises to the point of consciousness. It is entrenched belief here that private is always more efficient than public and our hidden tax is simply the long run penalty for this delusion. Economists could have shed some light if they understood and differentiated the incentives that arise from indirect transactions (which in 95% of cases cannot be made direct) and if they had noticed that the inflation syndrome is a function of indirect payment itself, not a function of the costs specific to health care, or to higher education or to military materiel (which is the way they are normally studied).

Frederick P. Jagels, Evergreen Economic Research

Posted by Anonymous | Report as abusive

In Singapore corporate taxes are 13% +-… in California between Fed and state a poor small business will pay ~ 43% above $100K…so we have compare with them if we want to create jobs and compete. Who cares if in Italy or Japan they pay more taxes… their economy is not growing.

We need growth strategies, no subsidies or QEs.

Posted by robb1 | Report as abusive