Is the U.S. a "Low Tax" Country?

July 08, 2011

Many have pointed out that although the U.S. has high statutory tax rates relative to other industrialized nations, we have a lower overall burden of taxes compared to the OECD average.   Averaging over the period 2002 to 2008 (most recent OECD data), total tax revenue (federal plus state/local) as a percent of GDP is 26.6 percent in the U.S. versus 35 percent in the average OECD country.  This differential is frequently cited as a justification for tax increases of all sorts, particularly on corporations. 

However, a closer look at the composition of taxes reveals that in most categories the U.S. has essentially the same tax burden as other OECD nations.  What makes our overall tax burden "lower" is the lack of a value added tax (VAT).

Figure 1 shows OECD data on total tax revenue as a percentage of GDP, broken down by source, and averaged over 2002 to 2008, for both the U.S. and the average of OECD countries.  Perhaps surprising to some, the U.S. is above average in personal income tax: 9.6 percent of GDP versus an OECD average of 9 percent.  The U.S. is also above average in property tax: 3.1 percent versus an OECD average of 1.9 percent.  The U.S. is below average in both the corporate income tax (2.5 percent versus 3.5 percent) and the payroll tax (6.6 percent versus 9.5 percent). 

In only one category, taxes on goods and services, is the U.S. far from the norm: 4.7 percent of GDP in the U.S. versus an OECD average of 11.1 percent.  In fact, in the absence of these taxes, total revenue in the U.S. would be very close to the OECD average: 21.9 percent of GDP in the U.S. versus an OECD average of 23.9 percent.

This additional tax revenue in other OECD countries is directly related to the presence of a VAT and its associated statutory VAT rate.  The VAT is a consumption tax levied at each stage of production, and it exists in one form or another in every OECD country except the U.S.  As shown in Table 1, VAT rates average about 18 percent and range from 5 percent in Japan to 25.5 percent in Iceland - considerably more than any sales tax in the U.S., which range from zero to 9.44 percent (combined state and local). 

In virtually every country where the VAT rate started low it ended high.  For example, in Denmark it went from 15 percent to 25 percent, in Germany from 11 percent to 19 percent, and in the UK from 8 percent to 17.5 percent.  This is what has made taxes on goods and services the largest source of revenue in the average OECD country, whereas in the U.S. they represent the third largest source of revenue. 

Economists often debate the advantages and disadvantages of a VAT, but it is certainly associated with much higher levels of taxation than is the norm in the U.S.  As Figure 1 suggests, there is an upper limit to how much taxpayers will pay on personal income, corporate income, payroll, and property taxes — and the U.S. is very close to that limit.  Based on the experience of other nations, adding a VAT in the U.S. would add upwards of ten percentage points to the nation's tax burden, something US. Citizens would be reluctant to tolerate.

Table 1: VAT/GST rates in OECD member countries

1st Year

1976

1980

1984

1988

1992

1996

2000

2004

2007

2008

2009

2010

Australia

2000

-

-

-

-

-

-

10.0

10.0

10.0

10.0

10.0

10.0

Austria

1973

18.0

18.0

20.0

20.0

20.0

20.0

20.0

20.0

20.0

20.0

20.0

20.0

Belgium

1971

18.0

16.0

19.0

19.0

19.5

21.0

21.0

21.0

21.0

21.0

21.0

21.0

Canada

1991

-

-

-

-

7.0

7.0

7.0

7.0

6.0

5.0

5.0

5.0

Chile

1975

20.0

20.0

20.0

20.0

18.0

18.0

18.0

19.0

19.0

19.0

19.0

19.0

Czech Republic

1993

-

-

-

-

-

22.0

22.0

22.0

19.0

19.0

19.0

20.0

Denmark

1967

15.0

22.0

22.0

22.0

25.0

25.0

25.0

25.0

25.0

25.0

25.0

25.0

Finland

1994

-

-

-

-

-

22.0

22.0

22.0

22.0

22.0

22.0

22.0

France

1968

20.0

17.6

18.6

18.6

18.6

20.6

20.6

19.6

19.6

19.6

19.6

19.6

Germany

1968

11.0

13.0

14.0

14.0

14.0

15.0

16.0

16.0

19.0

19.0

19.0

19.0

Greece 

1987

-

-

-

16.0

18.0

18.0

18.0

18.0

19.0

19.0

19.0

19.0

Hungary

1988

-

-

-

25.0

25.0

25.0

25.0

25.0

20.0

20.0

20.0

25.0

Iceland

1989

-

-

-

-

22.0

24.5

24.5

24.5

24.5

24.5

24.5

25.5

Ireland

1972

20.0

25.0

23.0

25.0

21.0

21.0

21.0

21.0

21.0

21.0

21.5

21.0

Italy

1973

12.0

15.0

18.0

19.0

19.0

19.0

20.0

20.0

20.0

20.0

20.0

20.0

Japan

1989

-

-

-

-

3.0

3.0

5.0

5.0

5.0

5.0

5.0

5.0

Korea

1977

-

10.0

10.0

10.0

10.0

10.0

10.0

10.0

10.0

10.0

10.0

10.0

Luxembourg

1970

10.0

10.0

12.0

12.0

15.0

15.0

15.0

15.0

15.0

15.0

15.0

15.0

Mexico

1980

-

10.0

15.0

15.0

10.0

15.0

15.0

15.0

15.0

15.0

15.0

16.0

Netherlands

1969

18.0

18.0

19.0

20.0

17.5

17.5

17.5

19.0

19.0

19.0

19.0

19.0

New Zealand

1986

-

-

-

10.0

12.5

12.5

12.5

12.5

12.5

12.5

12.5

12.5

Norway

1970

20.0

20.0

20.0

20.0

20.0

23.0

23.0

24.0

25.0

25.0

25.0

25.0

Poland

1993

-

-

-

-

-

22.0

22.0

22.0

22.0

22.0

22.0

22.0

Portugal

1986

-

-

-

17.0

16.0

17.0

17.0

19.0

21.0

21.0

20.0

20.0

Slovak Republic

1993

-

-

-

-

-

23.0

23.0

19.0

19.0

19.0

19.0

19.0

Spain

1986

-

-

-

12.0

13.0

16.0

16.0

16.0

16.0

16.0

16.0

16.0

Sweden

1969

17.7

23.5

23.5

23.5

25.0

25.0

25.0

25.0

25.0

25.0

25.0

25.0

Switzerland

1995

-

-

-

-

-

6.5

7.5

7.6

7.6

7.6

7.6

7.6

Turkey

1985

-

-

-

10.0

10.0

15.0

17.0

18.0

18.0

18.0

18.0

18.0

United Kingdom

1973

8.0

15.0

15.0

15.0

17.5

17.5

17.5

17.5

17.5

17.5

15.0

17.5

Unweighted average

16.0

16.9

17.9

17.3

16.5

17.8

17.8

17.8

17.8

17.7

17.6

18.0

Source: OECD.  http://www.oecd.org/document/60/0,3343,en_2649_37427_1942460_1_1_1_37427,00.html#vat

Note: Many countries, such as Canada and Austria, have additional regional rates.  Also, most countries have reduced rates on certain goods.

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