Many have pointed out that although the U.S. has high statutory taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. 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 taxA property tax is primarily levied on immovable property like land and buildings, as well as on tangible personal property that is movable, like vehicles and equipment. Property taxes are the single largest source of state and local revenue in the U.S. and help fund schools, roads, police, and other services. : 3.1 percent versus an OECD average of 1.9 percent. The U.S. is below average in both the corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. (2.5 percent versus 3.5 percent) and the payroll taxA payroll tax is a tax paid on the wages and salaries of employees to finance social insurance programs like Social Security, Medicare, and unemployment insurance. Payroll taxes are social insurance taxes that comprise 24.8 percent of combined federal, state, and local government revenue, the second largest source of that combined tax revenue. (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 taxA consumption tax is typically levied on the purchase of goods or services and is paid directly or indirectly by the consumer in the form of retail sales taxes, excise taxes, tariffs, value-added taxes (VAT), or an income tax where all savings is tax-deductible. 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 taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. 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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