Is America a Highly Taxed Country?

Conservatives often say that America is one of the highest-taxed nations in the world.  My father recently told me this.  Donald Trump also said the same thing in the same words in his acceptance speech at the Republican National Convention. 

If this were true, it would be a problem worthy of examination and serious discussion.  The problem is that it isn’t true.  It isn’t remotely true.  America is one of the lowest-taxed nations in the world.  If it were true that America is a highly-taxed country, it should have a reasonable influence on American tax and spending policies.  We might infer that the United States government is inefficient, compared to other countries.  We might want to focus on cost-cutting, instead of raising revenue to close our fiscal deficit.  But it isn’t true.

Let’s look at the data.

OECD Federal Tax Burden

The Organization for Economic Cooperation and Development is a group of thirty-four countries, which includes all of the Western industrialized economies.  The organization gathers comparative economic data from all member countries.  Tax rates represent tax revenue from all sources, including businesses and individuals.  Taxes include individual income taxes, business income taxes, and all other taxes, including sales taxes, value-added taxes, excise taxes, import/export taxes, natural resource royalties and production taxes.  Tax rates are measured in terms as a percentage of GDP, which is the standard measure of the tax burden across several sources.  The data is available here: http://stats.oecd.org/Index.aspx?DataSetCode=REV

The United States Federal tax rate is second-LOWEST of the OECD, at 10.5% in 2013 (the latest year with complete reporting).  Only Switzerland, at 9.5%, has a lower Federal tax rate.  The United States’ Federal tax rate would have to approximately double to reach the average tax rate for the rest of the OECD. 

The US tax rate has been consistently among the lowest of the OECD for years.  The following chart shows federal taxes for all OECD countries from 2008 to 2013.

OECD Total Tax Burden

The OECD also maintains records for the total tax burden for member countries.  Total taxes include Social Security (or equivalent) taxes, State and Regional taxes, and Local taxes, also measured as a percentage of GDP.   The United States total tax burden is fourth-lowest of the 34 OECD countries, behind South Korea, Chile and Mexico.

The United States total tax burden is 25% of GDP; the OECD average (ex-US) is 34%.  The United States total tax burden would have to increase 35% to reach the average total tax burden of the rest of the OECD.

The US total tax rate has also been consistently low for years.  The following chart shows total tax burden from 2008 – 2013. 

World Federal Tax Rate

The World Bank is an alternative source of tax data, including data from most nations on earth.   Only Federal or central authority tax data are available.  For the year 2011 (the recent year with the most complete reporting), the United States had the fourteenth-lowest Federal tax rate in the world.

The data is available for download on this site:  http://data.worldbank.org/indicator/GC.TAX.TOTL.GD.ZS

The list of countries with lower taxes than the United States is as follows:

Ethiopia, Pakistan, India, Afghanistan, Bangladesh, Central African Republic, West Bank and Gaza, Lithuania, Oman, Nigeria, Bahrain, Estonia, United Arab Emirates.

From 2009 through 2011, the United States had the lowest tax rate in the OECD, so no OECD countries appear in this list.

The time series data is a fairly messy chart, because of the number of countries included in the plot, but it is clear that the United States has consistently had among the lowest Federal tax rates in the world.

Federal Government Expenses

Taxation is one thing.  Government spending is another thing.  Data on Federal Government expenses are available from the World Bank.  As of 2011, the United States is eighth lowest of the 34 OECD countries in terms of Federal spending as a percentage of GDP.

If we assume that all countries federal governments are performing equally relative to the size of their economies, then those with the highest expenses (Portugal, Austria, Hungary, New Zealand, Greece) would be the least efficient.  The countries with the lowest expenses (Switzerland, Canada, South Korea, Japan, Spain, Chile, United States) would be considered the most efficient.

But I think it can be argued that the United States’ federal government is doing more than many other governments in terms of infrastructure, scientific research, environmental protection, etc.  Further, as of 2013 the United States is spending more than the next nine countries combined, accounting for 40% of the world’s military spending.  Military spending consumes over 50% of the nation’s $1.1 trillion-dollar discretionary budget.  Considering the burden of military spending, it is apparent that the United States Federal Government performs the remaining functions of government very efficiently.

Conclusions

The main point is that Donald Trump said that the United States is among the most highly-taxed countries in the world.  And that is absolutely not true.  We among the lowest-taxed countries in the world.  That is what the data say. 

It matters, because in the course of informing the public and influencing policy, false information will lead to the wrong conclusions.

If the United States were actually highly-taxed compared to the rest of the world, we might think that the United States government is inefficient.  But knowing that we are among the lowest-taxed countries, if all governments are doing equally well, we have to conclude that our government is efficient.  If we are doing better than other countries, and paying less tax (adjusted for our deficit spending) we have to conclude that our government is very efficient.

I like living here.  I like safe drinking water, safe food, safe medicines, safe working conditions and good roads.  I like having the leading science research and leading universities of the world.  I like having a justice system that protects me from discrimination and arbitrary prosecution.  I like having a reasonably strong military, although I don’t think military spending should consume half of the discretionary federal budget.  I like having financial regulations and consumer product regulations that rein in the worst players in our business world, such as Wells Fargo and Turing Pharmaceuticals.  I like having a pension program that protects seniors and provides for their medical care, although again, I question those costs, which are being borne by young people whose wages are lower than their parents’ wages.  I like having toilet paper in government buildings (except our national parks), which is something missing in some other countries I that I have visited.  I like that our cars are now five times safer than in 1965, thanks to government regulations. I like that air travel is 1700 times safer than 1965, thanks to government regulations.  I like that the in Los Angeles is 98% cleaner than in 1965, thanks to government regulations.  All of these things cost money.  I am willing to pay to continue living in the leading country; I think we should all be willing to pay more to maintain those services and standards. 

If we had conditions like those in other countries with tax rates comparable to ours, I would think we lived in a pretty shitty country.

We have been systematically under-taxed since the 1980s.  It was an interesting experiment, to see if economic growth would allow us to keep low tax rates, or if cutting down on funding would make government more efficient.  Perhaps there was a measure of success.  But we have now accumulated a large debt, and it is time to start paying our bills.  Because every dollar of deficit spending is a dollar stolen from our children and grandchildren, who will not have the opportunity to keep rolling over the debt.  Interest payments on the debt are now 14% of our federal spending, at a time when interest rates are virtually zero.  When interest rates rise, those debt payments will become crushing, unless we simply print money to pay it off.  We can do that for a while, but I don’t think it will end well.

So, it is wrong to say that we are among the highly taxed countries in the world.   We are not.  It matters because it leads to bad policy.  And we ought to be paying higher taxes to maintain our position as a leading country, and to avoid stealing from our children.

The tax revenue/GDP parameter is a way to measure fairness.  If an American is paying 10% of gross income in individual income tax (excluding Social Security and Medicare payroll taxes), including all unrealized and deferred capital gains (401k, IRA), then they are pulling their weight.  Unfortunately, due to the complexity of the tax code, it is difficult to tell who is paying their fair share of taxes, and there is a widespread belief that the system is unfair. 

I think we should reform our tax system to make it simpler, more transparent, and give all taxpayers confidence that they system is fair.

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Another version of this post is published on the blog "Wonky Thoughts", DougRobbins.Blogspot.com.