by T. R. Reid
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THESE DAYS, WHEN CONGRESS takes up tax reform, the “reform” generally makes things worse. A Congress that produces something like Section 7803(c)(2)(B)(ii)(IX) in the name of reducing complexity hardly seems likely to agree on any serious changes that would improve the system. Even with one party controlling both Congress and the White House, tax reform would be a stretch in our acidic political atmosphere. So how could Congress and the White House agree on serious changes to the tax code when our country is ferociously divided?
The fact is, we’ve done it before, in a time of severely divided government. In the mid-1980s, a strong conservative in the White House and a strongly liberal Speaker of the House—that is, Ronald Reagan and Tip O’Neill—reached agreement on the biggest transformation of the federal income tax since the tax was created in 1913. The Tax Reform Act of 1986, passed by a divided Congress and signed by a Republican president, was widely admired; it was precisely the kind of change that almost all tax experts favored. That reform was based on principles that have been adopted by countries around the world. If we go back to those fundamental principles, the United States could achieve serious tax reform, even in our current state of political gridlock.
Another benefit of looking at other countries is that comparative analysis can tell us where Americans stand relative to the rest of the world when it comes to how much tax we have to pay. During his campaign for the presidency in 2016, Donald Trump repeatedly said, “The United States is the highest-taxed country in the world.” Was he right?
2.
“LOW EFFORT, LOW COLLECTION”
The Gallup poll surveys Americans every year about the taxes they pay, and every year a hefty majority says that taxes are too high.1 Whenever I mentioned this to economists in other countries, they laughed. Nobody in the world’s other rich democracies would say that American taxes are too high. Relative to other countries like us, the United States is One Nation, Undertaxed.
This is not a political statement or an editorial opinion. It’s a fact: Americans pay significantly less than our counterparts in the world’s other advanced, free-market economies. In terms of the overall tax burden, Americans pay less. In terms of specific taxes—income tax, sales tax, gasoline tax, and so on—American rates are almost always lower. (On the other hand, Americans tend to give more than anybody else to charity, because we use private charities to perform some of the tasks funded by taxes elsewhere.) The one clear exception to this pattern is the corporate income tax, where the official tax rate and the “effective” rate (how much corporations actually pay, after the tax lawyers have orchestrated various avoidance mechanisms) are higher in the United States than in almost any other nation.
A standard way to measure national tax burdens is to calculate a country’s total tax revenues—national, state, and local—as a percentage of gross domestic product (the sum of all the wealth produced in the country in a year). This statistic, called the “overall tax burden,” is measured annually by the Organization for Economic Cooperation and Development (OECD), which is sort of a United Nations but with membership limited only to the richest countries. For many years now, the OECD’s calculation of overall tax burden has shown that total tax revenues in the United States are much lower than in most other advanced countries.
For the year 2014, the OECD reports that overall tax burden for all of its thirty-five member countries averaged 34.18% of GDP. Some countries impose taxes at a considerably higher level. In Denmark, taxes amounted to almost half—49.58%—of all the wealth that country produced in 2014; in France and Belgium, the tax take was about 45% of GDP. A few European countries, like Ireland (28.71%) and Switzerland (27.03%), taxed somewhat below the OECD average. Generally, though, the overall tax burden in the democracies of Western Europe was in the neighborhood of 40% of GDP.
In the world’s richest country, the United States, taxes were far lower: 25.88% of GDP. Of the thirty-five richest countries, in fact, the United States rated thirty-second in total taxes paid; only in South Korea, Chile, and Mexico did people face a lower tax burden than Americans.
Here’s the OECD’s chart of total tax revenue as a percentage of GDP, by country, for the year 2014:
Country
Overall tax burden
Denmark
49.58
France
45.49
Belgium
45.00
Finland
43.84
Italy
43.69
Austria
42.82
Sweden
42.78
Iceland
38.92
Norway
38.68
Luxembourg
38.37
Hungary
38.23
Netherlands
37.52
Germany
36.57
Slovenia
36.49
Greece
35.77
OECD average
34.18
Portugal
34.17
Spain
33.85
Czech Republic
33.09
New Zealand
32.52
Estonia
32.43
Poland
32.08
United Kingdom
32.07
Japan
32.04
Israel
31.25
Slovakia
31.25
Canada
31.22
Latvia
28.87
Turkey
28.76
Ireland
28.71
Australia
27.85
Switzerland
27.03
United States
25.88
South Korea
24.59
Chile
19.75
Mexico
15.15
Source: Revenue statistics: Comparative tables, OECD Tax Statistics
This comparison raises an intriguing question about the impact of high taxes on the overall economy. In America, it is often said that high taxes stifle economic growth. But Denmark and Sweden have a much higher tax burden than the United States, and yet both countries have had higher rates of growth than the United States for most of the last five decades. In those nations, clearly, high taxes did not stifle growth.
Another international institution, the World Bank, makes its own comparison of the tax burden in different countries. The World Bank
uses a different formula from the OECD’s, but it comes to the same conclusion: the United States is a low-tax nation. To determine this, the bank’s economists use three basic measurements:
“tax capacity,” which describes how much revenue a government would take in if it taxed all the income and all the wealth at the average tax rate of all countries;
“tax effort,” which measures how much of that potential revenue the country actually tries to take in through taxes;
“tax collection,” which measures how much of the tax that should be paid under the nation’s law is actually collected.
The United States, as the world’s richest nation, naturally leads all others in tax capacity. But when it comes to tax effort and tax collection, we rate near the bottom of all the advanced countries. Most of the rich democracies in the world—Australia, Austria, Belgium, Britain, France, Italy, the Netherlands, Norway, and so on—are classified as “high effort” and “high collection” countries. In contrast, the United States (along with Canada, Japan, and South Korea) is rated as both “low effort” and “low collection.”2
Because Americans pay less than their counterparts in other rich countries in overall taxes, it’s not terribly surprising that we pay less, for the most part, for specific types of taxes, such as the income tax, Social Security tax, sales tax, gas tax, tobacco tax, capital gains tax, and taxes on wealth and inheritance.
Taxes on Labor: This means the taxes that are imposed on wages and salaries—essentially, the income tax on earnings plus the taxes that pay for health care, pensions, and so on (in the United States, that would mean the total of a worker’s personal income tax, Social Security tax, and the Medicare tax). The average tax on labor in all OECD countries in 2013 was 36%; for Americans, it was 31.3%. Of the thirty-four member countries, the United States ranked twenty-fifth in taxing wages and salaries.
The Top Rate: It’s not easy to compare income tax collection from country to country, because each country has its own definition of “income” and its own schedule of exemptions, deductions, and so on. But you can match up the top marginal rate of tax in various countries—that is, the maximum tax rate imposed on the highest level of income. France is the world champion at soaking the rich, although it finally had to cut the 75% top rate it imposed on the biggest earners. In 2013, Denmark taxed top earnings at 60.4%, and several advanced countries (for example, Belgium, Germany, Sweden, and Portugal) had a top rate higher than 50%.
In the United States, the highest rate at the start of 2017 was 39.6%. If you add in the average top rate in state taxes, high-income Americans on average pay 46.3% in tax on their highest earnings. On this score, the United States rates a little below the average; seventeen of the OECD countries have a higher top rate, and sixteen are lower. The lowest rate on the rich is in the flat-tax nation of Hungary, where everybody, rich or not, pays income tax at 15%. But Hungary has to impose the world’s highest sales tax to make up the revenues lost due to its minimal income tax rate.
In the United States, however, hardly anybody pays tax at that top rate because you have to be pretty rich before the highest rate kicks in. Americans pay 39.6% only on income higher than $418,400; that rate hits less than 1% of U.S. taxpayers. Other countries start applying the top rate at much lower income levels. In Belgium, the top rate is 53%, and it applies to any income above $56,171; half of all taxpayers are subject to the highest rate. In Sweden, the top rate (56.7%) kicks in at $81,698; that hits about 45% of all taxpayers. In Norway, the top rate is 40%, which is just about equal to America’s. But Norwegians have to start paying at that rate at an income of $95,270.3
Capital Gains Tax: A capital gain is the profit you make by trading stocks and bonds, or real estate, or commodities like gold. If you sell some shares of stock for $50,000 more than you paid for them, the $50,000 you gained is considered income. But in many countries, this kind of income is taxed differently (and often at a lower rate) than “ordinary income” from wages and salaries. Some countries—for example, New Zealand, the Czech Republic, and South Korea—have zero tax on profits from capital trading. In the United States, the federal tax on capital gains for most people is 15%; for those making more than a quarter of a million dollars per year, it goes up to 23.8%.
Because many states also tax capital gains, the average capital gains tax in the United States is about 19.1%—lower than in most of the other rich democracies (although it’s obviously higher than in the countries with no tax on capital gains). Here’s a comparison of some nations’ tax rates on capital gains in 2012:4
Australia: 22.5%
Austria: 25%
Britain: 28%
Czech Republic: 0%
Denmark: 42%
Finland: 32%
Ireland: 30%
Mexico: 0%
South Korea: 0%
Spain: 27%
United States: 19.1%
Sales Tax: Americans usually have to pay a retail sales tax on most things they buy at a store. Generally, there’s a state sales tax and often a city or county sales tax on top of that (although four states, Delaware, Montana, New Hampshire, and Oregon, have no sales tax). On average, the sales tax adds about 8% to the price of the item.5 But the United States, as we’ve seen, has no national sales tax, or value-added tax. In most other rich countries, in contrast, the sales tax—whether it’s called a VAT or a New Zealand–style GST—is about three times as high, in the range of 20% to 25%. The highest VAT in the world is found in Hungary; it was 27% in 2016.6
The result is a serious tax break for Americans. A Swede who buys, say, a $2,000 computer will pay an additional $500 in sales tax. A Texan buying the same computer would pay just $160 in tax. And an Oregonian would pay no sales tax.
Gas Tax: Because gasoline is a standard commodity sold around the world, market forces make the price of a gallon roughly the same everywhere—until you figure in the gas tax. Americans pay far less to fill the tank than drivers in any other rich country, because gas taxes here are far below the levels elsewhere. Of the richest thirty-five advanced democracies, the United States has the second-lowest level of fuel taxes; Mexico is lowest, with a gas tax of zero.
In the United States, the federal tax on a gallon of gas—18.4 cents—hasn’t changed for two decades. Every state imposes a gas tax on top of the federal levy. In 2014, California’s was the highest, at $0.71 per gallon; in most states, it’s closer to $0.40 per gallon. On average, Americans pay total taxes of $0.53 per gallon; Californians have to pay $0.89 per gallon.
Overseas, the gas tax is six to eight times higher. Turkey has the stiffest tax on gasoline, at $4.32 per gallon. In western Europe, the tax generally runs over $3.00 per gallon.7 Here’s a breakdown of gasoline taxes—federal, local, and sales tax all included—in some of the rich countries:
Country
Tax per gallon
Turkey
$4.32
Israel
$4.20
Netherlands
$3.79
Norway
$3.67
U.K.
$3.44
Germany
$3.29
OECD average
$2.62
Austria
$2.46
Japan
$2.16
United States
$0.53
Source: OECD
Of course, those taxes come on top of the basic price of the gasoline itself. In the fall of 2016, when Ameri
cans were groaning about gasoline that cost about $2.10 per gallon, Europeans were paying $6.00; they considered that normal.
That explains why the rich countries of Europe and East Asia have such well-developed mass transit systems; even the most luxurious bullet train is generally cheaper than driving any significant distance. And why German, Japanese, and South Korean carmakers were so far ahead of Detroit in producing fuel-efficient cars.
Tobacco Tax: Taxing cigarettes is a twofer; it brings in steady revenue, and at the same time it discourages people from taking up an unhealthy habit. Consequently, the tax tends to be steep almost everywhere; in many countries, more than half of the price per pack is tax.
But American smokers get off easier. The U.S. federal tax on cigarettes is $1.01 per pack. States and cities then load on additional levies. Americans, on average, pay about $6.00 for a pack of cigarettes, of which roughly half is tax. The U.S. price is a bargain by European standards, where the same pack of cigarettes would cost about $9.00. In Canada, the same pack would cost about $10.00. The world’s highest price for cigarettes is in Australia, where a single pack costs about $16.00—two-thirds of it being tax.8
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THE ONE AREA WHERE we (almost) lead the pack in tax rates is in the income tax on corporations. At the start of 2017, the U.S. corporate tax, at 35%, was the second highest in the world. Although France’s basic tax rate was a tad lower (33.3%), the French added special surtaxes for big corporations that brings the total rate to 38% for major French companies. Since the beginning of this century, almost all the other industrialized nations have cut their corporate tax rates, partly to give their domestic businesses a competitive advantage and partly to lure corporations away from the United States and other high-tax nations. The United States and France have been the only holdouts.
