Taxing times: Americans pay less in taxes than many other industrialized nations

 By Thomas Hargrove of Scripps Howard News Service 

Posted April 16, 2011 at 8 p.m.

WASHINGTON — Americans pay much less in taxes than most other people in the industrialized world.

Surprised?

According to the latest estimates from the Organization for Economic Cooperation and Development (OECD) — a Paris consortium that tracks financial conditions in 34 nations — the United States pays 24 percent of its total economy (as measured by gross domestic product) to taxes collected by all levels of government.

That’s a bargain compared to most nations.

Australians pay 27 percent; the Japanese pony up 28 percent; Canadians, 31 percent; British, 34 percent; Germans, 37 percent; French, 42 percent; and Swedes, 46 percent. Danes lead the world by forking over 48 percent to their government.

Economic experts agree that America holds a tremendous international advantage because it has the world’s largest national economy and also enjoys one of the world’s most modest tax burdens.

Among nations tracked by the OECD, only Turkey, Chile and Mexico generally have lower tax rates, slightly below what Americans pay.

“The lighter tax burden on individual Americans is certainly a benefit not only to us but also to the rest of the world,” Mickey Kantor, commerce secretary in the administration of President Bill Clinton, said in an interview. “It means we can consume more and invest more. And we certainly have more foreign investments outside the United States than do other nations.”

Kantor, who also was Clinton’s U.S. trade representative, from 1993 to 1997, said Americans pay less in taxes but also have a much smaller “social net” of government benefits — such as free health care, government-operated pensions and individual retirement accounts and free college tuition — than most European nations.

Yet Americans can be forgiven if they think their taxes are burdensome. The United States leads most of the world in aggressive taxation on income, both personal and corporate, as the primary means of raising government revenue.

“We are the only major country that does not have a broad-based value-added tax. And, in many ways, that means we have a most unfortunate system of taxation,” said Gary Hufbauer of the Peterson Institute for International Economics, a research organization in Washington, D.C.

The value-added tax, often called VAT, is a consumption tax on the estimated market value added to a product or material at each stage of its manufacture or distribution. It is much simpler and broader than U.S. sales taxes, paid only by a product’s final consumer or buyer.

The tax can dramatically increase the cost of goods. The least-expensive version of Apple’s iPad costs $499 plus sales tax in the United States. The digital device costs $621 in Japan, $693 in Britain, $712 in Spain and $742 in Germany and France.

“Obviously, we pay a lot of taxes on products, especially luxury products. Things like alcohol, cigarettes or beauty products,” said public-relations executive Ulrika “Ulli” Wippel, 36, from her home in Uppsala, Sweden. “The tax might be 12 percent on groceries, but 25 percent on some of those other products.”

Since taxes already are counted in the list prices of goods, people in Sweden rarely notice they are being heavily taxed. Sweden’s consumption taxes raise almost as much revenue as its general income tax, which is lower than the federal income tax in the United States.

“We never talked about the taxes we’d pay,” said Ulrika Wippel’s American-born husband, Jim Wippel. “I think there is a misconception on income taxes here, that it is so much higher than it is. When I go back to the States and tell them what I actually pay in income tax, jaws drop. Everyone thinks we are paying 40 or 50 percent, but it is so not true.”

Editor's note

This is the final of three stories about the tax burden we face in the United States and Florida. Click below for the other stories or pick up a copy of the Daily News on Sunday.
Part one: Tax burden five to six times higher in some states than others
Part two: Florida’s better, but families struggle to deal with tax burden

The OECD estimates Swedes pay an average of 25 percent of their income to a federal income tax, although the rate is progressively smaller for low-income earners.

The United States relies on personal income taxes to provide 36 percent of all tax revenue, according to the latest OECD estimates. American businesses pony up another 12 percent in levies on their incomes. Most other nations collect no more than a third — and often much less — of their revenues from a general levy on income.

Personal income taxes — filed by nearly 139 million Americans in 2010 — are probably the most invasive kind of levy, because people must tally their earnings, calculate often-complicated exemptions and then estimate what share must be given to the federal government and to the 41 states that also tax income.

“The United States has a system of taxation by confession,” quipped former U.S. Supreme Court Justice Hugo Black during a complex tax ruling in 1953.

The VAT and other levies on consumption are the primary method of raising revenue in most of the nations monitored by the OECD. Experts agree it’s a less invasive tax than direct levies against income. And foreign governments are using their reliance on the VAT to influence international trade.

“They are imposing those value-added taxes on our imports and exempting them on their exports,” Hufbauer said. “It has the effect of making their products more attractive. U.S. firms don’t have that advantage.”

Perhaps that’s why a growing number of economists, both liberal and conservative, are calling for a cut in the current rate of corporate income taxes, something President Barack Obama endorsed in this year’s State of the Union address to Congress.

“American corporations are being taxed more than those in other developed nations,” Kantor said. “That hurts our companies by making them less competitive.”

America also faces another tax challenge, because its reliance on income taxes has made the nation more vulnerable to startling revenue reductions that have created trillion-dollar deficits at the federal level and billion-dollar shortfalls for most state governments.

The OECD finding that taxes represented 24 percent of America’s gross domestic product in 2009 was actually down from nearly 28 percent of GDP in 2007, before the recession struck.

Canada, Britain, France and most other developed countries reported less than a 2-percentage-point drop in tax revenues as a percentage of the economy during the recession.

“I suspect that a large part of the difference is in the way the U.S. collects taxes,” said University of California, San Diego, economist Valerie Ramey.

An OECD study has found that the United States has one of the world’s most progressive tax systems, she said.

“As a confirming example, California has one of the most progressive income-tax systems in the country. In particular, it taxes capital gains as normal income,” Ramey said. “As a result, its tax revenues decline more during recessions and rise more during booms than other states.”