How Do U.S. Taxes Compare to Other Countries?
Living in the U.S. might not be as bad tax-wise as you think
You might think that the federal government taxes you to death, not to mention state and local taxing authorities, but the U.S. is actually on the bottom end of the scale when compared to other developed nations.
The Federal Reserve Bank of Chicago performed an analysis of income tax rates in 2017 and found that the U.S. ranked 32 on a list of 35 member countries of the Organization for Economic Cooperation and Development (OECD).
The Tax Policy Center looked into the matter in 2015 and found that our taxes represent about 26 percent of the country’s gross domestic product. Compare this to the average for other member countries of the OECD, which is about 34 percent.
Several European countries tax in excess of 40 percent of GDP. Ireland is one of only four countries with a lesser overall tax burden than the U.S. The others are Korea, Chile, and Mexico.
So who pays the most? Don’t pack your bags and head for Denmark—residents there pay the highest percentage of GDP—or to France, Belgium, or Finland either.
Percentages of GDP are only one way to compare tax burdens. Think of this approach as the big picture. The issue changes a bit if you narrow the focus down to just income taxes.
Income taxes charged to taxpayers, including businesses, comprised a pretty significant 49 percent of total U.S. tax revenues in 2015, and 40 percent derived from individual taxpayers, not businesses. New Zealand, Australia, and Denmark ranked higher at over 50 percent. The average percentage among OECD nations was 24 percent.
A single American earning about $51,500 a year paid more than 25 percent of his gross pay in taxes, although this number includes Social Security and Medicare. But this is still less than the average among OECD countries, which came in at a little over 27 percent.
Then there are the tax rates themselves—tax brackets. The top tax rate in the U.S. dropped to 37 percent in 2018 under the provisions of the Tax Cuts and Jobs Act and only significantly wealthy individuals pay this much. The top rates were less in 12 countries. The highest individual income tax rate in Hungary is only 15 percent.
Social Programs and Assistance
One of the difficulties in comparing data from different countries is that it can be like measuring apples against oranges. Many countries with significant overall tax burdens funnel a good portion of their revenues back to the public in the form of government services that are at least marginally superior to those offered in the U.S.
According to the Tax Policy Center, the U.S. imposes less in the way of “social program” taxes than the average for OECD countries—24 percent of our overall tax burden is representative of these programs compared to the average of 26 percent. These taxes include things like Social Security retirement and disability benefits as well as unemployment.
Japan, on the other hand, imposes taxes of this nature exceeding 40 percent, but that should be put into perspective. The nation doesn’t tax unemployment compensation as the U.S. does.
The Pew Research Center specifically analyzed these social program taxes in 2015 and found that citizens in 21 out of 39 countries paid more for social assistance than they did in income taxes. The U.S. had the 11th lowest tax burden of this nature, but employer contributions were not included in the calculation.
Excise and Value-Added Taxes
Excise taxes are those imposed on specific goods and services—think gasoline and cigarettes and the like. For the most part, these are imposed at the state and local levels and they're buried in the purchase price.
The U.S. imposes far less in taxes on goods and services than any other OECD nation—17 percent of its revenue comes from this source compared to an average of 32 percent. This is largely attributed to the fact that it doesn’t have a national-level VAT.
Interestingly, France—which ranked second behind Denmark on the Tax Policy Center’s list of highest taxes as a share of GDP—is largely credited with creating the VAT back in the 1950s. China announced in March 2018 that it was reducing its VAT rates by 1 percent effective May 2018.
The Added Cost of Preparation
It’s said that time is money so it bears mentioning that the U.S. has one of the most complicated tax filing systems among developed nations. According to T.R. Reid, author of A Fine Mess: A Global Quest for a Simpler, Fairer, and More Efficient Tax System, U.S. taxpayers collectively spend about six billion hours preparing and filing their returns every year.
The average in Japan is about 15 minutes per person—a pretty significant difference. Americans fork over about $10 billion annually to professional tax preparers in an effort to personally avoid as much of this onerous task as possible. And this figure doesn’t count the approximate $2 billion that’s spent on tax preparation software for the same reason.