How Do U.S. Taxes Compare to Other Countries?
Living in the U.S. might not be as bad tax-wise as you think
It might come as a surprise to some, but the United States is actually on the bottom end of the tax scale when compared to other developed nations. The Tax Foundation performed an analysis of income tax rates in October 2019 and found that the U.S. ranked 32 on a list of 41 countries.
The Tax Policy Center looked into the matter in 2018 and found that U.S. taxes represent about 24.3% of the country’s gross domestic product (GDP). The average for other member countries of the Organisation for Economic Co-operation and Development (OECD) is about 34%.
Several European countries tax in excess of 40% of GDP, including France, Denmark, Belgium, and Sweden. Ireland is one of only three countries with a lesser overall tax burden than the U.S. The others are Chile and Mexico.
Percentages of GDP are only one way to compare tax burdens. The issue changes a bit if you narrow the focus down to just income taxes.
Income taxes charged to individual taxpayers comprised a pretty significant 50% of U.S. federal revenues in 2019. Corporate income taxes made up only 7%.
But this percentage attributed to individuals is shifting downward. About 65% of households paid less in individual income taxes in 2018 than they did in 2017. This is largely due to the Tax Cuts and Jobs Act (TCJA), which went into effect in 2018 and provided many Americans with tax cuts.
The average single American household got to keep approximately $1,300 more of their earnings when the TCJA went into effect.
The top tax rate in the U.S. dropped to 37% for 2018 through 2025 under the provisions of the TCJA, and only significantly wealthy individuals pay this much. The top rates are lower in over 20 countries. The highest individual income tax rate in Hungary is only 15% as of 2020.
The TCJA additionally doubled standard deductions and upped the value of a few tax credits, although it imposed stricter limitations on some itemized deductions. But overall, 2018 tax reform treated many Americans kindly.
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 a little less in the way of “social program” taxes than the average for OECD countries—25% of our overall tax burden is representative of these programs compared to the average of 26%. 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%, but that should be put into perspective. The nation doesn’t tax unemployment compensation as the U.S. does.
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—18% of its revenue comes from this source compared to an average of 32%. This is largely attributable to the fact that it doesn’t have a national-level VAT.
These "value-added taxes" (VATs) are imposed by every OECD member country except the U.S., according to the Tax Policy Center, and whether the U.S. should be imposing this tax is a matter of some debate.
Interestingly, France—which ranked highest 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% effective May 2018.
The Added Cost of Tax 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.
Pause and take a deep breath the next time you wince when you look at your paystub and see all those taxes that were deducted from your take-home pay. It really could be worse. You could live and work in Denmark.