• How high are taxes?

    Bruce Bartlett is a national treasure. A week ago, he posted on tax levels in the US and various other countries, that showed our tax burden was relatively low. Evidently, some readers complained that he did not include state and local taxes in the calculations. Did he ignore their calls? No, he redid the calculations, this time including state and local taxes as well:

    The table below shows total taxes, including state and local government taxes, as a share of G.D.P. in 2008, the latest year for which there is complete data. The table makes clear that the United States has very low taxes by international standards.

    When Americans see these data they are usually incredulous that Europeans submit to such seemingly oppressive tax levels. Conservatives, in particular, tend to view freedom as a fixed sum: the bigger government is as a share of G.D.P., the less freedom there is for the people (if government consumes, say, 40 percent of G.D.P., then people are only 60 percent free).

    The late Milton Friedman popularized this idea, but even he thought that freedom would not be seriously threatened in Western democracies until government spending reached 60 percent of G.D.P. We are far away from that “tipping point,” as he called it; in 2010, total federal, state and local government spending amounted to 36 percent of G.D.P.

    Readers of this blog know that, for us, there’s no better answer than data. It’s hard to argue with these.

    Update: Center for Budget and Policy Priorities graphed these numbers.

    *For the record, Turkey, Chile, and Mexico are the three OECD countries that have more uninsurance than we do. Interesting.

    • Bruce points out that the gap is smaller than it appears to be. To reimburse people for something you can cut their taxes or leave their taxes higher and send them a check. The net effect is the same, but in one case tax rates appear higher. Childcare deductions instead of reimbursement is an example.

      A big ticket item is that most other countries provide healthcare through taxes. It’s basically the difference between sending one check to the govt and sending two checks – one to the govt and a second to an insurance company. Of course, in every other country, healthcare is less expensive.

      • Yes, but this is an answer to people who claim taxes are “too high” in the US.

        I also find it ironic that when you add in our phenomenally high health care costs, we’re still below average (his second graph), adding more weight to the point that our taxes aren’t really that high.

    • It’s hard to untangle this, for sure. If you pay more taxes, but don’t have any reason to contribute to your 401(k), how do you count the tradeoff?

      I think the issue is much more, whether people believe they are getting value for their taxes, or not. And this is really, really, cultural. Here in Switzerland, tax money spent on landscaping of public lands is universally regarded as money well spent. When I lived in New Jersey, it was clear that people there felt far differently about that.

    • Yes, but our taxes are far more progressive than most of these countries. In other words, our upper income earners pay about as much as they do in Europe even while tax/GDP is lower, due to the fact that middle/lower income people have much lower tax burdens as compared to Europe.

      These figures also average out significant differences in high tax states like California and high tax localities (where many upper income people are located). If you’re paying combined marginal rates well north of 50% today (which will probably go higher still to cover the deficits) and, unlike in Europe, you need to spend million+ to pay for your advanced education loans and your kids’ education, healthcare, and so on — I think there’s a good argument to be made that taxes are “too high” in terms of: economic incentive for work (the more relevant comparison here is what your tax rate would be if you simply worked less or chose a less demanding profession in the USA) and in terms of “fairness”.

      I reject the notion that these countries should be our basis of comparison in terms of what is “too much” for US. I would agree this would tend to indicate that causing taxes to rise a few more percent of GDP probably won’t kill us per se, but this depends entirely on how those revenues are collected and on how the money is spent. For instance, if we were to attempt to close this gap by raising taxes on the rich exclusively–we’d be sending tax rates into astronomic territory and this would dramatically affect growth over the long run. How many people on the left are seriously proposing large tax increases on the poor and middle class — even to pay for the safety net they presumably want? Almost zero.

      By the way- picking 2008 as a year of comparison magnifies this difference greatly — the economic downturn combined with our tax code that relies heavily on upper income earners has clearly caused taxes as a percent of GDP to fall several percent — far more than they have in the rest of the world.

      • I don’t imagine US taxes are any more progressive than they are in Canada. I’d be surprised if very many of the above listed countries had less progressive tax structures.

        In any case, as a high income single with no dependents and no significant tax deductions (we don’t get to claim a lot of things our US neighbours do, like mortgage interest) I still pay less in income taxes than some American colleagues I know pay in health care premiums.

        You might think my taxes are higher. I prefer to think my health care premiums are much lower.

        • The US has just about the most progressive tax regime in the developed world except for possibly Ireland. Canada and English speaking countries more broadly have significantly more progressive taxes than Europe does though. For instance, most income levels in France pay about 40% of their income in taxes, including the poor and middle class (albeit more through VAT, payroll taxes, etc).


          There is a well documented relationship in the literature between the size of the welfare state, measured as a share of GDP, and the less progressive (nearly effectively flat) taxes.

          This actually makes a lot of sense of you think about it. When government makes it a priority to provide an extensive amount of public goods, transfers, and what not (e.g., 35%+ of GDP) these must necessarily compete for resources that would otherwise have been allocated towards more private pursuits. You can’t provide for this by just curtailing the rich’s consumption alone. At any given level of productivity there is only so much stuff that can be produced with the available resources and they, consciously or not, need to tradeoff the majority of the country’s private consumption (not just the rich) for those pursuits government deems worthy.

    • You’ll find a nice graph of these numbers on the Center on Budget’s blog on April 27:

    • Dr. Carroll,

      A few points to consider. This graph does not take into account the progressiveness of the US tax system (which Pete addressed). As well, the ability to gain more revenue in taxes has never been able to budge in the US above a certain GDP level, which I believe Schiller discovered (could be wrong). To me, your chart supports that we need to make the tax system simpler. There is obviously a mismatch between what your tax rate is and what you pay out of pocket. The way to fix that. Get rid of exceptions and bring down the rate.