Tax Policy in the United States vs. Other Developed Countries
Despite lower tax rates compared to other advanced nations, the United States prioritizes individual responsibility and limited government involvement in social welfare programs. In 2023, total tax revenue in the US constituted 25.2% of Gross Domestic Product (GDP), significantly lower than the OECD average of 33.9%.
Value-Added Tax (VAT)
A primary reason for the tax disparity is the widespread use of VAT in over 170 countries worldwide. VAT, a consumption tax levied on goods and services, generates significant revenue streams. In contrast, the US federal government relies heavily on income taxes.
Income Tax
Income taxes account for approximately half of US tax revenue. Despite lower tax rates for lower income earners, progressive taxation ensures higher earners contribute more. Tax credits and deductions also provide significant relief, resulting in an average effective tax rate of 16.6% for those earning between $200,000 and $500,000.
State and Local Taxes
The US tax system differs in the substantial role played by state and local governments. They rely on income taxes, sales taxes, and property taxes, with property taxes constituting 10% of an American's overall tax burden. This decentralized tax structure is unique among developed nations.
Trade-Offs of Lower Taxes
Lower federal taxes in the US come with trade-offs. States assume primary responsibility for funding education and policing, which are often federalized in other countries. This decentralized approach can lead to significant disparities in service quality and funding levels among states.
Additionally, the smaller federal government in the US results in a less extensive social safety net compared to other advanced economies. Citizens are largely responsible for covering expenses such as healthcare, higher education, and elder care.