American Tax Burden and Trade-offs
Compared to other advanced nations, Americans enjoy a relatively lower tax burden. In 2023, taxes collected accounted for 25.2% of the US's GDP, significantly below the OECD average of 33.9% and much lower than the 40% tax-to-GDP ratio found in several European countries.
The absence of a federal value-added tax (VAT) contributes to this disparity. VAT, a consumption tax levied on the value of goods and services, is employed by over 170 countries worldwide. In the US, income tax constitutes the primary source of federal revenue, with 44% from personal income taxes and 7% from corporate income taxes.
Despite lower taxes, the US faces significant trade-offs. Social programs in the US are primarily administered by states, resulting in a less robust safety net for citizens compared to nations with more comprehensive welfare systems supported by higher tax revenues.
In contrast to VAT, the US tax system relies heavily on progressive income taxes. While individuals in the lowest tax brackets pay modest rates, those earning more can often reduce their tax burden through credits and deductions. This system leads to a notable disparity in tax contributions, with high earners paying a disproportionate share while many low-income individuals pay no income tax.
Additionally, the US has a unique decentralized tax system, with states and localities playing a major role. State and local taxes account for approximately one-third of the total tax burden, with income taxes, sales taxes, and property taxes being the primary sources. This decentralized approach allows for greater local autonomy but also creates disparities in tax policies and burdens across different states.
Lower taxes in the US come with significant trade-offs, including a less comprehensive safety net, reliance on states for social programs, and a decentralized tax system that can lead to inequities. Nevertheless, the US's low tax burden remains a distinctive feature of its economic landscape.