Taxes in the United States: A Comparative Analysis

Compared to other advanced nations, the United States features a lighter tax burden. However, this relief comes with trade-offs.

Tax Revenue

In 2023, total tax revenue in the US accounted for 25.2% of GDP, below the OECD average of 33.9% and significantly lower than the 40%+ tax-to-GDP ratios prevalent in nine European countries.

Per-Person Taxes

According to the Cato Institute, workers earning the average wage across 22 European countries pay approximately $11,676 more in taxes than their American counterparts. The difference for a family of four rises to $21,546.

VAT vs. Income Tax

A key distinction is that over 170 countries worldwide utilize a value-added tax (VAT) at the federal level. VAT is a broad consumption tax that applies to both goods and services. The US, however, relies primarily on income tax.

VAT Advantages

VATs generate substantial revenue. Some countries offer reduced rates for essential goods to mitigate the impact on low-income households.

Income Tax in the US

Instead of VAT, the US relies heavily on income tax, which constitutes approximately half of federal revenue. Progressive tax rates apply, with lower earners paying 10% and 12% while higher earners benefit from deductions and credits.

Affluent Americans

A significant factor in the lower overall tax burden in the US is the presence of a large number of highly affluent individuals. These individuals contribute substantial income tax revenue.

State and Local Taxes

State and local taxes comprise about one-third of the total tax burden in the US. Income taxes, sales taxes, and property taxes are common revenue sources.

Decentralized Tax System

The US has a decentralized tax system, with states and localities having significant taxing authority. This differs from many European countries where quasi-state entities wield greater power.

Trade-Offs

The lower federal tax burden in the US is offset by a smaller social safety net. States typically provide essential services such as education and healthcare, leading to disparities among states.

Conclusion

The US tax system differs from its European counterparts in several ways, including the absence of VAT, a reliance on income tax, and a decentralized structure. These differences result in a lower overall tax burden but also in a smaller social safety net.