US Tax Burden and Social Safety Net

Lower Tax Burden

In comparison to other developed nations, the United States has a relatively low tax burden. In 2023, total taxes collected comprised 25.2% of GDP, significantly lower than the OECD average of 33.9%. Per capita, the tax burden in the US is notably lower than in Europe, with workers in 22 European countries paying an average of $11,676 more in taxes than their American counterparts.

VAT vs. Income Tax

A primary reason for the tax discrepancy lies in the widespread implementation of a value-added tax (VAT) in over 170 countries. A VAT taxes the value of goods and services at each stage of production and distribution. Unlike these countries, the US relies primarily on income tax, which makes up around half of federal revenue.

Progressive Income Taxes

US income taxes are progressive, with lower earners paying lower rates. In 2018, the average effective tax rate for those making $200,000-$500,000 was only 16.6%. Additionally, tax credits and deductions further reduce the tax burden for many Americans.

The Role of States

State and local taxes account for the remaining one-third of the US tax burden. These taxes are used to fund essential services such as schools and police, which are often covered by federal governments in other countries. While this decentralized approach provides local autonomy, it also results in significant disparities in certain areas, particularly education.

Social Safety Net

The lower tax burden in the US comes with trade-offs. The reduced federal government size offsets the lower tax revenue, but it also contributes to a smaller social safety net compared to countries with more generous welfare programs. For example, the US collects less tax revenue for its Social Security obligations than the OECD average.

Conclusion

The US tax system differs significantly from that of other developed nations, particularly in its reliance on income tax and the role of states. While this has resulted in a lower tax burden, it has also led to a smaller social safety net, with Americans being responsible for expenses that are often covered by governments in other countries.