Taxes in the US: A Unique System with Trade-Offs
When it comes to taxes, the United States stands out from other advanced economies. While Americans enjoy a relatively low tax burden, this comes with significant compromises.
A Low-Tax Country
In 2023, total taxes collected in the US made up 25.2% of the country’s gross domestic product (GDP), significantly lower than the 33.9% average for countries in the Organization for Economic Cooperation and Development (OECD). In fact, nine European countries have a tax-to-GDP ratio of over 40%. On a per-person level, workers in the US pay significantly less in taxes than their European counterparts.
The Absence of a Value-Added Tax
One key reason for this discrepancy is the lack of a value-added tax (VAT) in the US. A VAT is a consumption tax levied on the value of goods and services, and over 170 countries worldwide employ it at the federal level. In contrast, the US federal government primarily relies on income tax. This means that Americans generally have a lower tax burden as a percentage of their income.
Trade-Offs: Smaller Safety Net and State-Administered Programs
However, this lower tax burden comes with significant trade-offs. The US has a smaller safety net for its citizens, and states are responsible for administering large social programs. This decentralized system means that states have more control over necessary programs like education and law enforcement, but it also leads to bigger discrepancies among states.
Income Taxes: Progressive and Focused on the Affluent
The US federal government relies heavily on income taxes, which make up about half of all revenue. Income taxes in the US are progressive, with lower tax brackets for those who earn less. Additionally, affluent Americans contribute a significant portion of income tax revenue, sparing ordinary people from paying much in tax. The presence of highly profitable corporations also contributes to the income tax base.
State and Local Taxes: A Unique System
The US is unique in its decentralized tax system, with states and localities depending on income taxes, sales taxes, and property taxes. Property taxes, in particular, make up a significant portion of an American’s total tax burden, with the OECD average being 5%. This system allows for more control over local programs but also leads to discrepancies among states.
The Cost of Lower Taxes
While lower taxes may seem appealing, they come at a cost. The US has a smaller federal government, which means that citizens are left to pay for essential services like healthcare, education, and childcare on their own. This is in contrast to other countries, which fund these services through higher taxes. Ultimately, the US tax system is a complex balance of trade-offs, and understanding these compromises is essential for making informed decisions about our economic future.
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