Aggregate U.S. Tax Picture
Since we just finished looking at Federal individual income tax, let’s start by extending that picture to look at all Federal receipts.
As you can see, while the U.S. Federal government does make a few hundred billion dollars per year from other sources, the vast majority of Federal revenue comes from individual income tax and from social security. Once again, I was at least a little surprised. First, I expected corporate income taxes to be a much larger piece of the pie. And second, I expected “other” — which includes custom duty — to be substantially larger than excise (excise taxes are internal taxes on things like cigarettes and fuel). It appears that we really have bought into free trade on a global basis.
Now, if we go back and add in state and local taxes, we can finally start to get a picture of what we wanted at the beginning: the total U.S. tax burden.
The total U.S. tax burden peaked at just under four trillion dollars in 2007 and 2008. For 2007 (the latest year for which I have census estimates), that amounts to $34,195 per household. You may recall that in 2009, the median income was $31,757. Of course, that comparison doesn’t mean particularly much, since it’s the median and not the mean; still, I thought the proximity of the numbers interesting.
There are two last areas I want to cover in this brief survey of U.S. taxes. The first is to compare the tax burden to the total GDP.
This is interesting, because it shows that while taxes have been increasing over the decade, they’ve been increasing at a slower rate than the GDP — effectively, the total tax burden on the economy has been decreasing. However, as every American knows, we also have a mounting deficit. We tend to think of this in terms of national debt, but it is also the case that individual states and municipalities regularly engage in deficit spending. There are several ways to model the impact of the added debt, but the most straightforward is to directly subtract new debt accrual from GDP. Revising the graph with the removal of all deficit spending at the Federal, State, and municipal levels, we get the following:
Generally, subtracting the deficit spending from the GDP doesn’t seem to have had too much of an impact. One can see that with the deficit taken into account, the total tax burden as a percentage has stayed approximately flat for the period. However, there doesn’t appear to have been a substantial impact on the overall growth of the economy as a result. There is a fairly substantial exception as deficit spending ballooned in 2009, and it will be interesting to see what impact this has on future years; but, from $65 billion in 2001 to just under $1 trillion in 2008, there hasn’t been much impact. In particular, while one can always speculate that decreasing the growth of taxes (or reducing taxes) may stimulate the economy, the reality is that a 4.4% CAGR from 1997 to 2009 doesn’t seem too shabby to me.
But I suppose my opinion on its relative shabbiness doesn’t really matter. What matters is, how do all of these figures compare to our competitors? Let’s start by looking at that tax burden number. I knew that nominal Federal tax rates were relatively meaningless — and were relatively low compared to the equivalent rates in other countries. But I also always suspected that when you put in social security, and all the complexity of the individual state taxes, that we wouldn’t be too far behind “socialist” Europe. That said, now that we know what the total tax burden looks like for the U.S., how does it compare?
Coming in at the third lowest in the OECD, it compares quite favourably, if your goal is low taxes. In fact, with all of the craziness and complication of the U.S. tax code, and all the “hidden” taxes that we never think about, we pay an incredibly low percentage of our GDP in taxes.
But does that really say anything interesting? I would argue that it doesn’t. Looking at the relatively low U.S. taxes in a given year doesn’t say anything about the impact of having low taxes. If we’re to go back and see if we can actually afford the Obama health-care “tax”, shouldn’t we think about what impact that tax will have on our economic capability? A reasonable place to start that assessment is to look at the relative success of these countries over time. For starters, let’s examine the top ten countries by per capita GDP, and then see how that list has changed over time.
Intermediate data for 2001 is included because I don’t have access to OECD tax revenue data prior to that year. If it becomes available at a later point, I may remove the intermediate step. In any case, as you can see, all charts are to the same scale, and each of the top 10 countries have increased in per-capita GDP from 1997 to 2009; however, they have not grown at the same rate (as an aside every country in the OECD has grown in per capita GDP over that time span). But while the U.S. started at the quite enviable position of 2nd highest per-capita GDP in the world in 1997, and managed to grow at a 3.36% CAGR, it still dropped to fourth place overall by 2009. The question now is, is that relative growth in any way related to tax burden?
Perhaps someone can see a correlation between the combined data above, but it’s not obvious to me. And in point of fact, while there is almost certainly some causal relationship between taxation and growth, if we look at the specific countries in the list and their relative growth compared to their change in tax policy, it seems clear that whatever impact tax policy has had has been overshadowed by larger, macro-economic trends.
Let’s look at some of the key factors:
- Moving past industrialisation — Luxembourg, Ireland (which fell 1 spot from 2001 to 2009, but wasn’t on the list at all in 1997), and Switzerland have all advanced their economies by moving into high-tech. Luxembourg flourished in banking after the Swiss lost favour, and has since moved on to acquire the regional headquarters for Skype and Amazon. Ireland is at this point a classic story in high-tech, becoming one of the leading development centers in Europe, and a primary outsource shop for the U.S. Switzerland lost some of its banking gloss, but has a burgeoning high-tech sector as it actively seeks to become the home for start-ups in Europe.
- The growth of China — while China itself isn’t on this list, the tremendous demand it is making on world resource supplies has led to the increases in oil-rich Norway and mineral rich Australia (whose economy is primarily fuelled by mining).
- Economic collapse — the housing collapse in the U.S. is arguably the single largest contributor to global recession, and is clearly responsible for the lack-luster growth of that country. From 1997 to 2009 the CAGR for the U.S. was 3.36%, the fifth lowest in the OECD. But if we look at 1997 to 2007 it comes in at 4.3%, only 3 places behind the OECD average, and ahead of Denmark, Austria, and Swizerland. Caught up in the banking collapse caused by that, Iceland’s economy completely melted down at the end of 2008.
Conclusions
So, at the end of it all, we have some surprising conclusions.
- The poor and middle class are effectively on a flat tax, and the U.S. states and Federal government should seriously consider whether the benefits of their über-complicated tax schemes out-way the costs;
- The rich are already paying their fair share of income tax — but Congress should reëvaluate the cap on social security contributions;
- With one of the lowest overall tax burdens in the industrialized world, the U.S. can certainly afford the new health care tax (whether the tax is a good idea or not is a separate issue; but affordability at the macro level isn’t really in question); and,
- Using tax policy to stimulate the economy may result in some marginal change, but focusing on larger, macro-economic shifts such as educating the population are likely to be much more impactful.
For those of you interested in the numbers, there’s some detail on the next page. For all of the rest of you, until next time:
Cheers!
Chris
Chris,
This was a great post, informative and interesting. I have a few thoughts that perhaps you or someone else could comment on:
First, regarding the taxes paid by the wealthy (i.e. “top 1%”), many people combat the notion that the wealthy are being disproportionately taxed by invoking the law of diminishing (marginal) utility. That is, while the wealthy may be paying a considerably greater percent of their incomes in taxes than the less affluent, they, the wealthy, still have a ton of money laying around and the taxes paid, despite being numerically larger, are worth about the same when adjusted for utility. Inherently, this makes some sense to me in that I may more desperately need that X percent of my income if I make $20,000 per year rather than $200,000 or $2,000,000. However, a dollar is always worth a dollar and any concept of utility seems too subjective to be helpful on this scale. What are your thoughts on this?
Second, you made an excellent point on the costs associated with complying with our über-complex tax code. The cost alone is enough to justify considering alternate systems (flat tax, fair tax, etc.). But, how do we, the US, relate to comparable countries in regards to tax complexity? A quick skim of the World Bank Ease of Doing Business Rankings is informative for some glimpse at corporate taxes, however it was relatively unhelpful in yielding information on personal tax complexity. I would be especially interested to see which tax systems have stimulated the most growth.
Third, I am curious about the connection between our total tax burden and the inference that we have the ability to tax more yet still grow our GDP per capita. It is obvious that other countries are able to tax more and maintain a higher GDP per capita than us (or, as your rightly pointed out, raise their GPD per capita faster than us despite higher taxes), but I wonder if suggesting that ‘because other countries have done it, we can too’ may be a too simple an answer. I am certainly no expert in macroeconomics, but some of the countries that managed this feat (like Luxembourg, Switzerland and the Netherlands) are working with a significantly smaller populations, which, I imagine, could be more readily affected by an influx of businesses than our much larger country – in effect growing GDP despite the “tax burden.” So, the question is how much can we learn from countries like Luxembourg and where do those analogies lose utility?
Anyway, thanks again for the great article!
Best,
Micah
Hey Micah,
Thanks for the great reply and the great questions! I’ll come back to the first and third a little later, but I wanted to just give a quick answer to your second question.
The bottom line is that the U.S. doesn’t have any peers of comparable tax complexity. The closest is the U.K., at 11,500-ish pages is closest. But even there, that’s the entirety of their tax code. The over 16,000 pages I quotes for the U.S. was income tax only, and Federal only. After the U.K., other countries drop off quickly. Canada’s income tax act is over 2,000 pages — but it’s written in two languages at that length! The French weigh in at 1,900 pages. After that, it falls off steeply. Of the countries in which I’ve lived, Germany is pretty big at 141 pages, but that’s for the entire Abgabenordnung (or fiscal code, not just the taxes). The Czech Republic, Russia, and Singapore all have flat(-ish) tax structures these days. Really, it’s almost impossible to compare.
As somewhat of an aside, I suspect part of our tax complexity is due to our age. In Europe (and even in the U.S.), people think of the U.S as a young country. However, the reality is that we’re one of the oldest countries in the world. There are only 3 countries in Africa that predate the 20th Century, and none that predate the 19th. In the Americas, a few date from the 19th Century, but we’re the only one to date from the 18th. In Asia, Thailand dates to 1776, but it’s the only 18th Century country, and the vast majority are 20th Century. In Europe, San Marino dates to 1600, the U.K. dates to 1707, and … that’s it. The U.S. is the fourth oldest country in the world. That gave us a lot more time than anyone else to mess up our tax code.
Once again, thanks for the reply, and I’ll get back to your other two questions as soon as I have a few moments.
Hi Micah,
Coming back to your other questions, regarding the first, I’m not sure I completely buy into the marginal utility argument, at least not from that direction. It depends on what one means by “worth”. Money is an abstraction of saved societal free-time, and the rich (who by definition have acquired large quantities) are capable of doing large things (witness Bill Gates philanthropic efforts, or Sir Richard Brandson’s X Prize). One can argue that these have greater worth to society and are a natural outcome of accumulation of wealth. I would say those dollars are worth more to society, not less. That said, they are certainly worth less to the individual (i.e., you’re correct, those saved dollars are more meaningful to the poor than they are to the rich).
The question ultimately comes down to what a “fair” tax is. As I mentioned, the top 1/2 of Americans pay 98% of the Federal income tax. Digging further into this, the top 10% of Americans pay 45.1% of total taxes. This is higher than any other OECD country (for Germany, the number is 31%; for France the number is 28%). This is true even though France and Germany have much higher marginal tax rates because they also have much higher consumption taxes — and consumption taxes (e.g., sales tax) are regressive.
Regarding your third question, yes, it’s hard if not impossible to compare the U.S. to any other country. There are serious issues with scale, which is why I selected the per capita number. Two other ways we could have compared would have been to look at countries with similar populations, and to look at countries with similar total GDPs. Looking at pure GDP, there’s really no one comparable. At $13.8 trillion in 2009, the U.S. was slightly smaller than the entire E.U., but slightly larger than the 17 country Euro zone, 35% bigger than China, and more than triple the next closest economy (Japan). So, I suppose we could compare to China, but I think even more than in the per capita measures, country specific items other than taxation policy would drive the conclusion. Going back to similar population, it’s slightly better than similar GDP, but not much. In 2009 there were 5 other countries which had the same order of magnitude population as the U.S. (which is to say, in the hundreds of millions): Indonesia, Brazil, the Russian Federation, Japan, and Mexico. I would argue that the only one of those worth comparing is Japan. As it happens, the data isn’t even available for Indonesia, Brazil, or Russia. I’ve put together another chart for Mexico, Japan, and the U.S. here: https://www.cwrichardson.com/images/TaxVPopChart.png and I think you’ll find it no more illuminating than the per capita data.
But again, you’re correct. It takes miles to turn a tanker. Thinking that the sort of economic change that caused the success of Switzerland or Ireland could be effected in the U.S. would indeed be naive. I’ll write a separate post on what I think the policy implications of this data should be; for the moment, my only point was that changing tax policy is not going to have a meaningful economic impact.
Cheers,
Chris
Chris,
For the sake of simplicity, I’m going to respond to both of your replies here.
First, I have to admit that I was one of those people that assumed the US was a fairly newcomer on the country-founding scene, at least in comparison to Europe and parts of Asia as I’m fairly familiar with Sub-Saharan Africa and Latin America. I know that I visited a few bars in Prague that are older than the US, so to learn that we are the fourth oldest country in the world came as a shock.
Being an attorney by training, but not by trade, I can say that our legal system has generated similar levels of relative complexity in all areas of the law when compared to our Southern neighbors. When I’m working on projects in Latin America, it always amazes me how easy it is to maneuver in a civil law setting – most things are fairly well laid out in the code and it is reasonably static by comparison. Though, it has been interesting to watch the evolution of legal systems throughout Latin America as they slowly shift to include more of what we in the States would consider to be a common law approach. Of course, in many respects we’re moving more and more towards a codified legal system, so perhaps we’ll meet in the middle. All of this is to say that maybe “younger” countries will catch up to us in tax complexity as they age or maybe we should consider pursuing the sweeping reforms that many countries enact (seemingly without much trepidation) on a fairly regular basis.
Second, I completely agree with your comments on the marginal utility argument. I particularly like your view on the societal benefits the wealthy can generate. While some may debate whether those benefits are a natural outcome of wealth accumulation, history is filled with corporate tycoons turned philanthropists and I suspect this trend will continue.
Regarding the relative percent of taxes paid by the wealthy, I wonder what the effects of wealth distribution, or the gap between the rich and the average, have on the percent of the population paying the majority of the total taxes by country. That is, does it take a smaller percentage of the population to pay the majority of the taxes in the US because that percent of the population is so much wealthier than the average taxpayer? So, setting aside for a moment the debate on whether the wealthy are paying enough or too much in taxes, can some of the difference between the US and Germany and France, in terms of what percent of taxpayers are paying the majority of the taxes, be accounted for by disparities in the number or magnitude of the wealthy in each country? If so, how significant is this effect?
Third, thank you for your brief analysis of alternate means of comparing the US to other countries. Admittedly, I find all of the comparisons to be fairly unsatisfying though, sadly, I can’t recall enough math or economics to suggest additional means of comparison.
I’m looking forward to your policy implications/recommendations write up. I don’t know where you’re finding the time to work on all of this, but I am thoroughly enjoying it.
Cheers,
Micah
Good stuff! Maybe you should be in politics!
Great write up!
I’m skeptical of the state and local tax numbers. My CA effective tax rate is much less than my Federal effective taxe rate and CA very high state taxes.
I never understood the argument for a flat tax rate vs just eliminating exemptions. Marginal tax rates are pretty simple. People would understand the tax system better if they computed their tax from the marginal tax rate table instead of the precomputed tax tables. (IIRC this is how it was on the original federal tax form.)
I’m not sure if the rich are paying their fair share, at least not rich investors. 15% on long term capital gains is a steal.
Hey David,
Thanks! I’m definitely glad you enjoyed it.
It’s true, I would imagine your effective tax rate in CA is much lower than your effective Federal tax rate (see the first chart on page 1). However, your local and state taxes are still almost certainly higher than your Federal taxes (particularly in CA). When you add your property tax, auto tax, your CA SDI, and most significantly your sales tax, I suspect you would find those add to more than your Federal tax. That said, it’s possible they may not, as the analysis here was for hypothetical families of four, not for any specific individual. Also, the analysis was based on the largest city in each state, and living in LA could be very different than living in San Bernardino.
Regarding the rich paying their fair share, see my reply to Micah — maybe, maybe not. But as to tax policy, I agree. I’m not advocating a flat tax (even if we wanted one, we probably couldn’t implement one, because of state and municipal differences — I may have a flat tax in the Czech Republic, but that’s in part because I don’t pay separate taxes to the state of Bohemia or the city of Prague).
Now that I have excavated all this data, I do intend to come forward with some proper suggestions. In the meantime, I just wanted to point out some immediate things that jumped out of the data: that we have a preposterously complex tax system, given that for the middle class we’re effectively extracting a flat tax; and the rich are paying more than most people probably think they are.
With respect to the specific point of the 15% long term capital gains, I’m not sure. I don’t know if I can extract from anywhere the distribution of sources of income for the wealthy. But capital gains would imply they’ve sold some capital. I imagine that the majority of their income in most years comes from interest and dividends, which would be taxed as income. And in fact, capital gains and capital gains taxes are part of AGI, so both are included (though buried) in the above analysis.
Thanks again for reading and commenting!
Chris