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America's Comparatively Low Tax Burden

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As the Presidential candidates argue over which group is paying too much in taxes and which one can afford to pay more of "their fair share" a broader perspective should be taken. That broader perspective is the fact that today Americans pay far lower taxes than citizens of nearly any other country in the Organisation for Economic Co-operation and Development (OECD). The OECD is an international organization comprised of 34 countries, representing many of the wealthier countries in the world.

When we examine the OECD tax data we observe a few items immediately. The first is that Americans currently pay one of the lowest tax rates. In 2009, America's tax revenue represented 24.1% of the GDP, ranking it the 32nd lowest out of the 34 OECD countries. The only countries with a lower tax rate were Mexico and Chile. OECD countries with the highest levels of taxation were Denmark, Sweden, Belgium, and France. The average rate for OECD countries was 33.8%, a tax rate of nearly 10% higher than in the US. This lower tax rate goes hand-in-hand with America's comparatively lower level of social services.

Back in 1965, America had a similar effective tax rate (24.7%) but the distribution of the federal spending has changed. In 1965, defense comprised nearly 50% of the federal expenditures whereas today it is down to about 20%. At the same time, the expenditures for social security and health care have risen dramatically. America's tax rate in 1965 put it only slightly lower than most OECD countries, where the average rate was 25.4% (America had the 16th lowest rate of the 24 countries that were members in 1965).

A few important points can be gleaned from comparing those data points. The first is the observation that America has moved from a comparatively typical taxation rate for wealthy countries to one that is far lower than most OECD countries. A second is that this shift was driven by America maintaining its overall taxation rate while other OECD countries increased their taxation rates (the OECD average for the 24 countries who were members in 1965 rose from 25.4% in 1965 to 35.3% in 2009). A third, related point is that America's social welfare system is far weaker than most other OECD countries, a fact that is tightly related to the fact that the US collects far less in taxes since governments need to collect more in taxes when they agree to provide more social services.

When did America move from a period of typical taxation rates to one that was comparatively low? For those who have spent any time studying American politics, they will not be surprised to hear that this shift got its first big push during the Reagan administration and has continued relatively steadily ever since. While other countries raised their taxation rates to reflect the increasing need for social services America left its rate about the same but shifted the taxation burden. Forty years ago, corporate taxes comprised 16% of the federal revenue but today are only about 8%, a reflection of federal regulations that provide generous corporate tax breaks and loopholes. The tax burden was picked up by social insurance taxes, the payroll taxes that fund social insurance programs such as Social Security and Medicare. These taxes, which are highly regressive, went from being 25% of the federal revenue in 1972 to being 36% today as the tax burden has been shifted to working class and middle income families.

So, the next time you hear politicians talk about America's enormous tax burden, just remember that America currently has one of the lowest rates of any wealthy country.

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Note: Data for this article was taken from
http://www.whitehouse.gov/sites/default/files/omb/budget/fy2009/pdf/hist.pdf
http://www.cbo.gov/publication/42905

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