'Fiscal cliff' reality check: Are US taxes low or high? (+video)
As Washington confronts the 'fiscal cliff' and seeks a deal to reduce the deficit, one key issue is the tax rate. Comparatively, US taxes are low, but politically, a big hike is a nonstarter.
At the heart of the current debate over the so-called “fiscal cliff” is a fundamental question: Are US budget deficits so high because the government spends too much or because Americans are paying too little in taxes?Skip to next paragraph
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Or is the answer a bit of both?
Something has to give. Both President Obama and Republicans in Congress agree the country must take steps to reduce budget deficits, even as it’s also wise to soften the impact of the fiscal cliff – the negative impact of tax hikes and spending cuts that are currently slated to go into effect on Jan. 1.
One lens on the debate is global – checking how the US compares with other advanced economies. Such a check-up gives some useful context to the debate, even though the exercise isn’t meant to imply that the US should mimic other nations.
The upshot: Judged by global comparison, the US is taxed relatively lightly, so much so that the country could close its deficit over the next decade entirely via tax hikes, while still keep its tax revenue below European levels.
But America also appears to have a spending problem – notably when it comes to health care – over the longer term. And just because American taxes are on the low end of the scale doesn’t mean that raising taxes would be easy for the economy to bear.
Another big lesson from overseas: America isn’t alone when it comes to having chronic budget deficits. It has company from Japan and many European nations. The point here is that higher taxes alone do not guarantee balanced budgets. One still must spend appropriately.
The Organization for Economic Cooperation and Development (OECD) estimates that in 2010 American individuals and businesses paid taxes (federal, state, and local) that amounted to 24.8 percent of US gross domestic product. That compares with 33.8 percent of GDP for the OECD overall, encompassing more than 30 advanced economies.
That’s a big gap. Nine percentage points of GDP, to be precise.
And every other large advanced economy in the world ranks higher than the US in the percentage of GDP paid in taxes. On the OECD list, only Chile and Mexico have lower overall taxes as a share of GDP (about 20 percent and 19 percent, respectively).
Democrats can point to this as evidence that higher taxes should be part of the solution.
In fact, although this idea is politically unpalatable, Congress could close America’s budget deficits over the rest of this decade entirely through tax hikes – and America would still have below-average taxes among OECD nations.
As an illustration, consider that Obama's most recent budget plan (which he proposed in February) envisions bringing deficits down to 3 percent of GDP at the end of the decade through relatively modest changes to current policy: some spending restraint and some tax hikes that amount to about 1 percent of GDP. So, operating from the Obama template, even if you eliminated the plan’s spending restraint, the tax hikes needed to eliminate deficits altogether wouldn’t be large enough to push US taxes up to 34 percent of GDP.
OK, we’ll get real now. Politically that scenario is a nonstarter. The presidential election was a contest between Mitt Romney, who wanted to keep taxes low for all Americans, and Obama, who pledged to keep taxes low for 98 percent of households – while raising them modestly for the rich.
On economic grounds, too, just because other nations tax more doesn’t make their level of taxation the right one. In fact, European tax rates vary widely, ranging from nearly 48 percent of GDP in Denmark to 27.6 percent in Ireland.