'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.
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Some economic research concludes that, on balance, nations with a smaller size of government will enjoy faster economic growth. Note that European economies still haven’t caught up to America’s when it comes to GDP per capita. Some economists argue that “big government” in Europe has dampened GDP growth there, and that the US risks slower growth if it follows a European path on taxes and spending.Skip to next paragraph
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America's gross national income per person was about $49,000 in 2011, according to the World Bank. That was lower than a few small European nations: Switzerland, Luxembourg, and oil-rich Norway. But Germany came in at $40,000, and Britain and France just below $36,000 (near non-European countries Canada and Japan).
Moreover, if US taxes are “low,” they’re not as low as you might think. To some extent, the 2010 figures on taxation were made smaller due to temporary tax cuts – a policy effort to revive growth after the recession.
And keep in mind that other nations finance a higher share of their health care through taxes than the US does. British or Japanese consumers are buying a product, via taxes, that in America is mostly paid for in the private sector.
The topic of health care brings us to the next point of global comparison: A quick look at other nations suggests that America has a spending problem, not just a revenue problem.
Specifically, US spending on health care, combining public and private expenditures, was 18 percent of GDP in 2010, much higher than in other OECD nations. For comparison, health care’s share of GDP totaled about 10 percent in Britain and Japan, 11 percent in Canada and Switzerland, and 12 percent in Germany and France.
Again, much of the US spending occurs in the private sector. But the federal costs are large and fast-rising. The long-run worry about America's fiscal solvency centers heavily around the costs of paying for programs such as Medicaid and Medicare.
That rise in those costs is projected to remain a fiscal problem even if America raised taxes enough to bring the federal deficit down to zero by 2020.
The choices facing US policymakers aren’t easy. There's no public consensus how to best control health-cost inflation without sacrificing desired care and insurance coverage. And on the tax-revenue side of the puzzle, many budget experts say tax hikes are at best part of the fiscal solution. The current slow economy makes it a tricky time to impose tax hikes, and in the longer run, raising taxes too much could inhibit growth.
But the International Monetary Fund, among others, has warned that the US needs to make some fiscal adjustments. With Europe already wrestling with a public-debt crisis, the IMF recently warned that “the United States and Japan must promptly define and enact clear and credible plans to return to fiscal sustainability over the medium term and buttress investor confidence.”