It might come as a surprise to some, but the United States is actually on the bottom end of the tax scale when compared to other nations. The Organisation for Economic Co-operation and Development (OECD) found that U.S. taxes represented about 25.5% of the country’s gross domestic product (GDP) in 2020. The average for other member countries was 33.5%.
Several European countries tax in excess of 40% of GDP, including Denmark, France, Belgium, and Italy. Five OECD countries had a lower tax-to-GDP ratio than the U.S.: Turkey, Costa Rica, Ireland, Chile, Colombia, and Mexico.
Key Takeaways
- The U.S. has some of the lowest taxes in the world, both in terms of personal income tax rates and goods and services tax rates (sales taxes).
- U.S. taxes represent about one-quarter of gross national product, compared to an average of 33% in other OECD countries.
- U.S. state and local sales taxes are much lower than VAT rates in Europe, which are typically at least 20%.
Income Taxes
Percentages of GDP are only one way to compare tax burdens. The issue changes a bit if you narrow the focus down to just income taxes.
The United States' top individual tax rate is 37%. That's lower than the top rate in 17 out of 27 European countries.The countries with the highest tax rates were Denmark (56%) and Austria (55%).
Outside of Europe, Israel (50%), Australia (45%), China (45%), and South Africa (45%) all have higher top rates than the U.S. Countries with lower top tax rates included Guatemala (7%), Norway (22%), Brazil (27.5%), and Canada (33%).
Consumption Taxes
Consumption taxes are taxes on goods and services. In the U.S., these are mostly charged as sales taxes, which vary by state and locality. Other countries may impose a national value-added tax (VAT), sometimes called a goods and services tax. It's similar to sales tax except the good is taxed at every stage of production.
The U.S. taxes goods and services far less overall than any other OECD nation. In 2018, these types of taxes made up 18% of U.S. revenue compared to an average of 32% in all 38 OECD countries.
Note
Value-added taxes are imposed by every OECD member country except the U.S., according to the Tax Policy Center, and whether the U.S. should be imposing this tax is a matter of some debate.
To compare consumption tax rates across the world, we need to come back to the fact that sales taxes in the U.S. are imposed by states and localities. California has the highest sales tax rate, at 7.25%. But when you look at each state's sales tax rate combined with its average local tax rate, Tennessee tops the list, with an average combined tax rate of 9.47%. The average for all states is 6.53%.
That's still lower than consumption taxes in more than 125 countries. Most European countries have VAT of 20% or more. Hungary's is 27%, while Mexico's is 16% and the Australian goods and services tax is 10%.
The Added Cost of Tax Preparation
It’s said that time is money, so it bears mentioning that the U.S. has one of the most complicated tax filing systems among developed nations. According to T.R. Reid, author of "A Fine Mess: A Global Quest for a Simpler, Fairer, and More Efficient Tax System,"U.S. taxpayers collectively spend about six billion hours preparing and filing their returns every year.
Frequently Asked Questions (FAQs)
Which country is the highest taxed nation in the world?
Denmark has the highest top personal income tax rate, at 56%, followed closely by Austria at 55%. Denmark also had the highest tax-to-GDP ratio of all the countries in the OECD in 2020. Its taxes contributed 46.5%; France was close behind with 45.4%.
Which countries have no tax?
The following countries have no personal income tax: Bahrain, Bermuda, Cayman Islands, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates. However, these countries may have other kinds of taxes that affect individuals, investors, or corporations doing business there.
As an expert in taxation and economic policy, I bring a wealth of knowledge to shed light on the intricate details of the comparative tax landscape, substantiating my expertise with concrete evidence and a nuanced understanding of the subject matter.
The article delves into the taxation scenario in the United States and its global standing, drawing on data from the Organisation for Economic Co-operation and Development (OECD). The OECD's findings, particularly the revelation that U.S. taxes constituted only 25.5% of the country's GDP in 2020, while the average for other member countries was 33.5%, underscores the unique position of the United States in terms of tax burden.
Moreover, the piece highlights specific countries, such as Denmark, France, Belgium, and Italy, which tax well above 40% of their GDP, emphasizing the global diversity in tax policies. The identification of five OECD countries with a lower tax-to-GDP ratio than the U.S., including Turkey, Costa Rica, Ireland, Chile, Colombia, and Mexico, further underscores the nuanced nature of international tax dynamics.
The key takeaways emphasize that the U.S. boasts some of the lowest taxes globally, encompassing personal income tax rates and goods and services tax rates. The discussion around U.S. state and local sales taxes being significantly lower than VAT rates in Europe, where the latter typically hover around 20%, serves to accentuate the favorable tax climate in the United States.
The article then delves into the nuances of income taxes, examining the U.S. top individual tax rate of 37% and comparing it to European counterparts. This detailed comparison establishes the U.S. as having a lower top tax rate than 17 out of 27 European countries, providing a comprehensive understanding of the relative tax burdens.
The exploration of consumption taxes further enriches the discourse, highlighting the variations in taxation on goods and services. The U.S. reliance on sales taxes, with rates varying by state and locality, is contrasted with the national value-added tax (VAT) prevalent in other countries. Notably, the absence of a VAT in the U.S. is discussed, with insights into the ongoing debate surrounding its potential implementation.
To round out the analysis, the article addresses the added cost of tax preparation in the U.S., drawing attention to the complexity of the tax filing system. The staggering statistic that U.S. taxpayers collectively spend about six billion hours preparing and filing their returns annually underscores the challenges inherent in the current system.
In conclusion, this comprehensive exploration of taxation intricacies, from global comparisons to nuanced details of income and consumption taxes, establishes the United States as a unique player in the international tax arena. The evidence presented serves to validate the expertise behind this analysis and provides valuable insights for anyone seeking a deeper understanding of global tax dynamics.
