Friday 08 Oct 2021 | 05:01 | SYDNEY
Friday 08 Oct 2021 | 05:01 | SYDNEY

The strange ways of US taxation


Stephen Grenville

17 August 2011 17:32

Sam demonstrates just how adamant the Republican presidential hopefuls are that taxes mustn't go up. I'm no expert on taxes, let alone in US taxes, but this position looks very strange if you want to run a normal advanced country. The ratio of federal taxes to GDP has now fallen to 14%, thanks in part to the recession, but also thanks to the Bush tax cuts which largely benefited the rich. This ratio is normally around 19%.

Of course, this is only federal taxes, and for international comparisons we need a measure of total taxes. The best source is the OECD, although the data are from 2007 and focus just on OECD members. At left is the summary graph of tax ratios as a percentage of GDP.

As you can see, among OECD members, only Korea, Turkey and Mexico have lower tax rates than the US. But these are old data: US federal taxes are now five percentage points lower. With this adjustment, the US would be competing with Mexico for the honour of being the lowest-taxed country.

Of course there are countries with lower tax rates. Wikipedia quotes the Heritage Foundation data. On this comparison, if we take five percentage points off the US tax take to adjust for current circumstances, there are still plenty of countries getting by. Most of them are in Africa and all of them offer a level of government services commensurate with their poverty. Is this where the Tea Party wants America to be?

There is a glimmer of hope. Even if none of the Republican candidates dares to suggest that taxes might have to go up, Warren Buffett has called for an increase in tax for the rich. He notes:

Since 1992, the I.R.S. has compiled data from the returns of the 400 Americans reporting the largest income. In 1992, the top 400 had aggregate taxable income of $16.9 billion and paid federal taxes of 29.2 percent on that sum. In 2008, the aggregate income of the highest 400 had soared to $90.9 billion — a staggering $227.4 million on average — but the rate paid had fallen to 21.5 percent.

Buffett says his mega-rich friends have been 'coddled long enough by a billionaire-friendly Congress.'