Whining about American taxes

Writing from NYC we get some woman complaining about how low taxes are in the US. My response there.

Yes, the federal income tax rate is 35%. Add the NY State income tax of 8% and the NY City rate of 4% and you\’re at 47%.

This isn\’t a low income tax rate by anyone\’s standards.

It puts NYC in the top 10 (ish, there\’s a lot of countries on joint 5th at 50%) of 90 odd countries for marginal personal income tax rates.

All of which means is that it\’s not the taxation system which is your problem. It\’s the structural side, the way you spend the money which is. The way you spend the money some of the highest income taxes in the world get you The Bronx. Or Brooklyn.

You need to be looking at the other side of the ledger.

5 comments on “Whining about American taxes

  1. It’s not that taxes are too low. She’s complaining that rich people can avoid them – which is true. But far more cripping for the US economy is the fact that an awful lot of low to middle income earners ALSO avoid paying taxes. The system of tax allowances and benefits there mean that about 40% of households pay no federal income tax at all. The tax base is therefore far too narrow, the burden of taxation falling mainly on the upper middle class. Add to that the US’s fantastically expensive (especially to employers) healthcare system, and it is evident that part of the problem in the US is indeed a tax system desperately in need of reform. But not in the way she thinks.

  2. Yes, the US tax system seems to be shot full of holes and root and branch reform on a rational basis would be a good thing. Closing loopholes and freebies and then lowering the marginal rateswould be a very sensible thing. Can’t see it happening though.

    But two other substantive comments:

    @Frances – true that many h/holds pay no federal income tax, but bear in mind that US federal income tax is quite limited… it raises about 6 % of GDP in revenue. There are other federal taxes (social insurance taxes) that are income related, but they are paid by everyone who works, so the 40% figure doesnt apply there.

    @ Tim – firstly, the overall tax take … percentage of income paid out as tax … is relatively low in the US, compared to other developed economies. Total revenues, all taxes combined, are about 25% of GDP. The top decile pays less than 40% in tax, taking all taxes into account. High marginal rates therefore reflect bad overall design, as much as anything.

    It is misleading to state that the US is somehow heavily taxed. Badly taxed would be a better choice of words.

    Secondly, while spending committments needs to be looked at, you seem to be forgetting that the Bush White House cut the percentage of GDP taken in as tax by about 4 percentage points of GDP during its lifetime, mostly focussed on the federal income tax (falling from around 10% of GDP to 6%). This moved the structural budget deficit substantially into the red.

  3. My household income is in the top 20% in the US and we pay federal income tax at 6% of total income.

    However, when you add on state tax (3.5%), town tax (3%), school tax (5%) and social security and medicare (7.5%) we end up paying 25% of income.

  4. Who cares what the official levels of income tax, state tax, whatever, are? What we know is that when you add up *all* local state and Federal taxes, 26.9% of GDP is taken in tax, which is lower than almost any other developed country.

    That’s the only important statistic – and anyone claiming that the US is anything other than a low-tax country is simply wrong (the figure is lower than headline tax rates because of income thresholds and tax breaks. There may be an argument for reforming the tax system so that headline tax rates are lower and tax breaks are reduced, but that’s about how tax should be distributed, not about whether the overall take is high).

    Tim adds: The amounts that the US gets in the various taxes aren’t all that out of the ordinary. The % of GDP in corporation tax, or income tax, are at or above average.

    They don’t have a VAT. That’s what lowers the overall tax take.

  5. No VAT essentially means income tax is lower, though.

    John’s right, but I think tax breaks do have an impact over just distribution as they still distort economic activity. It’s similar to taxing at 30% and rebating through a government benefit 10%, and calling it 20%.

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