On this you can only get 20% in tax out of the US economy


It\’s a fairly common theme around at the moment. Federal taxation has been around 20% of GDP under a number of different tax regimes. So, maybe you can only get 20% in tax out of the US economy?

Unfortunately, I think there\’s a problem with this idea. And it\’s that people seem to be looking at one level of a federal tax system, the Federal level, and forgetting all the other levels.

Federal taxation is (and that\’s Federal, not federal) pretty much varieties of income taxation (income tax, FICA etc and for this purpose I\’ll pile capital gains taxation in as being taxation on incomes) and corporate taxation (which itslelf is a pretty small part of the whole, 3% maybe of GDP). There\’s a bit mroe coming from import tariffs but in hte grand scheme that\’s trivial.

And I have no real problem with thinking that the ability to tax incomes tops out at somewhere in the 20-25% of GDP level. I wouldn\’t want to prove it of course but income tax, NI and corporate and capital taxation in the UK are of roughly those levels. I wouldn\’t be surprised at all to see that they\’re similarish in other OECD countries as well.

What\’s very different about the US tax system is that at that Federal level we only see these taxes. In most other industrialised countries we see the more local taxation being reported at the country level. For example, Council Tax in the UK is roughly equivalent to property tax in the US. But property tax is levvied at the city or county level there. And spent at that level as well. So when we talk about the total level of taxation we are reporting property taxes as being part of the national burden in Europe but not in the US. Same with sales taxes (State and county), booze n\’ciggies (State) and so on.

However, there is one other huge difference. Consumption taxes. Fuel duty (gas taxes) in the UK are, on their own, something like 1.5-2% of GDP. VAT is a huge number, 5-6% of GDP perhaps. As they are in most other EU countries.

So, as a first sketch of an answer, I\’d posit that maybe, yes maybe, you only can get 20% in tax out of the US economy at the Federal level. But that\’s because you can only really get 20-25% (don\’t forget there are State income  taxes there as well) of the economy out of people in taxes upon their income. In order to get more of the economy in tax you\’ve got to have excise and consumption taxes.

Which, in the US, just aren\’t levvied at the Federal level. Which means that unless you do start having Federal excise and consumption taxes then yes, the Federal Government is stuck with playing with 20% of the economy that can be extracted in those taxes that the Federal Government levvies.

As I say, not sure I\’d want to defend this very strongly, but would be interested to hear what others think.

5 thoughts on “On this you can only get 20% in tax out of the US economy”

  1. Isn’t this a version of Hauser’s Law?

    Tim adds: Now that I’ve been made aware of Hauser’s Law, possibly. Although I would go with Dan Mitchell’s point (good man Dan, at Cato) that this is an explanation of the empirical observation by Hauser.

  2. It may be a very basic atavistic thing.
    Tax is protection money.
    There are loads of studies about optimal tax régimes and they all come out at around 20-28%. (Except the ones commissioned by will hutton, of course.)
    In the days when income tax was trivial the bourgeoisie contributed an estimated 18% of their incomes to charity. Charity receipts from private donation have declined in line with tax rises.

  3. As someone who lived in the USA for a few years, and with my wife being a New Yorker, I feel qualified to comment on this. Firstly, income tax is levied at three levels, federal, state and city. In NYC you will be paying a total of 30% to 35% income tax.

    On top of that, sales tax is levied at (usually) just under 10%. 9.5 seems like a popular figure, as does 8.95 for some reason. It’s a state tax. There are also numerous other taxes, such as on your phone bill, on hotel rooms, etc. (When I lived in San Francisco my phone bill arrived with sixteen, yes, sixteen, taxes listed. Sometimes the taxes were more than the bill).

    There are over 3,500 tax jurisdictions in the US, which is the real reason why internet purchases are tax exempt – no one could figure out how to levy all the taxes anyway!

    In summary, beware of headline tax rates, they are very misleading.

  4. Optimal tax is perhaps how government might put it, wishing for more but having to settle for whatever juice can be squeezed from the people without drying them up.

    For the taxpayer, of course, the number is far nearer zero than 28%. It would be lovely for us to have some politicians who understand there is a MORAL component to taxation, not just financial. Until they can better justify their spending (and therefore necessarily REIN IT IN), then I do not want to hear about any experiments in which they try to get more out of us. They should make do with LESS, and be more efficient. At some point they are taking more than the majority of the people are willing to give, and something vaguely like tyranny has ensued.

  5. Not all US states, counties, and cities levy income taxes. I have none of those where I live. The combined federal/state/county/city sales taxes vary from 6.5% to 7.5% here. We do pay substantially higher fuel taxes here in Florida, relative to the surrounding states, as well as tobacco taxes.

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