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.