How America Pays Taxes vs Other Wealthy Countries

Tax Tips

(AlanCleaver 2000)

Ever since disgruntled colonists dumped British tea into Boston Harbor, Americans have despised taxation more than any other nation. Nor is their loathing unjustified. Regardless of one’s political views, few of us are entirely satisfied with the return on our tax dollars lately. However, EveryJoe.com’s breakdown of income taxes in about two dozen other countries reveals that Americans could have it a lot worse. While federal income taxes in the U.S. generally consume between 15%-35% of an individual’s income, citizens of Belgium lose anywhere from 25%-50% to income taxes. Japan can be even more confiscatory, with tax rates ranging from 5% on low amounts of income to as much as 50% on higher amounts. Likewise, the Netherlands imposes tax rates as high as 52% on high income. Israel, Italy, Germany, Austria and Spain all levy taxes above 40% on high income individuals. But no country is as grasping as Denmark, with a top personal income tax rate of 59%. In view of such alarmingly high foreign tax rates, it’s no wonder MSN quoted Urban Institute senior fellow Eric Toder as saying “…when you look at the overall tax burden, the U.S. is quote low.” Overall tax burdens aren’t the only important consideration, however. To investigate the issue further, TurboTax researched American vs. foreign tax composites, where tax dollars go, and unusual taxes here and abroad.

Tax Composite of the United States vs. Other Countries

(alancleaver2000)

A popular discussion topic in most countries is the distribution of income taxes – that is, who pays the most. While much is said and written about who should pay more or less, surprisingly little attention is given to who actually pays more or less. A look at the data on tax distribution in the United States, for instance, reveals that high income individuals pay an enormously disproportionate amount of total income taxes in the country. The Tax Foundation’s Fiscal Facts report shows that the top 1% of income earners (1,410,710 people) pay 40.42% of all income taxes in the United States. The top 2.5% (5,642,839 people) pay 20.20% of total income taxes, while the top 5% (a combined 7,053,549 people) pay 60%. The top 10% as a whole pays 71.22%, while the bottom 50% of taxpayers account for only 2.89% of all income taxes. Indeed, the Tax Foundation’s Scott Hodges cited ,”…an OECD study released last year showing that the U.S.—not France or Sweden—has the most progressive income tax system among OECD nations.”

While most western European nations have similarly progressive taxation structures, the “super-rich” are not always saddled with so much of the burden. ThisIsMoney (the UK’s Financial Website of the Year) reported in June 2007 that, “…only a fraction of Britain’s super-rich are paying income tax.” While “…at least 400 UK-based individuals earn, or are capable of making, £10m a year”, it was determined that “…only 65 paid income tax, according to the latest figures obtained under the Freedom of Information Act.” The tax structure in Canada mirrors that of the United States, with The Canadian Encyclopedia stating that, “…Canada’s most affluent citizens already pay the majority of the nation’s tax bill, and our reliance on revenue from the wealthiest citizens is growing.” This is confirmed by the fact that although, “…the wealthiest 10 percent of tax filers earned 35.7 percent of the total income” between 1990 and 2002, “…1976 and 2004, the after-tax income gap between the richest and poorest families barely budged from 8.1 to 9.9, proving Canada has nearly perfected its Robin Hood routine.”

Clearly, the progressive tax structures of most wealthy nations depend disproportionately on high earners for tax revenue. The recession has only amplified this fact, as the Washington Post discusses in its article “World’s Wealthy Pay a Price in Crisis.” India’s government has “…has launched an effort to track down billions of dollars in “black money” — or hidden profits of the rich”, and there have been “… fresh tax increases for high-earners in the Netherlands, France, Ireland, Italy, Belgium and several other countries.”

Where Tax Dollars Are Spent

(jerrysEYES)

Another controversial topic is how our income taxes our spent once they are collected. Various groups report on percentages of tax expenditures they find objectionable or wish to see increased. The War Resisters League, for instance, reveals that military spending (on both current and former personnel) account for 54% of income tax revenue. A considerable amount of income tax money also goes to social programs in the United States. Assuming a hypothetical individual with a yearly income of $52,000, MSN stated in 2007 that, “…about $219.40 of every $1,000 of your taxes went to pay for health care last year” – even if you do not have health insurance. Likewise, “…some $206.60 of the weekly paycheck went to the Social Security fund.” Another $95 a week goes to Medicaid. Military spending, of course, consumes a large share of income taxes – $48 from our hypothetical individual for troop salaries, %76.70 for “…operating and maintenance costs”, and $25.80 for research and development.

Income taxes are spent similarly in other wealthy countries, with the notable exception of military spending. The vast differences in military spending among wealthy nations is reflected in Wikipedia’s list, which shows the United States spending over $600 billion- good for 41% of all military expenses in the world. By contrast, China, an economy growing by leaps and bounds every year and routinely said to be in competition with the United States, accounts for only 5.8% of world military spending. France and the United Kingdom spend even less on defense – $65.7 billion and $65.3 billion, respectively – good for 4.5% each of world military spending. The difference in such countries is generally re-allocated to social spending and other government activities.

Unusual Taxes at Home & Abroad

(GlennFleishman)

Unpleasant as income taxes can be, they are at least relatively straightforward. The same cannot be said of all taxes, both in the United States and abroad. It’s difficult to imagine, for instance, why Tennessee recently “…became the latest of more than 20 states to tax illegal drugs.” Per state law, those in possession of illegal drugs “…have 48 hours to report to the state and pay your tax” – but you are not required to identify yourself, according to MSN. Arkansas residents are taxed for getting nose rings and tattoos, while Alabama inexplicably singles out decks of playing cards for taxation. Canada exempts breakfast cereals from taxes if they contain toys or bonus items, so long as those items are “…not liquor, wine or beer.” On January 8 2010, BusinessWeek reported that France was considering a “Google tax” that would “…tax ads on Web sites such as Google, Yahoo, and Facebook to generate funding for artists and cultural projects.” But that’s nothing compared to Germany, where the UK’s Mail Online reported that a teen might lose half of the £8,000 she auctioned her virginity for to a 50% tax on prostitution.

Taxing Times

Virtually every wealthy nation has seen tax increases on some group or another (usually high income earners) as a result of the recession. However, it is important not to lose sight of important and enduring differences in how these nations collect income taxes. Depending on how much tax is collected, on whom the burden primarily falls and on what the money is spent, a nation’s very existence and standard of living can be dramatically affected.

Comments (23) Leave your comment

  1. Back in the 50s (under Republican Eisenhower) income > 2 million was taxed at 80%. Through loopholes by Kennedy the effective rate was down to %50. Kennedy dropped the stated rate down to %70 but eliminated most of the loopholes effectively raising the taxes on the very rich. This is how we paid for the expenses of WWII, interstate hwy, Moon landings etc. Except for a downturn at the beginning of Kennedy’s term, these decades were the US longest uninterrupted growth rate – usually over 2% and under Johnson hit 4%. So, high taxes on the rich DO NOT hurt the economy and may even stabilize it by preventing ‘bubbles’ like the telecom & housing bubble.

  2. flat tax. And the country is 19/19 healthcare and still no universal coverage unlike the other countries and tuition free college (paid by taxes). After fed, you get whalloped with state, county, sales, property, fees, levies, etc…well, well over 50-60% taxes–for what?

  3. @Rick, Alex and Robin,

    Please educate yourselves before commenting. The top 1% pay about 40% of the taxes and earn about 20% of the income. So, please tell me what a “fair” percentage of taxation should be for them? Would you feel the same if someone making 50% of your income insisted you paid more than you currently do simply because they assumed you “could afford it” better than they could? How about if we applied that thinking to everything you purchased? Yeah…that’s what I thought.

  4. @Matt,

    First of all, none of us pays income taxes on our wealth; we pay it on our income. Wealth is the value of all you have accumulated; income is what you earn in a given year. Your welath is taxed when you die and pass it along to your relatives as inheritance.

    Second, your point about income mobility presumes that your two scenarios account for all such mobility. Even if that were true, it would still point out the basic fact that those who choose to invest in their future through higher education are better able to improve their financial situation than those who don’t.

    As for those who rely entirely on Social Security for their retirement income, I hope they represent a small percentage of retirees. Per the Social Security Trustee reporte, SS payments in retirement account for rougly 21% of the average retiree’s income. So, again, preparation is the key. We used to teach this through stories like “The Ant and the Grasshopper”; nowadays, we seem intent on turning the Grasshoppers in our society into victims and the Ants into villains. It may make you feel good to partake in that kind of rhetoric, but it does precious little to help the Grasshopper. Forty-five years of the “Great Society” experiment should be ample evidence of that.

    Your assumption that all or most of the high-income earners make their money throug “non-productive means” ignores the fact that very few people work on Wall Street while most of the top 1%, 5% and 10% of income earners are small business people and/or highly-educated professionals. They have earned their high incomes by doing what most of the rest of us are not willing or able to do — invest a large amount of time and money in their education and/or invest a large amount of time and money in running their businesses. Why should you or I feel entitled to a greater percentage of their income simply because they’ve earned more than we have?

  5. I have read countless times that the top 10% pay too much in taxes. What you are arguing is that total dollars in taxes supersedes the percentage.

    People who argue the opposite side say the rich should pay, at the minimum, the same percentage as middle class citizens. If you are unfamiliar with this concept search “average tax”. Many of the super rich understand that they are incapable of making their money if it were not for the very system they are paying into. Check out the http://givingpledge.org/ for additional information on this.

    While I cannot argue for the current political management of tax revenues I can assure you that our country is dependent on the super rich putting in a minimum of 23-25% of their total dollars earned each year (including all income, capital gains, etc.). In many instances, this is simply not the case and brings the middle class to ask why I am paying a larger percentage of $150,000 than Warren Buffet at $1,500,000 income.

  6. The top x% pay ahigh percentage of the tax – because they make a disproportionately high percentage of the income. After all it is an income tax. What is so terribly sad is what these stats say about the distribution of income – but that would be telling the whole story.

  7. The issue with this article in regards to tax discrepancy is that it doesn’t take into consideration the income of the upper class. Sure, it makes sense to tax the rich more than the poor, but the reality in America is that the top 20% makes 80% of income. Likewise, the top 10% make 70% of income in America. I think that makes it fairly sensible that the top 10% is paying 70% of all tax money. Realistically, they could shoulder a greater burden, considering the ability of the rich to get by with their considerable needs, compared to a poor family attempting to stretch their meager incomes. If anything, a rich individual paying 35 million dollars but still making 65 million more would do society as a whole a greater good by paying more. Not that anyone cares about the poor.

  8. As someone who earns in the top 5% and therefore contributes to 60% of taxes paid, I think the system is very fair. I have a good income and should pay a larger portion of my income then some one who is not as fortunate. We pay less taxes than most countries and although I don’t agree with how a lot of this money has been spent, we must pay taxes. It is a necessary evil. I would not want to live in a society without a taxing system. Who would build roads, bridges, who would put out fires, house criminals. etc, etc? The system is very fair and no system is perfect.

    And to the person above who says that the top 1% who pays 40% of the taxes also earns 40% of the income. That is incorrect, you are forgetting that the tax rates are progressive and so they would earn much less than that.

  9. Matt

    Going from being “wary” of equating high incomes with high productivity (which is a legitimate concern given the complexity of the market), to assuming that “much of that income is made through non-productive means” is too much of a jump (absent real evidence) to read your final sentence without at least smiling at the hypocrisy.

    The truth is that over 60% of millionaires are small business owners and most of the rest are educated professionals (i.e. doctors and lawyers) who chose to spend the first third of their lives in school. Yes there are a small percentage of insidious executives in the financial sector who became wealthy through guile versus actual production, but they are the minority by far.

    By the way, not mentioning heirs and heiresses is probably for the best since their inheritance more than likely came in one lump sum (which would be taxed substantially, and if invested would then be taxed again and again as capital gains) and not as a yearly salary or wage, which is what is measured in the above article.

    You mentioned matter-of-factly that “when you have more wealth, you are going to get taxed more”. I don’t think anybody is unaware of this, it seems clear to me that what is unsettling to most people with a rudimentary understanding of fairness is that you get taxed a much higher PERCENTAGE. Which is the equivalent of a guy on the street (lets call him Mr. Federal Government) coming up to you and saying “hey I own this street and you owe me a toll”….you say “alright, fine…how much is it”…then he says “how much you got”.

    Thinking progressive taxation is fair is usually the result of believing one or both of the following two myths

    A) there is a finite amount of wealth and one person’s gain is another’s loss…or B) being rich is the result of either chance or corruption.

    While of course B is sometimes true, it is dwarfed by the wealth created through honest work and investment. Expanding progressive taxation provides a disincentive to create wealth and jobs (since, as stated above the wealthiest Americans are employers), which in turn affects overall economic growth and affects everybody. Penalizing the wealthy for becoming wealthy is cutting off your nose to spite your face…it is unethical, and completely un-American.

  10. BillOGoods-

    First of all, I would be wary of conflating high incomes with high productivity, especially when considering people in the Finance Sector. The architects of the “exotic and opaque” credit instruments that crashed our economy certainly did have astronomical incomes, but whether or not they were actually “productive” in any meaningful sense of the word is highly contestable (and that’s not even mentioning millionaire heirs and heiresses).

    Secondly, you paint an incomplete picture when you talk about tax distribution. Even with a flat tax (or even some regressivity in our tax system), the richest among us would still pay the lion’s share of our country’s income tax revenues–that’s just how math works. The increase in the share paid by the upper quintiles of our income distribution could also simply be a function of the increasing income disparity among the population, with the upper 10% controlling more and more of the country’s wealth when compared to the lower quintiles. When you have more wealth, you are going to get taxed more.

    Now for income mobility: Again, you paint an incomplete picture by not noting the causes of income mobility. For example: Right now, I will be posting very little, if any, earned income on my tax forms. I’m simply living on my student loans and focusing on my studies. When I finish me graduate degree a year from May, hopefully I will be moving into a job that pays between $50k and $70k per year. Now that’s quite a quintile jump! On the flip side: A worker making $70k retires and draws on his retirement, he falls into the bottom quintiles within a year. Why? …Because Social Security just doesn’t pay that much…

    Now, if the share of income taxes paid by the top 10% of earners is more of a function of an increasingly skewed income distribution, and if much of that income is make through non-productive means (like creating Synthetic Collateralized Debt Obligations, as an example), then what is so far about the distribution of the income tax burden.

    Without providing proper context to certain facts, it’s really easy to turn them in to overly simplistic talking points.

  11. I’m glad the post points out the unfairness in the US system that the top 1% of all earners pay over 40%, the top 10% pay over 70%, and the bottom 50% account for less than 3% of all income taxes. Call this what it is: a shame. Soon a majority of earners in the US will pay no income tax at all and, therefore, will have no stake in the system—and yet the “rich” are still demonized for not paying their “fair share.” The figures belie this well worn chant.

    By only considering the “federal tax” burden in the US, the post leaves out the additional layer of taxes imposed by the states (income, sales, intangibles, and real and personal property taxes)—something not applicable in most of countries cited in contrast to the US system to draw the conclusion we’re so “lucky” that it isn’t worse. That’s baloney. Ask residents of New York, California, and Massachusetts where, all toll, your tax burden from all sources is well in excess of 50%.

    No, “lucky” we aren’t. The tax burden on our most productive US citizens is shameful. We clearly don’t get “better” government for the money that’s confiscated at all levels of government unless, of course, you foolishly believe bigger government is better. Moreover, to remove the responsibility of a wage earning citizen to pay something in taxes to support the fisc is equally shameful as placing so big a burden on the few in the high earning class.

    Finally, look at some of the studies that show clearly the mobility among the five earning quintiles in the US. Over a five to ten year period, the upward mobility into higher quintiles of earnings and the downward mobility from the high earners to lower quintiles is massive. The “rich” are high earners, by and large, for one, two, or maybe three years and they drop down into lower earning quintiles. The poor also move out of the bottom quints in massive numbers over the periods observed. The bigger government gets, the less mobility you see.

    The US overtaxes and unfairly distributes the burden. Because other nations are more unfair and distribute more unequally doesn’t make us “lucky.” It makes us cheated relatively less than the citizens of other countries are cheated by their social-democracies.

  12. Did the writer even do any research at all for this article?

    In fact, a large portion of US federal tax income is spent on refinancing the public debt, not military spending. Sounds like someone needs to learn to do their homework… then again, TurboTax is the preferred program of our esteemed Treasury Secretary Timmy the Tax Cheat so perhaps I am expecting too much from this.

  13. Nate

    You may well be happier to pay 40% tax if your income were $2 million, but that doesn’t change the factual nature of the tax structure. Higher incomes are taxed more than lower incomes. How is the article “skewed” by stating this incontestable fact?

    I don’t think anyone is afraid of paying taxes. What they seem to be afraid of is paying nearly half their income to a government that is wholly self-serving and incapable of performing even its most basic functions properly. Do you honestly trust this government to run a healthcare system? Look at the public school system. I forget the foreign diplomat who said “if a foreign aggressor imposed the mediocrity of American education from afar, it might well be regarded as an act of war.”

  14. The analysis is also inadequate to reflect the total budgetary burden on people. Sure, the US has less overall direct taxation than any other developed country BUT, unlike any other developed country, it also does not offer universal healthcare. For a family of 4, that would represent about $15-24,000 per annum in the US. In addition, transport and education are subsidized. Sure, if you are young, single, male, healthy and educated, you are better off in terms of disposable income in the US than elsewhere, but as a whole the population is not in those shoes.

  15. This article is obviously skewed. without a real analysis of tax laws in the US or any ratio of how much money wealthy people in the United States make after taxes compared to a middle or low income family it sounds like the wealthy in this nation are embattled refugees paying through the nose while the rest of us get off paying much less. i for one would be happy to be making over 2 million a year and have to pay 15%-40% in income taxes compared to $40,000. The end result is the same, the wealthy still make more, and can afford premium tax lawyers who can write off countless deductions. On paper the the tax laws say one thing but the reality on the ground is another story. As well, I would be happy to pay more in taxes (I, unlike many, am not afraid of paying taxes if I know where the money is going and is spent wisely) if it meant the poorest of us can go to school and not worry about how to pay for grandpa’s medicine or my son’s braces.

    1. Everyone should pay an income tax, regardless of amount earned. This would allow everyone ownership in the system and help hold accountable those that wish to take an individuals wealth.
      Better yet eliminate our current tax code and replace with the fairtax.org. ( while repealing the 16th amendment).The fairtax is revenue neutral to the government and would greatly benefit those less fortunate.

    2. The problem with your argument is that the rich do not receive a greater benefit for the extra taxes that they pay. This is like one person paying a dollar to get a mercedes and the other paying a million to get a broken down ford. Why do we automatically demand that the rich have to pay more?

      1. >Why do we automatically demand that the rich have to pay more?

        Because healthy societies distribute wealth throughout the social classes. It isn’t like the rich don’t have plenty left over.

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