2013 Tax Rates: The U.S. Doesn't Have a Revenue Problem, It Has a Wasted Money Problem

Recently, ThinkProgess (the official blog of the progressive Center for American Progress) featured an article comparing the tax revenues of OECD nations (the organization of developed countries). The article made the claim that the United States has the second lowest revenue-to-GDP ratio of any nation in the group, or in other words, collects the second least amount of taxes proportional to its economy’s size. This is, apparently, something to be worried about. This is not new. Liberals have expressed concern about the apparent paucity of government revenues for some time.

But such simple analyses make a crucial error: they neglect to factor in state and local revenues. OF the OCED member states, all but five practice unitary government — where the central government is the sole source of authority. The other five — Australia, Canada, Germany, Mexico, and the United States, practice federalism, where, of course, authority is shared with subnational entities, whether they be Lander, states, or provinces. Thus they too make their own budgets, issue taxes and spend revenues.

In other words, the list neglects to include state tax collection, which constitutes for a fair percentage of revenues. When states are included, the proportion rises to 32.47%, or slightly below the 33.4% percent average. When approached from that perspective, the "taxation problem" seems to evaporate. But it is a fact, however, that the United States' government historically and generally has had a smaller footprint than others. Yet the size of the deficit compares poorly to that of other nations. What's behind the disparity?

Looking in terms of international development, one of the largest, recurring themes is the idea of a "Brazil cost," that there are a number of things (corruption, poor infrastructure, and stifling bureaucracy, amongst other factors) that make doing business in that country more expensive than other countries. Perhaps, however, it is time to consider the idea of an "America cost"; for many government products and services in this country are far more expensive than they would be abroad.

For example, the United States spends the most of any country in the world on its healthcare system: $8,233 per person in 2010, which is two and a half times the OECD average. At the same time, life expectancy in the U.S. is mediocre when compared to other OECD nations. While European and developed Asian nations can expect to pay anywhere between $100 to $400 million per kilometre of subway, American projects range from $1 billion to $8 billion per kilometre. Although Americans pay the second highest amount of money per student, those students perform poorly on most quantitative metrics of proficiency. The list goes on and on — Americans pay their government more for less.

It seems obvious, then, that the United States' problem is not so much a lack of revenue, but hideously inefficient spending. Thus there are two possible means of recourse. One is straightforward and simple — raise taxes to cover spending. But the other option is to take a critical look at our expenditures and become cognizant of the fact that the American government dollar goes less than the those of abroad, and try to remedy that fact. One is simple. The other is not. The question is — which one makes sense?