As Washington confronts the 'fiscal cliff' and seeks a deal to reduce the deficit, one key issue is the tax rate. Comparatively, US taxes are low, but politically, a big hike is a nonstarter.
At the heart of the current debate over the so-called “fiscal cliff” is a fundamental question: Are US budget deficits so high because the government spends too much or because Americans are paying too little in taxes?
Or is the answer a bit of both?
Something has to give. Both President Obama and Republicans in Congress agree the country must take steps to reduce budget deficits, even as it’s also wise to soften the impact of the fiscal cliff – the negative impact of tax hikes and spending cuts that are currently slated to go into effect on Jan. 1.
One lens on the debate is global – checking how the US compares with other advanced economies. Such a check-up gives some useful context to the debate, even though the exercise isn’t meant to imply that the US should mimic other nations.
The upshot: Judged by global comparison, the US is taxed relatively lightly, so much so that the country could close its deficit over the next decade entirely via tax hikes, while still keep its tax revenue below European levels.
But America also appears to have a spending problem – notably when it comes to health care – over the longer term. And just because American taxes are on the low end of the scale doesn’t mean that raising taxes would be easy for the economy to bear.
Another big lesson from overseas: America isn’t alone when it comes to having chronic budget deficits. It has company from Japan and many European nations. The point here is that higher taxes alone do not guarantee balanced budgets. One still must spend appropriately.
The Organization for Economic Cooperation and Development (OECD) estimates that in 2010 American individuals and businesses paid taxes (federal, state, and local) that amounted to 24.8 percent of US gross domestic product. That compares with 33.8 percent of GDP for the OECD overall, encompassing more than 30 advanced economies.
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