Political and economic differences between OECD countries have created variations in how they collect tax revenue, with the United States diverging significantly from the OECD average for some sources of revenue.
Different taxes create different economic impacts, so policy makers should always consider How? ‘Or’ What tax revenues are increased and not only How many is raised. This is especially important as the economic recovery from the pandemic continues.
In the United States, personal income taxes (federal, state and local) were the largest source of tax revenue in 2020, at 41.1% of total tax revenue. Social insurance contributions (including payroll taxes for social security and health insurance) were the second largest share, at 24.8%, followed by consumption taxes, at 16.9%, and property taxes, at 11.9%. Corporate tax accounted for 5.1% of total tax revenue in 2020, the third year after the Tax Cuts and Jobs Act was passed, and only 0.6 percentage point lower than in 2017.
Compared to the OECD average, the United States is much more dependent on personal income tax and property tax. While OECD countries collected an average of 24% of total tax revenue from personal income tax, the US share was 41.1%, a difference of 17.1 percentage points.
This is partly because more than half of business income in the United States is reported on personal income tax returns. Compared to other OECD countries, the US approach to corporate income taxation increases the share of tax revenue from US personal income tax and reduces the share of corporate tax revenue.
The OECD collected an average of 5.6% of total tax revenue from property taxes, compared to 11.9% in the United States.
The United States is much less dependent on consumption taxes than other OECD countries. Taxes on goods and services accounted for only 16.9% of total tax revenue in the United States, compared to 32.1% in the OECD.
Indeed, all OECD countries, with the exception of the United States, levy value added taxes (VAT) generally at relatively high rates. Local and state sales tax rates in the United States are relatively low in comparison, but they are based on a different tax base.
Countries also have different levels of government at which taxes are collected. The United States along with nine other OECD countries have a decentralized political structure where state or regional governments play an important role in tax collection.
Nearly half of US tax revenue comes from states and local governments.
Each country’s tax mix is different, depending on factors such as its economic situation and political goals. However, each type of tax has a different impact on the economy, with some taxes being more harmful than others.
In general, consumption taxes are a more efficient source of revenue because they create less economic damage and distortionary effects than income taxes. As the US economy recovers from the pandemic, tax revenues are also recovering. Policymakers must be careful and avoid enacting tax increases that will hurt the recovery or impose unnecessary burdens on American workers and businesses.