Fun Tax Facts

You’re invited to my seminar next week on the tax benefits of life abroad… How to Pay Zero Taxes.

I hope I’ll see you there…

To “get you in the mood,” today I thought I’d present some little-known facts about the US tax system.

Stay with me—because these facts will actually tell you a lot about why filing your return is such a headache…

Besides, for an economist like me, tax facts are fun!

• The US collects more tax revenue than any other country—about $8 trillion. Japan, Germany, France, and the United Kingdom all collect less than $2 trillion.
• The US relies more on income and corporate taxes than other countries. They account for 48% of tax in the US, compared to 34% for peer countries.
• 42% of US taxes are levied on individuals, compared to 4% on corporations. In peer countries, corporate taxes account for 6% to 12%.
• The US relies on income and corporate taxes because it collects less sales tax than other countries. Only 17% of US taxation comes from that source, compared to 28% for its peers, mainly through value added tax (VAT).
• The US also taxes its citizens less for social benefits like pension and medical insurance (24%) than its peers (30%).

When you file every April… don’t you wonder why exactly the tax code, and the filing system, are so complex?

Couldn’t it all be simpler?

Well, yes…

As I wrote in this space last week… the US tax code and all the paperwork associated with your return are far more complicated than any other tax system I’ve ever come across.

Some of the facts above have a lot to do with it…

VAT—which other countries rely on much more—is simpler to administer than personal income tax. It’s a set amount on every purchase you make. That means income tax filings are simpler overseas compared to the US.

US political culture has had a profound impact on the tax system…

For example, many European countries require retirement savings for individuals. The US, by contrast, encourages savings via a complex system of tax credits and exemptions. Similarly, the US Earned Income Tax Credit is used to redistribute money to the poor. In most countries this is done via straightforward welfare payments.

Every time Congress decides it needs to influence society or the economy, it adds a loophole here, a penalty there, and so on. The result is a tax code that runs to thousands of pages and would mystify Rube Goldberg.

US taxpayers are almost alone in being expected to figure their own tax by completing a myriad of forms at filing time…

In other countries, tax authorities simply indicate the amount due on the tax-filing website, and if you agree, you click “yes.” If not, you state your objection.

One thing I’ve searched for in vain is an estimate of the “tax efficiency” of the US system. Tax efficiency compares total tax collected to the administrative burden and economic distortions the system imposes. (Remember: I was a World Bank economist!)

If the time, aggravation, and cost of compliance cancel out a big chunk of tax income, then the system is inefficient. The same is true when the complexity of the tax system discourages investments and folks starting businesses.

A system where compliance is difficult or impossible without the help of tax accountants and lawyers is inherently less efficient.

So too is a system that leads people to make economic and investment decisions based on tax considerations rather than market signals.

What it all comes down to is… You, the American taxpayer, are getting a raw deal.

(Join me next week for my How to Pay Zero Taxes event and I’ll help you get a better one.)