At his rally in Iowa last week, President Trump said we are “one of the highest taxed countries in the world.” While it is true no one enjoys paying taxes, and there are an awful lot of them, the claim that we are one of the highest taxed countries? Well that’s just not even close to being true.
All told, U.S. tax revenues are 26 percent of our economy when including federal state and local taxes. This includes everything from individual income taxes, to the corporate tax, to payroll taxes, to state sales taxes. This falls on the low end of the spectrum for developed countries, where the average total tax is 34 percent, and it’s about one-half of Denmark, where almost half of income is paid in taxes. Of the 35 countries the OECD include in their data, only Ireland, Mexico, Chile and Korea are lower than the U.S.
{mosads}Yet, even as we are a low-tax country overall, our income tax is relatively large and certainly not conducive to growth. In the U.S., individuals pay a top marginal tax rate that averages 46 percent (depending on the state), compared to an OECD average of 43 percent.
At 35 percent, our federal corporate rate is the highest in the OECD and one of the highest in the world. For that reason, reducing the corporate tax rate to make us more competitive is an important objective of tax reform.
Our high marginal tax rates distort incentives, but we have so many tax breaks in our code, the high rate doesn’t translate to paying more overall in taxes. It mainly means we collect our taxes in a highly-complex and often inefficient manner, which is why there is so much we can do to improve our tax code.
There are more than $1.5 trillion annually in tax deductions, exclusions, exemptions and credits in the corporate and individual income taxes. Many of these tax breaks complicate the tax code, distort decisionmaking, chiefly benefit the wealthy and favor particular industries over others.
There is a great case for tax reform, which reduces these deductions in exchange for lower rates, a simplified tax code and, ideally, reducing the deficit. Well-designed tax reform could boost economic growth and improve incentives to work and invest.
But the current focus on tax cuts rather than reform is highly problematic. Our debt is a near record levels — there is no credible justification in this economy for growing it more.
Moreover, paying for tax reform is more pro-growth than deficit-financed cuts. Large cuts could actually slow growth even lower than the 1.8 percent it’s already projected to average over the next decade, since the drag from higher deficits could outweigh the growth from lower rates. Given that a major reason for tax reform is to promote growth, the costs should clearly be fully offset.
There are many options for offsetting costs.
There are many specific tax breaks that could be altered, including the healthcare exclusion, which economists from across the political spectrum say drives up healthcare costs; the state and local tax deduction, which require low-tax states to subsidize high-costs states though they get higher services; and/or the home mortgage deduction which is regressive and is a boon to the housing industry.
On the business side, lawmakers could repeal a number of special interest tax breaks, as well as the deductibility of interest, which creates perverse incentives to borrow more. The list goes on.
Or, if this is too politically challenging (and it seems that just about everything is these days), rate reductions could be paid for by a tax expenditures cap (something Martin Feldstein, Dan Feenberg and I have proposed) that would limit tax expenditures as a share of one’s income or to a set dollar amount.
We don’t need to have the highest taxes in the world to need tax reform. But reform is very different than cuts, and it is tax reform that we should be pursuing.
Maya MacGuineas is the president of the bipartisan Committee for a Responsible Federal Budget.
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