Lower Taxes Abroad

Many Americans believe their taxes are burdensome. The United States leads most of the world in aggressive taxation on income, both personal and corporate, as the primary means of raising government revenue.

"We are the only major country that does not have a broad-based value-added tax. And, in many ways, that means we have a most unfortunate system of taxation," said Gary Hufbauer of the Peterson Institute for International Economics, a research organization in Washington, D.C.

The value-added tax (VAT) is a consumption tax on the estimated market value added to a product or material at each stage of its manufacture or distribution. The levy is much simpler and broader than U.S. sales taxes, paid only by a product's final consumer or buyer.

The tax can increase the cost of goods dramatically. The least-expensive version of Apple's iPad costs $499, plus sales tax, in the United States. The digital device costs $621 in Japan, $693 in Britain, $712 in Spain and $742 in Germany and France.

"Obviously, we pay a lot of taxes on products, especially luxury products. Things like alcohol, cigarettes or beauty products," said Swedish public-relations executive Ulrika "Ulli" Wippel, 36. "The tax might be 12 percent on groceries, but 25 percent on some of those other products."

Because taxes are included in list prices of goods, Swedes rarely notice they are being taxed heavily. Sweden's consumption taxes raise almost as much revenue as its general income tax, which is lower than the federal income tax in the United States.

"We never talked about the taxes we'd pay," said Ulrika Wippel's American-born husband, Jim Wippel. "I think there is a misconception on income taxes here, that it is so much higher than it is. When I go back to the States and tell them what I actually pay in income tax, jaws drop. Everyone thinks we are paying 40 or 50 percent, but it is so not true."

The OECD estimates Swedes pay an average of 25 percent of their income to a federal income tax, although the rate is progressively smaller for low-income earners.

The United States relies on personal income taxes to provide 36 percent of all tax revenue, according to the latest OECD estimates. U.S. businesses pay 12 percent on their incomes. Most other nations collect no more than one-third — and often much less — of their revenues from a general levy on income.

Personal income taxes — filed by nearly 139 million Americans in 2010 — probably are the most invasive kind of levy, because people must calculate their earnings and often-complicated exemptions and then estimate what share must be given to the federal government and to the 41 states that also tax income.

"The United States has a system of taxation by confession," Supreme Court Justice Hugo Black quipped during a complex tax ruling in 1953.

The VAT and other levies on consumption are the primary method of raising revenue in most nations monitored by the OECD. Experts agree it's a less invasive tax than direct levies against income. And foreign governments are using their reliance on the VAT to influence international trade.

"They are imposing those value-added taxes on our imports and exempting them on their exports," Hufbauer said. "It has the effect of making their products more attractive. U.S. firms don't have that advantage."

Perhaps that's why a growing number of economists, both liberal and conservative, are calling for a cut in the current rate of corporate income taxes, something President Obama endorsed in this year's State of the Union address to Congress.

"American corporations are being taxed more than those in other developed nations," said Kantor, the former Clinton administration official. "That hurts our companies by making them less competitive."

America also faces another tax challenge, because its reliance on income taxes has made the nation more vulnerable to startling revenue reductions that have created trillion-dollar deficits at the federal level and billion-dollar shortfalls for most state governments.

The OECD finding that taxes represented 24 percent of America's GDP in 2009 actually was down from nearly 28 percent of GDP in 2007, before the recession struck.

Canada, Britain, France and most other developed countries reported less than a 2 percentage-point drop in tax revenues as a percentage of the economy during the recession.

"I suspect that a large part of the difference is in the way the U.S. collects taxes," said University of California, San Diego, economist Valerie Ramey.

An OECD study has found that the United States has one of the world's most progressive tax systems, she said.

"As a confirming example," Ramey said, "California has one of the most progressive income-tax systems in the country. In particular, it taxes capital gains as normal income. As a result, its tax revenues decline more during recessions and rise more during booms than other states."