Wednesday, March 31, 2010

Taxes per Person

Some pundits, reflecting on the looming U.S. budget deficits, claim that Americans are vastly undertaxed compared with other major nations.  I was wondering, to what extent is that true?

The most common metric for answering this question is taxes as a percentage of GDP.  However, high tax rates tend to depress GDP.  Looking at taxes as a percentage of GDP may mislead us into thinking we can increase tax revenue more than we actually can.  For some purposes, a better statistic may be taxes per person, which we can compute using this piece of advanced mathematics:

Taxes/GDP x GDP/Person = Taxes/Person

Here are the results for some of the largest developed nations:

.461 x 33,744 = 15,556

.406 x 34,219 = 13,893

.390 x 35,165 = 13,714

.282 x 46,443 = 13,097

.334 x 38,290 = 12,789

.426 x 29,290 = 12,478

.373 x 29,527 = 11,014

.274 x 32,817 = 8,992

The bottom line: The United States is indeed a low-tax country as judged by taxes as a percentage of GDP, but as judged by taxes per person, the United States is in the middle of the pack.

Update: This post has been more controversial than I expected.  I am surprised because I did not say much here.  I merely presented an identity and some data, which illustrated international differences in a novel (and, I thought, interesting) way.  In any event, I thank Scott Sumner for coming to my defense.