When it comes to taxes, Americans don’t shoulder as heavy of a burden as those in other advanced countries. But that kind of tax relief doesn’t come without compromises.
Overall, total taxes collected in 2023 made up 25.2% of US gross domestic product, or GDP. That’s lower than the 33.9% average for countries in the Organization for Economic Cooperation and Development (OECD) and far lower than the more than 40% tax-to-GDP ratio found in nine European countries.
On a per-person level, workers who earned the average wage across 22 European countries pay $11,676 more in taxes each year than they would in the US, according to the Cato Institute, a libertarian think tank. A family of four pays $21,546 more.
“The US is a low-tax country relative to other large and relatively high-income economies,” said Alan Cole, senior economist at the Tax Foundation. “There are few countries in our ballpark.”
A big reason for the discrepancy is that more than 170 countries worldwide employ a value-added tax, or VAT, at the federal level, a tax tool that President Donald Trump railed against last week in his speech at the World Economic Forum. A VAT is a consumption tax levied on the value of goods and services. In the US, such a tax doesn’t exist, with our federal government primarily relying on income tax.
“So really at most levels of income, in most circumstances, you’re just going to have a lower tax burden as a percentage of your income as an American,” Cole said. “It’s kind of surprising that it works at all relative to what European countries have.”
Lower taxes don’t come without big trade-offs, though, mainly a reliance on states to administer large elemental programs and an overall smaller safety net for US citizens.
The easiest way to think of VAT is a very broad sales tax at the federal level. Not only does the tax apply to goods that you buy in a store, similar to a state-level sales tax here, but it also applies to services.
Take a contractor who does a home repair. You wouldn’t normally pay sales tax on that in most states, but in Europe, that repair would be subject to a value-added tax. A VAT can also be more complicated than a flat sales tax. For instance, if a company buys an intermediate good from another, both companies will pay a part of the VAT.
So, a value-added tax is applied “to everything in the economy,” Cole said, with these countries charging a VAT up to 20% to 25%, much higher than the sales tax that US states typically assess.
