How Big is America’s Tax Burden?

A look at the distribution of government revenues to GDP.

One often hears arguments that America’s government is too large. People evoke the imagery of a bloated, gluttonous, over-reaching, and domineering public sector as a justification for policy reforms that cut taxes on businesses, privatize public assets or enterprises, deregulate markets, and cut social programs. In this note, I probe the proposition that the United States’ public sector is large through an examination of government tax statistics.

Assessing Public Sector Size through Expenditures

The analysis uses tax revenues (% GDP) to estimate the size of the U.S. public sector. Tax revenues capture “the amount of money that governments spent on good and services, including supplies and labor.”compulsory transfers to the central government for public purposes.” We scale this figure to countries’ GDP, to get a sense of federal government taxes levels relative to overall economic activity (as proxied by value-added output). So a country with a high score has a government that collects a lot of money relative to the size of the economy under its jurisdiction. We can infer that its central government is large compared to a country with a public sector that spends at comparatively low levels.

I use data from the World Bank’s World Development Indicators.1 We use 2015 data, because it renders a good balance between recency and low missingness.  Figure 1 (below) depicts the distribution of tax hauls:

Revenue to GDP

Distribution of Tax Revenue to GDP across Countries, 2015

Wagner’s Law

The size of the U.S. public sector looks less low-but-typical when we compare it against other wealthy countries. Consider the second figure below, which presents a scatterplot of government expenditures (% GDP) to per capita GDP levels (all data from the World Bank). A blue line depicting the results of a bivariate regression are superimposed. We distinguish OECD members in blue.

Taxes and Per Capita GDP
Scatterplot of Tax Revenues (% GDP) to Per Capita GDP, 2015

There are 103 countries represented in this figure, with the bins set at intervals of 2.5 percentage points. In this data, the United States registers a tax to GDP ratio of 11.2%. This is below our sample mean of 16%, but within one standard deviation (SD = 6.6%). The figure suggests that a typical government size, as measured by taxes (% GDP), is 10 to 22 percent. In other words, governments typically spend the equivalent of one-tenth to one-quarter of their national economic output.

The relationship is positive, suggesting that more developed countries have larger public sectors. The figure is illustrating a well-known concept in public finance called Wagner’s Law, although the law itself refers to spending rather than revenue. Taxes and spending roughly track each other. The Law, named after turn-of-the-20th century economist Adolph Wagner, posited that the increasing sophistication of modern economies require that a government assume more functions or jobs to keep markets running and sustain people’s economic wellbeing. As our economy becomes larger and more complex, then society comes to depend on more government services to keep itself running. There is no need for a pharma, nuclear power, or derivatives markets regulators if there is no pharma, nuclear, or derivatives industry. There was less need for Social Security when we died younger. We didn’t need public investments in higher education when virtually everyone farmed for a living.

Consolidated Government Expenditures

One problem with the World Development Indicators’ data is that it does not include the tax burden levied by all levels of government. When making global comparisons, this tends to render reasonably fair comparisons, because sub-national government taxes are generally not substantial. However, these burdens are substantial in the United States (as well as Canada and Switzerland), where the central government has devolved many of its operations. We are able to make these comparisons with some degree of confidence among the wealthy countries using data from the OECD’s Government Revenue Statistics2. We are looking at total tax revenues (% GDP) for 2015.

Again, U.S. tax levels are near the bottom of the OECD, and only surpass levels of newer, lower-income members who only recently gained accession to the organization.

Americans’ Tax Burden

From this vantage point, the U.S. government seems to spend seems well below what one would expect, given its high levels of wealth. It’s government a pretty big for a poor country, but quite small for a wealthy country. This lends itself to an interesting interpretation of society’s choice about socialism versus capitalism. Were America to dramatically increase the size of its government, it would still register as quite typical among wealthy countries. However, were it to really reduce the size of its government, it would be a more extreme outlier. The position to cut government is the radical ones, given that the vast majority of developed countries have had much larger public sectors.

  1. Metric GC.TAX.TOTL.GD.ZS from World Bank (2019) World Development Indicators Online database.

For More

You can download the R Markdown file used to generate these results from Open Science Framework. The data used in this analysis is available for download here and here.

Author: Joseph N. Cohen

Associate Professor of Sociology at the City University of New York, Queens College

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