U.S., European countries fund government differently, study finds

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In the past fifty years, European nations have become increasingly reliant on value-added taxes, according to a recent study released in December by the Tax Foundation.

The study, authored by Tax Foundation Center for Federal Tax Policy economist Kyle Pomerleau, details the rising popularity in Europe of the value-added tax (VAT), over the last five decades. VATs are taxes collected when one business makes a purchase from another business, within a product???s supply chain, including the final sale. To compare, a sales tax is charged only to the buyer, at the end of a transaction.

The Tax Foundation looked at the 34 countries in the Organisation for Economic Co-operation and Development (OECD) and did a breakdown of how each country gets its tax revenues.  The OECD includes the U.S., as well as France, England, Germany, Spain, Greece, Italy Japan and Canada.

Alien Concept

The United States is the only country in the OECD with no VAT. Instead, most state governments use a retail sales tax and an excise tax on the production of goods such as alcohol and tobacco.

Ryan Ellis, the tax policy director at Americans for Tax Reform, said the U.S. has wisely avoided imposing a VAT.

???Doing so would almost certainly result in a higher overall tax burden, not a displacement within the existing distribution of taxes collected,??? Ellis said in an email. ???The U.S. tax system has always been an income tax based one, and probably always will be. The corporate and personal income taxes came out of the Progressive Era, and the payroll tax???which is really just a redundant second income tax just on wages???came out of the New Deal and the Great Society.

???It’s hard to imagine shifting any of these over to a VAT, which is really an alien concept here culturally,??? he added.

The study looked at data from 1965 to 2011, highlighting the rise in the value-added tax???s popularity among European policymakers.

In 1965, only France had a VAT, and OECD countries only raised about 4.6 percent of total consumption tax revenue from the VAT, according to the Tax Foundation. By 2011, the VAT accounted for 49.7 percent of total consumption tax revenue within the OECD.

???Countries started replacing sales taxes, excise taxes, and custom duties with the VAT,which was seen as an improvement due to its export neutrality and exemption of business-to-business transactions,??? Pomerleau explains in the study. ???As countries throughout Europe and the rest of the OECD adopted the VAT, reliance on its revenue steadily grew.???

???The OECD countries rely on consumption taxes, as far as incidence goes???that is, they assess more cash register-level taxes,??? Ellis added. ???This is a good thing for the United States, since we’ve avoided adding the VAT to our already large tax burden.???

???A country may decide to have a lower corporate income tax to attract investment, as many have,  which may reduce their reliance on corporate income tax revenue and increase reliance on social insurance taxes or consumption taxes,??? Pomerleau explains in the study. ???A country may decide to have a lower corporate income tax to attract investment, as many have, which may reduce their reliance on corporate income tax revenue and increase reliance on social insurance taxes or consumption taxes.???

Consuming Capital

The United States relies heavily on individual income taxes to generate its tax revenue. 37.1 percent of taxes in the U.S. come from individual income taxes. By comparison, 24.1 of OECD nations??? revenue comes from taxes on individuals??? earnings.

The largest difference between how the U.S. and Europe funds government services, as European countries levy more taxes against consumer consumption. According to the study, only 18.3 of government revenues are generated by taxing consumer purchases, as opposed to the OECD???s 32.9 percent takings from consumer goods and services.

???Taxing consumption???and avoiding taxes on savings until savings are consumed???results in the most productive use of capital,??? Ellis explained. ???It retains money outside the tax system for investment in new technologies and business expansion.???

???A consumption tax can also mean a tax with incidence at a different point???say, when income is earned???but using a consumption tax base,??? he added.

Taxing Stuff

The study also points out that property taxes are a very small source of revenue for all OECD countries. However, the United States relies on property taxes for 12.4 percent of revenue???the highest percent of reliance among OECD nations.

To compare, Austria collects one-tenth the amount of property taxes collected in the U.S., as only 1.2 percent of Austrian revenue comes from taxing the value of individuals??? property.

Although he cautioned against the implementation of VAT policies, Ellis suggested some methods through which the U.S. could move to fairer consumption-based taxation.

???It’s imperative that policymakers shift the corporate and personal income taxes over to a consumption base. This can be done by moving toward immediate expensing of all business purchases, ending the double taxation of savings, and ending the double taxation of income earned overseas,??? he said. ???There’s a number of ways to skin the cat on that, but it’s important that we keep moving in that direction.???

Tom Gantert ( is senior capitol correspondent for Michigan Capitol Confidential, a daily news site of the Mackinac Center for Public Policy.