Revenue Structure: U.S. versus the rest of the OECD

Recent research out of the OECD explores the link between various revenue sources and economic growth, finding that income taxes are the most detrimental to economic growth, while consumption and property taxes are associated with increased economic activity. We’ve learned in this class that the income tax, through the marginal tax brackets, is the most progressive of these three major revenue streams, and yet this research is suggesting that shifting revenue to sales and property taxes could be good for our economy. Why is that?

First, it should be noted that this is purely an efficiency argument that the authors are making, and as policy students we know we have to weigh efficiency with equity in tax policy decisions. That said, at a microeconomic level, consumption taxes don’t negatively impact personal savings the way income taxes do (mainly through interest income taxes). More saving means more investment and higher economic growth. Another benefit of consumption taxes is that, targeted at “bads” such as tobacco or gasoline, they can reduce negative health or environmental impacts, leading to higher overall economic efficiency.

The main benefit of property taxes is that they don’t distort savings, labor, human capital, or other economic decisions. And, at least prior to our 2000’s housing bubble, the property tax base is much more stable than either income or even consumption.

So how does the U.S. compare to other OECD countries? The OECD’s report on the structure of general government revenues provides some answers which may or may not surprise you. First, our revenue baseline is much lower: only Slovakia, Korea, and Turkey raise less revenue as a percent of their nation’s GDP than we do.

Second, our revenue structure relies much more heavily on income taxes (including corporate income taxes) and less on taxes on goods and services than the OECD average.

This research would suggest we move away from the income tax and raise more of our revenue from consumption and property taxes. What about those of us who like progressivity in the tax code? The OECD notes that net wealth taxes and inheritance taxes (er, sorry: I mean death taxes) are both highly efficient options that can put progressivity back into our revenue structure. And we shouldn’t forget that progressivity in spending is just as important as progressivity in the tax code in terms of reducing inequality. The US actually has a relatively progressive tax code; we just don’t do a very good job of reducing inequality with the revenue we raise.