In 1774, German writer and statesman Johann Wolfgang Goethe penned the notion that “misunderstandings and neglect create more confusion in this world than trickery and malice. At any rate, the last two are certainly much less frequent.” In modern times, this sentiment has become known as “Hanlon’s razor,” which directs us to “never attribute malice when incompetence will suffice.”
It is within this context that we examine an economic myth that is making its rounds with increasing frequency. On Sept. 6 at 6:47 a.m., President Trump tweeted: “We are the highest taxed nation in the world — that will change.” This is not a new statement by the president. He has expressed this many times.
Last week, Maine State Sen. Dana Dow, who is also the chair of the Maine Legislature’s Taxation Committee, said, “If the United States is to truly remain a global leader in economic development, we cannot have the dubious honor of being among the highest taxed nations.” To clarify, Dow was writing within the context of the U.S. corporate tax rate.
If enough people make a false claim and repeat it enough times, that false claim becomes reality for those who lack the time, skills, or inclination to acquire genuine facts. And then they vote. Let us examine the claim that the U.S. is the most taxed nation on the planet.
At first glance, it is difficult to imagine that many would believe such a claim. After all, we in the U.S. enjoy very few social services when compared to our advanced-nation trading partners. Further, we tend to tax well below the level needed to balance our federal budget, which, as noted in the preceding sentence, is relatively small. So it would seem implausible that we could possibly be a high-taxed nation.
The table below, which shows total and various other taxes as a percent of total income (GDP), tells the story. The U.S. is not the highest taxed nation. It is, in fact, one of the lowest taxed nations within the Organization for Economic Cooperation and Development. (Note: I did not construct the table to include all of the taxes including payroll and social security taxes. But suffice it to say, we are low in those areas as well.)
This then leads us to the question as to what the president and others are referring when they tweet about the oppressive tax burden we bear. As with most misleading messages, theirs has one thin filament of factuality.
The U.S. does have the highest corporate tax rate within the OECD and nearly the highest rate in the world. And yet, we actually collect far less in corporate taxes than most other nations.
This seeming paradox is easily explained. The corporate tax laws permit many deductions and offer numerous loopholes to avoid the tax. Large multinational corporations are in a good position to skirt the tax, whereas smaller enterprises have less opportunity to avoid corporate profits tax.
As such, the U.S. would do well to lower the corporate tax rate and simultaneously eliminate most of the loopholes. This would place small businesses on a more equal playing field with large companies, at least as far as taxes are concerned. And given that profit taxes are progressive in nature, collecting more revenue with lower rates and fewer deductions would be helpful to nudge the economy away from the huge household income imbalance we have.
Next week we will address a reader’s question regarding the U.S. dollar, and then return to education at the end of the month.
(Marcus Hutchins is a former economist, treasury-bond arbitrage trader, and hedge fund manager. He retired to Southport in 1997, where he resides with his wife, Andrea, and youngest daughter, Abbey. He welcomes feedback at firstname.lastname@example.org.)