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OECD’s Prescription to Raise Taxes Is the Wrong Medicine for U.S.

5:17 PM, Apr 30, 2012 • By IKE BRANNON
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A report issued last week by the OECD (Organization for Economic Cooperation and Development) finds that the average tax burden on income in the United States has been declining in recent years, in sharp contrast to the trend in the other OECD countries. Naturally, progressives have been quick to cite the study as another bit of evidence that U.S. workers—especially the rich—are not paying their “fair share,” and that it's high time for the tax increases they favor. However, making sure that our tax burden conforms to the rest of the developed world is not exactly a path to a sterling economic performance or even sufficient tax revenue, as a perfunctory examination of recent economic conditions across the globe reveals.

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For instance, the report notes that among the countries that saw the sharpest increases in their tax burden in recent years are Portugal and Italy, two countries on the precipice of fiscal insolvency. In fact, all of the struggling European countries significantly out-tax the United States. Canada and Sweden, on the other hand, have done yeoman’s work on restraining the size and scope of government spending and have actually reduced tax rates of late. Both bounced back relatively quickly from the 2008 global financial crisis, an outcome that is not unrelated to their shrinking government footprint. Maybe high levels of taxation aren’t a panacea after all.

While it may be fair to say that the United States needs more tax revenue, the recent diminution in revenue is not a result of low tax rates but rather owes to a sluggish economy and the temporary cut in Social Security taxes. After all, before the financial collapse and great recession our tax code took in 18.5 percent of GDP, above the long-term historical average and certainly enough to finance a government that provides the necessary services to its citizens.

What threatens our long-term economic solvency isn’t a lack of revenues but the demographic trends that place a greater stress on our entitlement programs than ever before. In 2012 the oldest baby boomers turn 66, and for the next two decades the ranks of retirees are going to swell like never before, as will the resulting demand by seniors for health care and Social Security benefits. Despite the predictability of this crisis our politicians have yet to act to address it, and unless we act now it may be impossible to impose a satisfactory reform that holds retirees and near-retirees harmless while still preserving the system.

Addressing the problem by increasing the tax rates is simply not feasible—we need every last bit of economic growth to generate the wealth we’re going to need to pay for our obligations, and taxes deter growth.

Work done by labor economist Richard Rogerson shows that labor taxation has a significant negative effect on the number of hours employees are willing to work. He notes that in countries with higher labor tax rates, individuals spend less time working—not only do fewer of them work but those that do work fewer hours in a week, fewer weeks in a year, and fewer years until they retire. Increasing our tax burden on labor earnings is exactly the opposite of what is needed to boost employment and economic growth.

From 2004 to 2007 the tax revenue collected by the U.S. government went up by nearly 40 percent. No new taxes were imposed—we just reaped the fruits of strong and sustained economic growth. That should be our goal. The notion that we ought to raise taxes to comport with the levels in other developed countries is simply nonsensical.

Ike Brannon is director of Tax Policy at the American Action Forum. 

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