Developed countries typically pay for universal healthcare and generous social welfare programs through high taxes. That much is obvious. Less obvious is that high taxes alone aren’t enough to fund these benefits - for that you need a well-designed tax system, one that provides a reliable and robust stream of revenue without wreaking havoc on the economy.
Canada, Denmark, France, Germany and the United Kingdom all provide universal healthcare and relatively generous welfare benefits, at least compared to the US. My question is whether they also have well-designed tax systems. So let’s look at some data. First, corporate income taxes. Here the US is running in the middle of the pack:
Next, the top “all-in” personal income tax (PIT+) rate, which includes central (e.g., federal) and sub-central (e.g. state/regional) PIT, plus social security contribution, and takes into account tax credits and some deductions.
Unsurprisingly, the top PIT+ tax rate is lower in the US than the rest, but not much lower than the rates in Germany and the UK. Note also that sub-central tax rates are averaged across sub-central entities, such as provinces. In the US, these would mostly be the states, some with no income tax and others with double-digit income rates. California is one of the latter and, as a result of its high top income tax, the PIT+ in California approaches that of Denmark.
But the top rate applies only to the well-off. How do the tax systems of these countries treat regular folk, for example a single parent with two kids, earning an average wage?
It looks like the less-than-affluent pay much lower income taxes in the US than in the other countries. That means the other income tax systems are less progressive than in the US. But it’s not only income taxes that hit the masses harder in Canada, Denmark, France, Germany, and the UK. They also pay higher consumption taxes, e.g., sale tax and value-added tax. Consumption taxes are considered regressive because the rich spend less on goods and services than the less affluent folk, relative to their income. Check it out:
Consumption taxes may seem unfair, but they do provide a more reliable stream of revenue than income taxes on the rich. That’s because the rich get much of their income from capital gains, which are changeable from year to year.
Given that Canada et al tax their people more than the US, it’s no surprise their tax revenue, as a percentage of GDP, is much higher than that of the US:
Was that tax revenue enough to meet government budgets in 2020? Yes for Denmark, close enough for Germany. Not for the rest, but then again it was a pandemic year.
To simplify a bit, budget deficits turn into government debt. Then the question becomes whether a country can afford to service its debt at a level that does not exceed economic growth. If the answer is yes, and the country in question is achieving its policy goals, then I’d say it has a pretty good tax system. If the answer is no, then it doesn’t.