Tax and Spend – Fairly and Effectively

The Cooperative Society Newsletter
September 2017, Issue 5
by E.G. Nadeau

Did you know that the United States has one of the highest educational costs per student of all of the countries in the world? Despite these big expenditures, American kids score badly on literacy, numeracy, and problem solving compared to most other developed countries.[1]

This is just one of many examples in which US tax dollars aren’t getting a good return on their investment. Despite what appears to be a progressive taxation system in the United States, the overall low level of taxes, numerous tax loopholes, and low expenditures on social and infrastructure programs reward the rich and punish the poor and middle-class. What would a good system look like in which an adequate amount of taxes was collected in a fair manner, and the revenue was used to provide a set of goods and services that meets the needs of the country’s residents?

Most developed countries in the world are doing a much better job than the US on cost-effectively addressing their economic, social, and environmental responsibilities. All of us – in rich, middle-income, and poor countries – can learn from these successes.

Unfair taxation and ineffective expenditures
After a dismal failure during the summer to repeal and replace Obamacare, the next big target for Trump and Republicans in the House and Senate is the restructuring of the federal tax system. This has all the earmarks of another thunderous, drawn-out flop. What would be even worse, however, is if this triumvirate of discord actually passed and approved a tax-reform bill.

Given the draft bills and talking points under consideration, the likely outcome of such a bill would be a massive transfer of wealth to the already-wealthy and to corporations, a minor financial sop to the middle class, an undercutting of basic services to the poor, the sick, and the elderly, and a substantial increase in the federal debt to pay for the giveaways.[2]

Taxes are the major source of most governments’ revenues. As with any ledger, we need to look at revenues, expenditures, and the bottom line to evaluate a national budget. What are the sources of revenue? What are citizens getting for their tax money? A review of past US budgets shows that elected officials have been doing a bad job on both the revenue generation and the expenditure sides of the ledger.

This is not a new problem. It goes back decades to both Democratic and Republican administrations. We can’t blame the current president and Republican majority in Congress yet for these bad, historical fiscal results. As we mentioned above, however, if they get their way in the next few months, it will make future results even worse.

A look at revenue generation
Let’s look at the revenue side first. As others have pointed out, the United States has a relatively progressive income tax, and a relatively high corporate tax. But both kinds of taxes need closer examination. The OECD (Organization for Economic Cooperation and Development) is comprised of 32 of the wealthiest, democratically-oriented countries in the world. Recent data show that the US does have the most progressive income tax structure of all OECD countries. The data also show that the US has the top corporate tax rate (39%, if one includes the average state corporate tax) among OECD members.

But there are problems with these superficial comparisons. Out of 31 OECD countries in 2014, the US collected the least amount of tax revenue as a percentage of GDP. It also spent one of the lowest per-household amounts on “cash transfers,” such as Social Security, unemployment compensation, and a variety of programs for the poor. The net effect of this taxation and expenditure system has been that the US has the fourth-highest level of income inequality of OECD members after taking into account taxes and cash payments.[3]

In other words, the US tax system may be progressive, but it doesn’t collect much revenue relative to other developed countries and it spends relatively little on programs that benefit its citizens. So, high-income and wealthy people continue to be disproportionately enriched relative to others in American society, despite a nominally progressive tax system.

In terms of corporate taxes, statutory rates are one thing, and actual rates paid after tax breaks and loopholes are another. According to recent Treasury Department data, American corporations pay 28% in US and foreign taxes compared to 29% for corporations based in other G-7 countries. In other words, the effective tax rate is virtually the same for US corporations and those based in the world’s other largest countries.[4] So, the “unlevel playing field” claimed by proponents of reducing the US corporate tax rate is a spurious argument.

 A comparison of budget effectiveness in the US and other countries There are even more problems on the expenditure side. What kind of a return are Americans getting from their taxes? Not much, when compared to other OECD countries. For example:

  • The United States spends more on its military than the combined expenditures of the eight countries with the next-largest military budgets.[5] Many, on both the right and left, have argued that the US could continue to have an effective military presence in the world with a far lower defense budget.[6]
  • The US has by far the largest prison population and the largest proportion of its residents in prison of all of the countries in the world.[7] So, “the land of the free” is the least free in the world when it comes to locking people up. It is worth noting that imprisonment is a far more expensive way to deal with nonviolent offenders than community-based treatment – both while offenders are under the supervision of the criminal justice system, and in terms of their future likelihood of running afoul of the law.[8]
  • As alluded to in the introductory paragraph, the US spends more per capita on education than almost every other country in the world, but gets relatively poor results compared to most other developed countries – 19th out of 22 countries on literacy skills; 20th out of 22 countries on numeracy skills; and 18th out of 19 countries on problem-solving skills.[9]
  • The US also spends more money per capita on healthcare than any other country in the world, again with relatively poor results in terms of longevity, maternal mortality, childhood mortality, insurance coverage, and many other measures. If the Republican repeal and replacement of Obamacare were to go into effect, things would get even worse as an estimated 22 million more people would be without health insurance.[10]
  • The list of poor returns on US tax investments goes on and on: environmental programs, including reduction of carbon emissions, lagging maintenance and upgrading of its infrastructure (roads, bridges, airports, etc.), and social safety-net programs, including Social Security and a variety of programs for the poor.[11]

Can the US improve its tax-and-spend performance vis-à-vis other countries?
For the most part, there are not many surprises in the list of countries that do best on the above indicators. Nordic countries tend to be near the top of the class in many categories, followed by other northern European countries. Japan and Korea generally score well also. Estonia and the Czech Republic do well on educational performance measures, and Canada has one-seventh the rate of imprisonment as the United States. There are literally hundreds of lessons that can be derived from the ability of some countries to perform better and more cost-effectively on a variety of measures of returns on tax investments than the United States.

Trump and the Republican Congress are intent on making the US perform even more poorly on a range of economic, social, and environmental indicators as they “simplify” the income and corporate tax system and the budget this fall. “Simplify” is a code word meaning, “Reduce taxes on the wealthy, and reduce benefits derived from tax revenue, especially benefits for the poor.”

It is interesting to note that there is another version of a tax- and budgetary-reform bill floating around Washington. It’s a tax-reform proposal prepared by Bernie Sanders in 2016 when he was competing for the Democratic nomination for president. The Tax Policy Center, a joint venture of the Brookings Institution and the Urban Institute, did a detailed, independent analysis of this proposal.[12] Such a reform bill, if passed, would do a great deal to move the United States from near the bottom of OECD countries to near the top on a variety of social, economic, and environmental measures.

It is highly unlikely that such progressive budget reforms will be enacted in 2017 or the following three years. But, keeping in mind that major changes don’t take place overnight, why not in 2021?

[1] The data to back up these conclusions can be found in OECD, “Society at a Glance 2016: OECD Social Indicators,” Pp. 94-96,

[2] For example, Burman, Leonard E. et al, “An Analysis of the House GOP Tax Plan,” Columbia Journal of Tax Law, April 4, 2017,

[3] Huang, Chye-Ching and Nathaniel Frentz, “What Do OECD Data Really Show About U.S. Taxes and Reducing Inequality?,” Center on Budget and Policy Priorities, May 13, 2014,

[4] Center on Budget and Policy Priorities, “Actual US corporate tax rates are in line with comparable countries,” April 25, 2017,

[5] Peter G. Peterson Foundation, “US Defense Spending Compared to Other Countries,” June 1, 2017,

[6] For example, Preble, Christopher, “The Right Way to Cut Wasteful Defense Spending,” Politico, January 18, 2017,

[7] International Centre for Prison Studies, 2013

[8] Deady, Carolyn W., “Incarceration and Recidivism: Lessons from Abroad,” Pell Center for International Relations and Public Policy, March 2014

[9] Op. cit., OECD, “Society at a Glance 2016: OECD Social Indicators,” pp. 94-96,

[10]Peter G. Peterson Foundation, “Per Capita Healthcare Costs – An International Comparison, October 17, 2016,

[11] Kaplan, Thomas and Robert Pearjune, “Senate Health Bill in Peril as C.B.O. Predicts 22 Million More Uninsured,” New York Times, June 26, 2017,

[12] Mermin, Gordon et al., “An Analysis of Senator Bernie Sanders’ Tax and Transfer Proposals,” Tax Policy Center, May 9, 2016

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