04 October 2014

Musings on Markets: “The insanity of the US tax code: Bad Laws and Predictable Consequences”

Most Ineffective Tax Regimes in the World

The US has the ninth most ineffective tax system in the world, collecting 13.34% less in taxes than its marginal tax rate. Lest you are comforted by the fact that there are 8 countries in the world that have even more ineffective tax systems, it should be give you pause to see Greece, Venezuela, Nigeria and Kazakhastan on that list. While I am not a fan of first-world versus third-world categorizations, I think it is fair to say that the US is a first-world economy with a third-world tax system, a point that is made starkly when you contrast it with other developed markets or the largest emerging markets. (You can get the entire list of countries by clicking here.)

Aswath Damodaran

Interesting analysis of the US tax system and the differences compared to the rest of the world. The inefficiency of the US tax system may be related to another key difference versus the other first-world economies, namely the mix of direct and indirect taxes. Direct taxation is levied on income (be it individual or corporate), while indirect is levied on consumption, for example through VAT/sales tax. The recent trend in most countries is to increase revenues coming from indirect taxation, which are easier to quantify and collect than direct taxes. That could be another measure to pursue in the event of a reform in the US tax system, although it would be just as hard to pass as the other solutions discussed in the linked article.

see this recent study from PWC

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