Consumption Taxes and American Exceptionalism: An Anglo-World Comparative Perspective

The United States today has the lowest ratio of consumption taxes to GDP among OECD countries, and it is also the only country that does not have a national sales tax or value-added tax. This American aversion to consumption taxes has commonly been attributed to the embrace of a strongly progressive income tax, perfected during World War I. A comparison of tax revenues across all levels of government, however, shows that the United States had much lower levels of consumption taxes (compared to GDP and to total taxes) than Canada, Australia, New Zealand, and the United Kingdom as far back as 1902, even before the introduction of the income tax here. At the same time, American ability-to-pay taxes (including income and profit taxes, estate and inheritance duties, and corporate license and franchise fees) remained at the low end of the Anglo-world range until World War II. The most striking difference, though, is that local taxes (essentially equivalent to property taxes) were much higher here, taking around 50% or more of total American taxes until the Great Depression but accounting for only about 40% of total taxes in Canada and roughly 15% to 25% in the other three countries. In other words, American consumption taxes (raised by state and federal governments) were so low in the first third of the 20th century not because of the income tax, but because the American state was unusually reliant on local funding. It is only with the wide-spread property tax revolts of the early 1930s, together with the growth of the federal warfare state during the 1940s, that ability-to-pay taxes came to dominate the American tax system.