Any comparison of taxes is complicated because not all countries have the same types of taxes, nor do they apply them in a consistent way. The comparison method used by the Organization for Economic Cooperation and Development (OECD) is to compute an "aggregate tax burden" consisting of the ratio of total tax revenues to gross domestic product (GDP). (A little preparation and organization can take the stress out of last-minute tax filing. Check out Last-Minute Tax Tips.)
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Based on data contained in the 2010 edition of its Revenue Statistics report, the two lowest taxed countries are Mexico and Turkey. Included in the database are OECD member countries that represent many of the world's largest economies. Since 2000, the overall tax burden for those countries has hovered in the range of 35-36%.
Here's a look at five countries at the low end of the tax burden scale and how their citizens are faring in the current economic environment.
In addition to being the lowest taxed country in the OECD report at 21.1% based on the latest available estimates, KPMG ranked Mexico as the best place to do business from an overall tax standpoint. The May 2010 KPMG report focused on 95 cities in 10 developed countries. Mexico's low cost of living has attracted more U.S. expatriates and retirees than any other country. It's also home to many former Canadian residents, as well as people from around the world.
While Mexico has a reputation of being dangerous in some areas, most of the country is relatively safe. It also offers low property taxes and quality medical care at costs far less than in the United States - and many of its doctors were trained in the United States. The medical system is a combination of public, private and employer-sponsored insurance programs. The level of care varies by provider, with the best services offered by the privately funded systems. Funding for public healthcare is rising, but still remains one of the lowest per capita expenditures among OECD countries at only 6.6% of GDP.
Turkey imposes income taxes on both individuals and companies. In addition to these direct taxes, it levies a VAT of 18% and other indirect taxes. It's the second-lowest taxed country behind Mexico with a tax to GDP ratio of 23.5%, and is the world's 16th largest economy.
Turkey has a centralized healthcare and social welfare system that is administered by the federal government. The Ministry of Health has sweeping responsibilities including preventive health services, supervision of private hospitals, regulation of drug production and pricing, training of medical personnel, and construction and operation of state hospitals.
3. South Korea
The Far East didn't escape the financial crisis, but South Korea weathered the storm better than most. The president of the country, Lee Myung-bak, is a former head of the automobile company Hyundai. He instituted programs to rescue certain companies and banks, cut interest rates and implemented currency-swaps to shore up the country's foreign currency reserves.
Taxes weren't raised, thereby maintaining South Korea's position as one of the lowest taxed countries at a 26.6% aggregate tax burden. Among all the OECD developed countries, it experienced the most rapid recovery with an estimated 2010 GDP growth rate of about 5.8%. Seoul hosted the G20 Leaders Summit in November 2010.
4. United States
With the world's largest economy at over $14 trillion GDP, the United States maintains a high standard of living with a relatively low overall tax rate, compared to other nations. With a total tax burden of approximately 26.9%, its workers enjoy the highest income per hour in a free market economic system. While it does not provide the level of comprehensive services as highly taxed countries such as Denmark and Sweden, it has major social programs in place that focus on seniors including Social Security, Medicare and Medicaid. Pre-retirement safety nets include relatively generous welfare and unemployment benefits.
Unlike many European countries, the United States has no value added tax or national sales tax. Federal government revenues are derived primarily from a progressive income tax that ranges from 10% to 35%.
Things have changed in Ireland since the OECD ranked it fifth on the lowest aggregate tax list at 28.3 percent. Faced with growing deficits and shrinking revenues, the country recently appealed to the European Union and International Monetary Fund for a bailout to rescue its failing banking system. As a condition of receiving such financial aid, the government has announced that it will cut spending by 20% and raise taxes over the next four years. The goal is to reduce the annual deficit to 3% of GDP by the end of 2014.
The plan to accomplish this includes cutting its generous welfare programs by 2.8 billion euros and reducing the salaries for new government employees by 10 percent. The minimum wage will also be cut by one euro per hour to a revised rate of 7.65 euros per hour, and tax breaks on pensions will be reduced. The increased taxes on income are expected to generate additional revenue of 1.9 billion euros over four years. A new site tax will be levied on property and the sales tax will be raised from 21% to 23% in 2014.
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The Bottom Line
While these countries have enjoyed lower taxes, the United States and Ireland have accumulated debt loads that are putting increasing pressure on their ability to maintain the same level of government services. Ireland is already taking significant steps to reduce spending and get its fiscal house in order. The United States has not yet taken the steps needed to reduce its growing debt and get federal spending under control.
The situation in the United States may only get worse before it gets better. This year will be the first one where the "baby boomer" generation becomes eligible for full retirement benefits from Social Security and Medicare. Without substantial changes, those programs will not be able to support the same standard of living to which Americans have become accustomed. So the top five low tax countries may look very different in the years to come. (Find out more in Top 3 Challenges Facing Social Security.)
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