Worldwide Currency: We’re Number 1
Since the end of World War II, the US dollar has been the most influential and significant currency in the world. There are, however, challenges to the dollar’s supremacy. Keith Rockwell, former chief spokesman for the World Trade Organization, sees three challenges:
“The most direct threat comes from a growing group of emerging countries that resent Washington’s weaponization of the dollar on global markets and payment networks. A second threat arises from technology, as central banks around the world work to develop their own digital currency networks. Another threat stems from the possibility that political grandstanding on Capitol Hill over the budget may undermine efforts to raise the debt ceiling and could subsequently lead the U.S. to default on its loans.” .
Political grandstanding was on full display during the 118th Congress. Republicans, holding a slim majority in the House of Representatives and feeling the pressure from its far-right wing, brought the United States to the brink of defaulting on its debt obligations in June 2023. As Rockwell has written, “the mere suggestion that some members of Congress are prepared to make a political point by allowing the nation to default is the kind of thing that rattles investors and shakes global confidence in the US.” The far-right wing faction collected its pound of flesh but the debt ceiling was raised and would not be visited again until after the 2024 presidential election. And in the new 119th Congress, grandstanding, threats and political pressure will undoubtedly be at the forefront.
The dollar dominates as the largest international reserve currency. During the first quarter of 2023, the International Monetary Fund (IMF) reported that 59.02 percent of the world’s official exchange rate reserves were held in US dollars; 19.77 percent were held in Euros; 5.47 percent were held in Japanese Yen; 4.85 percent in UK pounds sterling; and 2.58 percent in Chinese renminbi. In 1999, the share of US dollar assets in central bank reserves was 71 percent, the year the euro was launched; in 2023, the dollar has dropped to 59 percent.
The Chinese renminbi is the world’s fifth-largest payment currency, third-largest trade financing currency, and fifth-largest international reserve currency. While its importance and influence has grown over the past two decades, it has far to go to replace the dollar as the dominant international currency. As Eswar Prasad of Cornell University and the Brookings Institution wrote in 2020, “While the renminbi has the potential to become a significant reserve currency, it is unlikely to attain safe haven status in the absence of far-reaching reforms to China’s institutional and political structures.”
Sources: Keith Rockwell, “An Exorbitant Privilege Now at Risk? The Once (and Future?) Almighty Dollar,” Wilson Center, May 1, 2023, https://www.wilsoncenter.org/article/exorbitant-privilege-now-risk-once-and-future-almighty-dollar; “Currency Composition of Official Foreign Exchange Reserves,” IMF, https://data.imf.org/?sk=e6a5f467-c14b-4aa8-9f6d-5a09ec4e62a4; Serkan Arslanalp and Chima Simpson-Bell, “US Dollar Share of Global Foreign Exchange Reserves Drops to 25-Year Low,” IMF Blog, May 25, 2021, https://www.imf.org/en/Blogs/Articles/2021/05/05/blog-us-dollar-share-of-global-foreign-exchange-reserves-drops-to-25-year-low; Junhua Zhang, “Prospects of the Yuan Unseating the Dollar,” GIS Reports, August 21, 2023, https://www.gisreportsonline.com/r/yuan-unseating-the-dollar/; Eswar Prasad, “The Renminbi Rises but Will Not Rival the Dollar,” Brookings Institution, October 2020, https://www.brookings.edu/articles/the-renminbi-rises-but-will-not-rival-the-dollar/.
Value Added Tax in OECD: We’re Number 38 (Don’t Have It)
First introduced in France in 1954, by 1960 there were fewer than ten countries worldwide that implemented the Value Added Tax (VAT); by 2022, it has become an important source of revenue in 174 countries. The VAT is a common form of consumption tax that is due at every stage of a product's manufacturing from the sale of the raw materials to its final purchase by a consumer. The OECD notes that “the spread of VAT has been among the most important developments in taxation over the last half century.” The VAT is attractive because it is capable of raising enormous amounts of revenue. In the United States, with consumption close to 70 percent of the GDP, even relatively small tax rates could capture a great deal of money.
In 2010, former Federal Reserve chairman and advisor to Barack Obama, Paul Volcker, suggested that higher taxes, perhaps a VAT or a carbon tax, might be needed to close some of the nation’s deficits. Obama said he wouldn’t rule out a VAT, despite his campaign pledge not to raise taxes on couples making $250,000 or less. It didn’t take long for the Senate—Republicans and Democrats alike--to strike back, voting 84-13 on a proposal sponsored by John McCain (Republican-Arizona): “It is the sense of the Senate that the Value Added Tax is a massive tax increase that will cripple families of fixed incomes and only further push back America’s economic recovery.” Conservative media, think tanks, and lawmakers joined forces to fully reject the notion of a VAT; but so, too, did Democrats object to such a new tax.
The possibility of a US federal VAT are slim: lawmakers on both sides of the ideological aisle are chary about introducing a new tax, even if it were to replace or modify existing federal taxes. Further, each state has its own taxing policy, and trying to coordinate and compromise with state legislatures would be an extraordinarily difficult task, full of complexities and political pitfalls.
Altogether, the OECD countries rely the most on consumption taxes, principally the VAT. In 2021, consumption taxes averaged 32.1 percent, social insurances taxes were 25.7 percent, individual income taxes were 23.9 percent; corporate taxes were 9.8 percent, and property taxes were 5.6 percent.
Sources: Consumption Tax Trends 2022: VAT/GST and Excise, OECD, n.d., https://www.oecd-ilibrary.org/sites/6525a942-en/1/3/1/index.html?itemId=/content/publication/6525a942-en&_csp_=9be05a02fe0e4dbe2c458d53fbfba33b&itemIGO=oecd&itemContentType=book#figure-d1e568; Walter Alarkon, “Value-added Tax Has Some GOP Backers,” The Hill, May 3, 2010, https://thehill.com/policy/finance/68445-value-added-tax-has-some-gop-backers/; Howard Gleckman, “Conservatives and the VAT,” Tax Policy Center, April 2010, https://www.taxpolicycenter.org/taxvox/conservatives-and-vat; Daniel Bunn and Cecilia Perez Weigel, “Sources of Government Revenue in the OECD, 2023,” Tax Foundation, February 23, 2023, https://taxfoundation.org/data/all/global/oecd-tax-revenue-by-country-2023.
Tax Obligation: We’re Number 33
When looking at other OECD countries, the US tax obligation of 26.6 percent of GDP is well below the average. Denmark has the highest percentage of GDP (46.9 percent); France is 2nd (45.1 percent); followed by Austria (43.5 percent), Italy (43.3) and Finland (43.0). The United States comes in as 26th. Chile, Ireland, and Mexico are the only OECD countries that collect a smaller percentage of taxes than the United States.
Individual states and their localities develop their own means and levels of taxation. Altogether, there are some 11,000 sales tax jurisdictions in the United States, and residents face combinations of income tax, property tax, excise tax, sales tax, and a wide variety of fees. Currently, seven states (Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, and Wyoming) levy no income tax. This compares with several states that levy high individual income taxes: California (13.3 percent), Hawaii (11.1 percent), New York (10.9 percent), New Jersey (10.7 percent), (Oregon (9.9 percent), and Minnesota (9.8 percent). In addition, twelve states tax Social Security benefits (Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, Rhode Island, Utah, Vermont, and West Virginia).
Source: Tax Revenue, OECD, https://data.oecd.org/chart/72Cy: Jim Probasco, “Nine States with No Income Tax,” Investopedia, March 21, 2023, https://www.investopedia.com/financial-edge/0210/7-states-with-no-income-tax.aspx.
Defense Spending: We’re Number 1
By 2022, total military expenditures throughout the world topped $2.24 trillion according to the Stockholm International Peace Institute. The sharpest rise in defense spending in 2022, a 13 percent increase, came from European countries in response to the Russian invasion of Ukraine. In all, the $876.9 billion spent by the United States constituted about 39 percent of the entire world’s military spending.
The United States military budget in 2023 was $876.9 billion (3.5 percent of GDP). China was 2nd, with an estimated military budget of $292.0 billion (1.6 percent of GDP). Russia was 3rd, with $86.4 billion (4.1 percent of GDP), and India was 4th, with $81.4 billion (4.1 percent of GDP).
Source: “World Military Expenditure Reaches New Record High as European Spending Surges,” Stockholm International Peace Research Institute, April 24, 2023, https://www.sipri.org/media/press-release/2023/world-military-expenditure-reaches-new-record-high-european-spending-surges. Stockholm International Peace Research Institute, https://www.sipri.org/media/press-release/2023/world-military-expenditure-reaches-new-record-high-european-spending-surges.
General Government Debt as Percentage of GDP: We’re Number 4
The United States is certainly not the only country compelled to borrow money. In fact, during the pandemic years, nearly all the OECD countries were compelled to borrow funds. What becomes troubling is the accumulated level of indebtedness compared to the country’s GDP. Interest on the national debt was $640 billion in FY2023, was bound to grow as indebtedness grows and as interest rates climbed higher. The United States is not the most vulnerable, but it is close to the top when comparing national debt as a percentage of GDP.
Japan ranks 1st in general government debt as a percentage of GDP, coming in at 255 percent of GDP. Greece is 2nd (192 percent), and Italy is 3rd (173 percent). The United States was 4th, with government debt at 144 percent of GDP. France (117 percent) was 6th, the United Kingdom (104 percent) was 12th, Germany (77 percent) was 19th, and Australia (70 percent) was 21st.
Note: The OECD defines general government debt as the sum of the following liability categories (as applicable): currency and deposits; debt securities, loans; insurance, pensions and standardized guarantee schemes, and other accounts payable.
Source: “General Government Debt 2022,” OECD, https://data.oecd.org/gga/general-government-debt.htm.
National Budget, Percentage of GDP: We’re Number 20
As one would expect, the United States, with the highest Gross Domestic Product would also have the largest national budget. In 2021, the US ranked number one, followed by China, India, Japan, Germany, France, the United Kingdom, Russia, Italy, Brazil, and Canada. But in terms of per capita spending, the US ranks 9th among OECD countries and as a percentage of GDP, it ranks 20th.
Norway has the highest per capita spending in the OECD at $37,204, followed by Austria ($36,254), Belgium ($35,244), Denmark ($33,379), and France ($32,379). The United States ranks 9th, spending $31,538 (using 2021 data). The OECD average for 2022 was $23,881. In terms of percentage of GDP, France ranked 1st.
Source: Luxembourg tops all countries with $62,084 pending per capita. “General Government Spending,” OECD, https://data.oecd.org/gga/general-government-spending.htm#indicator-chart.