This hasn't been my experience, either in the UK or since I moved to the US. In the UK I ended up on an O2 Simplicity (month-by-month) plan which provided more minutes, SMSes and data allowance that I needed for £20/month (note that I only use the data for the phone, I didn't tether it to my laptop). Originally I chose this because I wasn't sure about coverage where I lived (that's why I was changing provider), but it turned out to be a pretty good deal, saving me at least £10/month over a contract that I'd have been tied into. When the G1 was launched I wasn't interested in moving to T-Mobile, who I knew had no 3G coverage outside of Belfast, so I ended up with one off eBay (received as a gift) and kept my O2 contract.
When I moved to the US I signed up to Simple Mobile mainly because I could get a SIM from eBay before I left the UK, and it was PAYG (so the fact I'd no credit record didn't matter) but still included unlimited voice/SMS/data. Significantly more expensive at $60/month than I was used to paying in the UK, but seemed to be the going rate even for a contract.
Then the G2 launched back in October. I resisted for 2 or 3 weeks, then decided it had to be mine. The G1's battery was even worse than it had been (to be fair it had lasted 2 years), and although Cyanogen provided Android 2.2 the hardware isn't really up to it. I decided to go with T-Mobile; Simple Mobile use their network, so I knew the coverage would be fine, and I figured a contract was probably a good way to help get a credit record here.
Except, the pricing was a bit weird. $200 for the phone with a 2 year $80/month contract or $500 for the phone with an identical contract but no tie in and $60/month. Er, what? I pay up front and I save $180 and I can walk away whenever I want? Ok.
As it turned out this was the smart choice. Firstly $60/month means $60/month plus taxes, so I was paying more than I paid Simple Mobile. I figured I could bear that for a few months to get the credit history, plus the free network unlock after 3 months. Except then it became clear that international SMS wasn't included in the unlimited SMS (it is with Simple). Most of my SMS is international. Now, T-Mobile have a $5/month bolt on to cover that, but not if you're on their flexpay scheme because they found themselves unable to verify your SSN. So I cancelled the contract after the first month and moved back to Simple. I didn't even need to unlock the phone due to the fact it's the same network (though I have now in preparation for my trip back to the UK over Christmas). Surprisingly T-Mobile didn't try and keep me by sorting out the international SMS bolt on. I guess US mobile customers are used to being screwed over (certainly the pricing suggests that).
Er, sorry, that turned into a bit of a T-Mobile rant. My original point was that all of my recent mobile contracts have been month by month, not involved a subsidised phone, and saved me money over being tied in. And even if they hadn't my experiences with the flexibility offered by not being tied in (worries about coverage, discovering the deal isn't as good as you thought) mean that I'm pretty much convinced that contract-free is the way to go anyway.
 Dear America, for all your complaints about VAT it's not really a lot different from sales tax and at least the prices in shops/online actually include it. Also it's the same everywhere in the country.