TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Saturday, February 11, 2012

U.S. Income Taxes Are the Most Progressive in the World

The Atlantic, U.S. Taxes Really Are Unusually Progressive, by Clive Crook:

Income taxes in America are more progressive than in other rich countries--according to an authoritiative official study which, to my knowledge, has not been contradicted. The OECD's report Growing Unequal, on poverty and inequality in industrial countries, includes a table that provides two measures of income tax progressivity in 2005. ... Here they are in an excel file. According to one measure, America's income taxes were the most progressive of the 24 countries in the sample, except for Ireland. According to the other, they were the most progressive full stop. (A more recent OECD report, Divided We Stand, uses different data, a smaller sample of countries and a different measure of progressivity: the results are similar.) Before you ask, this ranking takes account of employee-side payroll tax as well as the federal income tax. ...

Why, according to the OECD, is the US system so progressive? Not because the rich face unusually high average tax rates, but because middle-income US households face unusually low tax rates. ... How does the picture change if you take indirect taxation into account? That would make the US system look even more progressive, because the US doesn't rely on a flat consumption tax like most other governments.

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The difference exists because other developed governments provide substantial benefits, primarily health care, to the middle class during their working years. By necessity, the revenue needed to pay these benefits comes mostly from the middle class.

In other words, high government spending as a percentage of GDP requires decreased progressivity in taxation. Empirical data matches the theory on this point.

Here's the irony. Progressives want to expand government benefits from the poor to the middle class. That makes the benefits less progressive. As we see, it also makes the taxes less progressive. Although the policy of paying benefits to and for the non-poor is called progressive, it is actually regressive!

Posted by: AMTbuff | Feb 11, 2012 12:15:46 PM

I have not read the Atlantic article, but I have reviewed the OECD reports referenced therein. They simply do not support the conclusion that Crook reaches.

The second report states quite clearly that:

"The United States has the fourth-highest inequality level in the OECD, after Chile, Mexico and Turkey. Inequality among working-age people has risen steadily since 1980, in total by 25%. In 2008, the average income of the top 10% of Americans was 114 000 USD, nearly 15 times higher than that of the bottom 10%, who had an average income of 7 800 USD. This is up from 12 to 1 in the mid 1990s, and 10 to 1 in the mid 1980s.

"Income taxes and cash benefits play a small role in redistributing income in the United States, reducing inequality by less than a fifth – in a typical OECD country, it is a quarter. Only in Korea, Chile and Switzerland is the effect still smaller."

The quote can be found here:

The first report notes that: "The effectiveness of taxes and transfers in reducing inequality [in the U.S.] has fallen still further in the past 10 years."

See here:

Sorry, Crook's dog just don't hunt.

Posted by: Stuart Levine | Feb 17, 2012 3:27:57 PM