Taxes in America: Surprisingly Progressive

When determining the level of ‘progressiveness’ in a tax code, there are a couple of factors to keep in mind. One is simply the brackets; how much the rich, middle class and poor pay as a portion of their incomes. Another is how much each of the those groups contribute to the overall budget. There is also the presence or lack of regressive taxes such as payroll taxes and VATs to consider. Now, we come to the question: just how progressive is the US tax system compared to other advanced nations. The answer is pretty surprising, but the US tax code is more progressive than nearly everyone.

To dig in a bit more, lets turn to a debate between Jonathan Chait and Veronique de Rugy from February 2012. The Atlantic provided the play-by-play:

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. This is evidently the source of de Rugy’s numbers. 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.

Exclude payroll tax, and the top 1 percent of taxpayers, not the top 10 percent, have lately accounted for nearly 40 percent of income tax receipts, the top 5 percent for nearly 60 percent, and the top decile for roughly 70 percent. (Here are the IRS data, excel file.)

For the reason I just gave, this does not prove that the US tax system is more progressive than anybody else’s–but it surely has some relevance to the question, “Are the rich paying their fair share of income tax?” If this isn’t fair, what would be?

Now the answer to that is simple: the rich pay such a large proportion of taxes because they have the money. America as staggering income inequality. In this debate, however, perhaps we should look at what has happened at the bottom of the income scale instead of the top.

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…[Emphasis mine]

That, in my opinion, is where is progressiveness lies in the US tax code: at the bottom. The rich pay a small percentage, but not-so-rich pay even less. Working class Europeans pay significantly higher income taxes. America also lacks a VAT (Value Added Tax); a regressive consumption tax that many other advanced nations feature. These factors, not to even begin mentioning tax credits and deductions, keep taxes low for working Americans, increasing the ‘progressiveness’ of American taxes.

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4 Responses to Taxes in America: Surprisingly Progressive

  1. Can you explain how the VAT is regressive? I always assumed it was progressive since it’s been floated by a few liberals as a way to cut the debt.

    • Sure. Its regressive because it applies to everyone at an equal rate. Its a flat tax; just on consumption instead of income.

      If I made $300,000 last year the tax I pay on a pair of shoes is the same as someone who made $15,000. It also hits lower income earners harder because they spend a larger part of their income on consumer goods and services and save and invest less.

      A progressive tax would increase as a percentage when an individual’s earnings increased.

      There are many conservatives, by the way, who support VATs. It’s not necessarily a liberal thing. Many liberals dislike it because of the regressive nature of the VAT. Some liberals like it because, “that’s what they do in Europe,” and to many on the left, Europe can do no wrong.

      Does that help at all?

      • Yeah that makes sense, thanks! However I could see a counter-argument here:

        If rich and poor alike are paying, say, 20% in taxes, and the rich buy more things than the poor, to get their total tax burden below what the poor pay the rich would have to consume significantly less, which is something of a progressive ideal, n’est pas?

      • Well a VAT is issued on a per item basis. Lets say we a 10% VAT. Someone making $12,000 a year might spend $500 a month on groceries. Their VAT taxes would be $600 a year, or .05%. Someone making $100,000 might also spend $500 on groceries in a month making their tax rate .006%.

        Lower earners have to spend a higher proportion of income just for essentials. If all that consumption is taxed the % rate is going to be higher in aggregate than the rich.

        It does all come down to spending habits though. If a rich person blows all their money their effective rate is going to be high.

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