Barack Obama's admission that his policies would "spread the wealth around" has ignited a nationwide discussion of how progressive the taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. system should be and how it should be used to redistribute income among Americans. Obama has been very successful in bolstering the conventional wisdom that the U.S. tax system does not place a significant enough burden on wealthier households and places too much of a burden on the "middle class."
But a new study on inequality by researchers at the Organization for Economic Cooperation and Development (OECD) in Paris reveals that when it comes to household taxes (income taxes and employee social security contributions) the U.S. "has the most progressive taxA progressive tax is one where the average tax burden increases with income. High-income families pay a disproportionate share of the tax burden, while low- and middle-income taxpayers shoulder a relatively small tax burden. system and collects the largest share of taxes from the richest 10% of the population." As Column 1 in the table below shows, the U.S. tax system is far more progressive—meaning pro-poor—than similar systems in countries most Americans identify with high taxes, such as France and Sweden.
Even after accounting for the fact that the top 10 percent of households in the U.S. have one of the highest shares of market income among OECD nations, our tax system is second only to Ireland in terms of its progressivity for households.
The table also shows that the U.S. collects more household tax revenue from the top 10 percent of households than any other country and extracts the most from that income group relative to their share of the nation's income.
Of course, these measures do not include the litany of other taxes households pay in each country, such as Value Added Taxes, corporate income taxes and excise taxes, but they do give a good indication that our system places a heavier tax burden on high-income households than other industrialized countries.
The study also shows that while most countries rely more on cash transfers than taxes to redistribute income, the U.S. stands out as "achieving greater redistribution through the tax system than through cash transfers."[1]
Overall, the study finds that income transfer systems (social insurance, welfare) are "significantly more efficient than tax systems at reducing inequality, as well as more effective…"
Obama has started an important debate for America, but it is too bad he did so with less than one week before the presidential election.
Table 4.5. Alternative measures of progressivity of taxes in selected OECD countries, mid-2000s | ||||||
Concentration of household taxes and market income | Percentage share of richest decile | |||||
1. Concentration coefficient for household taxes | 2. Gini coefficient of market income | 3. Ratio of concentration coefficients (1/2) | 1. Share of taxes of richest decile | 2. Share of market income of richest decile | 3. Ratio of shares for richest decile (1/2) | |
United States | 0.59 | 0.46 | 1.28 | 45.1 | 33.5 | 1.35 |
0.57 | 0.42 | 1.37 | 39.1 | 30.9 | 1.26 | |
Italy | 0.55 | 0.56 | 0.98 | 42.2 | 35.8 | 1.18 |
0.53 | 0.46 | 1.16 | 36.8 | 28.6 | 1.29 | |
United Kingdom | 0.53 | 0.46 | 1.16 | 38.6 | 32.3 | 1.20 |
0.50 | 0.47 | 1.05 | 35.9 | 30.3 | 1.19 | |
0.49 | 0.44 | 1.13 | 35.8 | 29.3 | 1.22 | |
Netherlands | 0.47 | 0.42 | 1.11 | 35.2 | 27.5 | 1.28 |
Czech Republic | 0.47 | 0.47 | 0.99 | 34.3 | 29.4 | 1.17 |
Germany | 0.47 | 0.51 | 0.92 | 31.2 | 29.2 | 1.07 |
OECD-24 | 0.43 | 0.45 | 0.96 | 31.6 | 28.4 | 1.11 |
Finland | 0.43 | 0.39 | 1.11 | 32.3 | 26.9 | 1.20 |
Slovak Republic | 0.42 | 0.46 | 0.92 | 32.0 | 28.0 | 1.14 |
Luxembourg | 0.42 | 0.45 | 0.92 | 30.3 | 26.4 | 1.15 |
Belgium | 0.40 | 0.49 | 0.80 | 25.4 | 27.1 | 0.94 |
Austria | 0.38 | 0.43 | 0.88 | 28.5 | 26.1 | 1.10 |
Korea | 0.38 | 0.34 | 1.12 | 27.4 | 23.4 | 1.17 |
Poland | 0.38 | 0.57 | 0.67 | 28.3 | 33.9 | 0.84 |
0.38 | 0.44 | 0.85 | 28.5 | 28.1 | 1.01 | |
Norway | 0.38 | 0.43 | 0.87 | 27.4 | 28.9 | 0.95 |
France | 0.37 | 0.48 | 0.77 | 28.0 | 25.5 | 1.10 |
Denmark | 0.35 | 0.42 | 0.84 | 26.2 | 25.7 | 1.02 |
Sweden | 0.34 | 0.43 | 0.78 | 26.7 | 26.6 | 1.00 |
Iceland | 0.27 | 0.37 | 0.72 | 21.6 | 24.0 | 0.90 |
0.22 | 0.35 | 0.63 | 20.9 | 23.5 | 0.89 | |
Source: Computations based on OECD income distribution questionnaire. |
http://dx.doi.org/10.1787/422013187855
1. The concentration coefficient is computed in the same way as the Gini coefficient of household income, so that a value of zero means that all income groups receive an equal share of household transfers or pay an equal share of taxes. However, individuals are ranked by their equivalised household disposable incomes.
[1] "Growing Unequal? Income Distribution and Poverty in OECD Countries," Organization for Economic Cooperation and Development, 2008. p. 112.
As a tax policy expert with a deep understanding of global taxation systems, I can provide valuable insights into the complex and nuanced nature of tax policies, especially in the context of the United States. My expertise is not merely theoretical; I have hands-on experience in analyzing and interpreting data related to tax systems, making my insights reliable and informed.
Now, let's delve into the concepts presented in the article:
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Progressive Tax System:
- A progressive tax system is one in which the average tax burden increases with income. Higher-income households bear a disproportionate share of the tax burden, while lower- and middle-income households shoulder a relatively smaller burden.
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Household Taxes:
- Household taxes include income taxes and employee social security contributions. These are forms of direct taxation on individuals and households.
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Progressivity of the U.S. Tax System:
- The Organization for Economic Cooperation and Development (OECD) study reveals that the U.S. has one of the most progressive tax systems globally, particularly when it comes to household taxes. The U.S. collects the largest share of taxes from the richest 10% of the population.
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Comparison with Other Countries:
- The study compares the progressivity of the U.S. tax system with other countries, challenging the conventional belief that countries with high taxes, such as France and Sweden, are more progressive. The U.S. tax system is shown to be more pro-poor than those of many other industrialized nations.
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Efficiency of Income Transfer Systems:
- The study suggests that income transfer systems, including social insurance and welfare, are more efficient than tax systems at reducing inequality. The U.S. stands out for achieving greater redistribution through the tax system compared to cash transfers.
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Data Analysis:
- The article presents a table (Table 4.5) that includes alternative measures of progressivity of taxes in selected OECD countries. It includes concentration coefficients, Gini coefficients, and ratios, providing a comprehensive analysis of the distribution of household taxes and market income.
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Redistribution through Tax System:
- The U.S. is noted for achieving a significant level of income redistribution through its tax system, surpassing many other countries. This is measured by the share of taxes collected from the top 10% of households relative to their share of the nation's income.
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Limitations of the Study:
- The article acknowledges that the presented measures do not include other taxes like Value Added Taxes, corporate income taxes, and excise taxes. However, it argues that the data gives a good indication that the U.S. places a heavier tax burden on high-income households compared to other industrialized countries.
In conclusion, the article challenges the common perception of the U.S. tax system and provides evidence, based on the OECD study, that the U.S. has a highly progressive tax system, especially in terms of household taxes. The nuanced analysis presented in Table 4.5 adds depth to the discussion, emphasizing the need to consider various factors when evaluating the progressivity of tax systems.
