Over at New York Magazine, Jonathan Chait explains to his readers why he is “forced to be so mean” to me. In his post, he writes that I utterly fail to prove that the US federal tax code is more progressive than those of other OECD nations. His argument in brief:
[de Rugy] introduces a series of other fallacies, like conflating the marginal tax rate (the percentage tax you pay on your last dollar) with the total tax rate (the overall percentage of your income paid in tax), using “income tax” as a stand-in for total taxes, and trying to broaden the debate into a bigger philosophical dispute. But it’s not a philosophical dispute. It’s a simple case of her making up false claims based on extremely elementary errors.
I probably wasn’t clear or maybe he didn’t read my response carefully enough. The OECD data includes all federal taxes paid by individuals, including the more regressive payroll tax. It means that the data does capture the impact of the payroll-tax cap. Again, it’s not just the income tax.
Also, he seems to miss the interesting thing about the whole piece -- while it is true that US taxpayers pay both a lower marginal income tax rate and a lower effective tax rate than their OECD counterparts, the US tax system remains more progressive than theirs—and that includes countries like France and Germany.
Beyond this OECD data, there are three main reasons for the higher progressivity of the US tax code:
- The U.S. tax code provides large deductions and personal exemptions to low-income earners. The reason is that the U.S. has a policy to distribute social benefits through the tax code such as the Child Tax Credit and the Earned Tax Credit — unlike European governments. This de facto increases progressivity.
- The U.S. has lower marginal (and effective rates too) than other OECD countries, but European higher marginal rates hit much lower income levels than in the U.S., making EU tax codes more regressive than ours. Take the personal income tax, which of all of these taxes is the main one with more than one rate, in most European countries the top rate is much higher than in the US but it will hit taxpayers’ income at a much lower level. Bruce Bartlett calculated that the “average [European] worker making an annual income in the $40,000 to $50,000 range is in the top marginal tax bracket.” More specifically, take the difference between France and the US. The top marginal rate in the US is 35 percent and kicks in at $379,000. In France, the top rate is 41 percent and kicks in at $96,000.
- The U.S. federal government relies much more heavily on the income tax than on consumption taxes such as the VAT, retail-sales taxes, and gasoline and tobacco taxes favored by the OECD nations. Consumption taxes tend to be regressive.
I am not sure what else to add except to suggest that Chait take a look at the OECD data himself. Alternatively, he can read the work of people he finds more respectable than me. I can suggest the excellent new book by economist Bruce Bartlett in which he does a very good job at demonstrating this point (and much more) or The Money Illusion’s academic economist Scott Sumner (here). For instance, the respectable Sumner suggests reading the work of economist Peter H. Lindert (Growing Public: Social Spending and Economic Growth since the Eighteenth Century) which shows that “Europeans were able to raise more tax revenue only by having more regressive tax systems than the US, i.e. tax systems that relied more heavily on consumption taxes. This is now pretty much common knowledge in the public finance area.” Here is also a really interesting article with the provocative title “Taxing the Poor to Pay the Poor” in The Economist addressing these same issues.
Now, for the ones who care about inequality (I personally care about mobility especially at the bottom), here is a paragraph from the guy who wrote the OECD chapter from which the data come:
So while the US tax system is progressive and reduces inequality, the US welfare state is much less effective at reducing inequality. And because the US has a very unequal distribution of income from capital and a much wider wage distribution than many other OECD countries, it ends up as a relatively unequal country after taxes and benefits.
In other words, while the US tax system is progressive, its government spending and especially its social safety net (meaning the spending that benefits the poor—not the middle class) is more regressive. That’s because much of the tax revenue collected is being spent on things like wars, the machines to fight wars, corporate welfare, and many middle-class benefits. Irrespective of the effect of income distribution, I think that's unwise.