Taxation, American Style

The U.S. tax code is more progressive and European than you think.

Americans often tout the contrast between the bloated, tax-funded welfare states of the Old World and our leaner, cheaper government. But the data reveal that the U.S. may be closer to Europe than we think.

Contrary to common belief, the American tax system is more progressive than those of most industrialized democracies. A 2008 report by the Organization for Economic Cooperation and Development (OECD), titled “Growing Unequal,” gave two different estimates of the progressivity of tax systems in 24 industrialized countries. One ranking found that the U.S. has the most progressive tax structure; in the other Ireland beat America by a nose. France, which has a notoriously generous welfare state, ranked 10th out of 24 in both of the OECD progressivity indexes.

Other countries have higher tax rates than the U.S. but manage to be less progressive overall. How can this be? The answer is that the rate structure alone doesn’t necessarily tell you much about the progressivity of a country’s tax system. The top rates kick in at much lower income levels in Europe than in the United States, making E.U. tax codes more regressive than ours. 

In his new book The Benefit and the Burden (Simon & Schuster), economics columnist Bruce Bartlett presents a chart (reproduced here) that shows the top statutory personal income tax rate and an “all-in rate” that includes payroll taxes in selected countries as measured by the OECD. 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.” A comparison of France and the U.S. is revealing: The top marginal income tax rate in the U.S. 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 also relies much more heavily on the income tax, rather than the regressive consumption taxes—such as the value-added tax (VAT), retail sales taxes, and gasoline and tobacco taxes—favored by most OECD nations. European countries generally have lighter taxes on capital as well, another regressive feature.

Finally, the U.S. tax code allows large deductions and personal exemptions for low-income households, distributing social benefits in the form of policies such as the child tax credit and the earned income tax credit. These adjustments increase progressivity.

Judging solely from government outlays, it appears to be true that the United States has a smaller, more efficient government than the big welfare states of Europe. Relative to the size of GDP, U.S. government spending is about 16 percent smaller than the average for the European Union. But the difference is largely illusory. European governments tend to channel much less spending through their tax codes than the U.S. does. A November 2011 OECD paper titled “Is the European Welfare State Really More Expensive?” calculates the share of tax breaks used in OECD countries, separating out those used primarily for social purposes. The data show not only that the U.S. offers more tax breaks for social purposes as a share of GDP than any other country (almost 2 percent as opposed to the 0.5 percent OECD average) but that roughly two-thirds are tax breaks toward current private benefits (such as encouraging people to have children). These breaks, which total some $84 billion a year, are better thought of as welfare spending via the tax code. 

Only by measuring tax breaks do you begin to see the true girth of the American welfare state. The chart at the top right shows social spending as a share of GDP in major countries, taking into account tax breaks for social purposes, direct taxation of benefit income, and indirect taxation of consumption by benefit recipients, all of which consume economic resources but do not show up in the budget or other measures of government spending as a share of GDP. According to these OECD data, net social welfare outlays in the U.S. consumed 27.5 percent of GDP in 2007—above the OECD average of 23.3 percent.

These social spending figures should not be confused with the amount a government spends to help poor people. Many tax breaks disproportionately benefit the middle class, not the least well off. The same is also true for spending; only 14 percent of the U.S. budget goes to lower-income Americans.

Which raises the issue of fairness. Basic principles of fairness tell us that people with roughly the same income should pay roughly the same amount of taxes. Unfortunately, the amount of taxes Americans pay today has little to do with how much money they make and more to do with how many kids they have, whether they rent or own a house, which state they live in, and whether they make their money in the form of wages or capital gains. This system is not only unfair; it is also highly inefficient, as the disparities encourage taxpayers to shift their income and investment around to reduce their tax burden.

Unlike their European counterparts, American lawmakers understand that low marginal rates are crucial to promoting economic growth. But when these lower rates are considered in conjunction with the fact that the U.S. government looks deceptively smaller on paper than those of many European countries, it is easy to overestimate our differences with Europe.

In fact, in many respects the U.S. government’s tax framework may be worse than Europe’s. It disproportionately relies on the top earners to raise revenue, it exempts a large class of taxpayers from paying any income taxes, and it conceals spending in the form of tax breaks.

Contributing Editor Veronique de Rugy is a senior research fellow at the Mercatus Center at George Mason University.

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  • GW||

    So our leaders are sneakier about taxing us than the leaders of other countries.

    No surprise there, I've thought that for years.

  • anon||

    Considering our government has more employees than most other nations have population, I am not surprised either.

  • Anonymous Coward||

    Europeans would rather maintain the polite fiction that they aren't taxing you much (VAT tax). America does things the right way, by making taxation such a labyrinthine journey that you will undoubtedly break laws or violate regulations somewhere along the way, which can be used against you at some point in the future.

  • KPres||

    The purpose of the VAT, or any consumption tax you hear politicians propose, is to get around the Laffer Curve.

  • TMF||

    You cant get around it, when there's a tax there's a way to cheat it.

  • Mr. FIFY||

    The best way for the IRS to do their evil work, would only happen if we had a cashless society... and the death penalty for barter. On the spot, Dead Right There, Judge Dredd style.

    Hey... is that the sound of Tony fapping?

  • anon||

    Notice how Bernard von NotHaus's sentencing has no hits on any search engine?

  • Mr. FIFY||

    Most curious, indeed. Nice spotting, anon.

  • Rich||

    Basic principles of fairness tell us that people with roughly the same income should pay roughly the same amount of taxes.

    Now, how could such a system *possibly* be implemented?

  • ||

    Americans often tout the contrast between the bloated, tax-funded welfare states of the Old World and our leaner, cheaper government. [...] Contrary to common belief, the American tax system is more progressive than those of most industrialized democracies.

    Just to nitpick, but welfare states and progressive taxation are not the same thing.

  • NotSure||

    True, but America is as much a welfare state as most countries in Europe are.

  • BakedPenguin||

    Am I missing something? Where are the charts?

  • anon||

    Charts only come if you pay for your Reason subscription with Gold or Liberty dollars.

  • BakedPenguin||

    Curses! Foiled again! *twirls moustache, furrows monocled brow*

  • Paul.||

    But as Veronique de Rugy observes, the data reveal that the U.S. may be closer to Europe than we think.

    No we're not. We're exactly as close to Europe as we think.

    Here's my oldest post I could conjure from 2005 responding to some ne'r-do-well:

    Paul|11.22.05 @ 1:57PM|#
    Pro L.
    I know they hate us and everything, but our constitution has held up pretty well for a long time. And to the extent that it's cracking, well, it's cracking in ways the EU should like.

    You stated it very well, Pro Libertate. Where our constitution has weakened, has been in the areas of federal intevention and weakening of individual rights in favor of group rights. As I've said a million times:

    Gentlemen, get over it, we're Europe.
  • Pro Libertate||

    I was kinda hoping we'd take a different path. Oops.

  • BMFPitt||

    Depends if "we" is the population at large or the aggregate H&R crowd.

    Either way, that's quite a collection of insanity.

  • Rhywun||

    But "progressive" means "better"... doesn't it?

  • Ron||

    progressing forward while standing at the cliffs edge is not better.

  • Rhywun||

    You just hate progress. Hater.

  • shrike||

    Romney tells donors privately his "cuts" will be to nibble on HUD and Education. Maybe combine a couple of departments.

    http://firstread.msnbc.msn.com.....aiser?lite

    There is your Small Gov guy.

  • ||

    I don't think anyone here is under the illusion that Romney is a small government candidate. Even the ODSers won't go that far.

  • Paul.||

    Wow, a year of steady, unqualified big-government-Romney bashing on this board, and you refer to Romey as "Your small Gov guy."

    I take it you just post here, but don't read here.

  • anon||

    It's Shriek. He's an Obamazombie.

    money .... moooonneeeyyy ... give me all your monnnneeyy...

  • Anonymous Coward||

    There is your Small Gov guy.

    Damn shriek, you really are that stupid, aren't you?

  • shrike||

    Look, there are lots of Team Red fans that post here. I don't know you but I could run down a long list.

    No GOPer in my life has ever cut spending and Romney won't. What fucking good is the GOP?

  • Randian||

    Look, there are lots of Team Red fans that post here. I don't know you but I could run down a long list.

    Run it, then.

  • KDN||

    Tulpa will be along any time now to explain how it is your libertarian duty to vote for Mitt. After all, he's slightly less likely to cause the utter collapse of the US.

    No GOPer in my life has ever cut spending and Romney won't. What fucking good is the GOP?

    Spot on, though the same thing will be said about the other major party. The GOP's rhetoric is more realistic, but it's a ruse. I have no faith in them following through on any of the good parts, though they will waste plenty of time attempting to slaughter the hobgoblins that threaten the dreams of middle America.

  • Mr. FIFY||

    Has any Democrat ever cut spending?

    Not "we'll reduce next year's growth by X percent"... actual cutting, shrike.

    Or, shut the fuck up. Either way.

  • ||

    "The U.S. government’s tax framework (...) disproportionately relies on the top earners to raise revenue"

    Tell that to those that whine about those big bad rich people who pay nothing and provide nothing of value.

    Also I wondered how long it would be before you'd need an account to comment here. I'll miss those weird spam advertisement links (though maybe not, the login didn't have a captcha.)

  • np||

    Unfortunately, the amount of taxes Americans pay today has little to do with how much money they make and more to do with how many kids they have, whether they rent or own a house, which state they live in, and whether they make their money in the form of wages or capital gains. This system is not only unfair; it is also highly inefficient, as the disparities encourage taxpayers to shift their income and investment around to reduce their tax burden.


    Yep, the entire mess that is the tax code comes from this. Why does America hate high income, salaried, renting, single professionals?

    Furthermore, the benefits are the seen, but the inefficiency points to the unseeen--rather than concentrating on being productive and saving[1] and spending time improving our skills or being creative, we have to worry about all of that, and while it encourages some activities, such taxes discourages others

    [1]well, this part is dead due to the Fed

  • Auric Demonocles||

    Why does America hate high income, salaried, renting, single professionals?

    They're jealous of my ability to woo ladies in my sweet bachelor pad in the city, while they're stuck in the suburbs with their screaming kids and overweight wife.

  • R C Dean||

    Why does America hate high income, salaried, renting, single professionals?

    Well, really, who doesn't?

    Seriously, though, that sounds like an excellent demographic description of your gay community in large metro areas.

    Taxing gays to fund marijuana raids: Progressives, this is your government. May you have the joy of it.

  • np||

    Speaking of Europe, it's not all bad. Been doing some research on internationalization...

    For one thing, Russia implemented a 13% nearly flat tax in 2001:
    http://www.voxeu.org/index.php?q=node/941
    Ok, it's not european per se, but many of its former soviet republics in eastern europe have also implemented a flat tax as well with overall low taxation.

    Andorra and Monaco have no income and corporate taxes. Although for Monaco, if >25% of corp tax comes from outside the country, it's taxable:
    http://www.lowtax.net/lowtax/html/jmccfir.html

    And while Switzerland's tax rate is progressive, I'd very much pick that over ours and over all of western EU countries any day:
    ...

  • np||

  • Juice||

  • robc||

    Commuting from Zurich to Zug isnt that much of a hardship. Switzerland just istn that large.

    I didnt own a car while I lived there.

  • ||

    Not sure if Andorra and Monaco are realistic examples.

  • thirtyandseven||

    OT, but is there no limits to this dickbag's ignorance?

    Obama:

    “I believe in investing in basic research and science because I understand that all these extraordinary companies that are these enormous wealth-generators -- many of them would have never been there; Google, Facebook would not exist, had it not been for investments that we made as a country in basic science and research,” Obama said. “I understand that makes us all better off.”
  • rxc||

    "Basic principles of fairness tell us that people with roughly the same income should pay roughly the same amount of taxes."

    So, someone with 100K in income from municipal bonds should be taxed the same amount as someone who works to earn 100K?

    I am sure that the financial people in every state and locality in the nation agree with you. /sarc

  • Tom Beebe||

    I'm no "financial" person, but I wonder why rxc thinks wages are somehow more "noble" than interesdt income. That guy who "earns" 100K from bonds has given possession of a considerable sum to the state or other entity in exchange for that interest payment. Somebody earned the amount he loaned out by hard work and savvy. Is only currently sweat-stained money somehow more noble?

  • rxc||

    It is the rich people who buy these bonds who pay for all the state and local improvements like schools and roads. If they get taxed at the same rate as earned income, they will want the bonds to pay more, which will raise the costs to the state and local governments. It will amount to a transfer of money from state and local govt to the Feds. This is why state and local financial managers do not like "fairness" in taxation of certain types of income.

  • R C Dean||

    So, someone with 100K in income from municipal bonds should be taxed the same amount as someone who works to earn 100K?

    Sure, why not?

    Taking away the tax exempt status of muni interest would raise the cost of borrowing, sure, but that would mean the fuckers wouldn't borrow so much.

  • robc||

    I have a problem with taxing income at all, but, yeah, got to agree. If we are going to tax income, tax income equally.

  • HermanLame||

    Hardly. The government has the guns and can raise a hue and cry about how forcing it to lower its expenditures will result in the poor starving, schools burning down, and terrorists running rampant in the streets.
    They'll borrow all they want and tax to pay the interest.
    It'll be interesting to see what happens when they can't tax enough to even do that.
    Too bad we will have to sit there as society presumably collapses.

  • Tom Beebe||

    Ler's eliminate all sales taxes. After all, aren't they the most regressive? Poor folks have to spend all they earn, so every cent they earn is taxed. Perhaps the most equitable would be to allow deductions for all net savings, education and health care (sure beats everybody's half-assed "care" and "education assistance" programs). Throw in a very generous personal exemption to make taxation even more progressive, then apply a flat tax on the balance.

  • robc||

    Sales tax in my state exempts enough stuff that Im not sure it is regressive, or at least not as regressive.

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