Over at the Washington Examiner, I responded to Jonathan Chait’s most recent feedback on my observation that the United States’ federal tax system is more progressive than those of other Organization of Economic Cooperation and Development (OECD) nations. The original article in the Examiner noted that, looking at the OECD data, it’s hard to claim that rising inequality in the U.S. is the product of a lack of progressivity in the federal tax code — a claim we often hear. The data shows that countries with supposedly less inequality than the U.S. have more-regressive tax codes. I also noted that raising taxes only on the rich won’t address our debt problem. Spending needs to be drastically reduced as well.


Chait wasn’t convinced by my argument. He argues that the fact that the share of taxes paid by the top earners in America is higher than that of those in other OECD nations doesn’t tell you anything about whether they are subject to higher tax rates — and hence it tells you nothing about the progressivity of the tax code. He is right and I never claimed it did. But here is, in my opinion, the most interesting aspect of this issue: While the top earners in America do pay a larger share of their income in taxes than their OECD counterparts, they also face lower marginal and effective rates and higher progressivity.

Here are some of the reasons why:


The U.S. tax code provides large deductions and personal exemptions to low-income earners, which de facto increases progressivity.

The U.S. has lower rates than other OECD countries, but their higher rates hit much lower income levels than in the U.S., making their tax codes more regressive than ours.

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.

All these factors together explain why the U.S. system is more progressive than most OECD countries. (For great data and explanation on this issue check out Bruce Bartlett’s excellent new book The Benefit and the Burden: Tax Reform: Why We Need it and What it Will Take.)

I would add that most inequality measures like the one compiled by the Census Bureau are based on before-tax income and exclude non-cash government benefits. This means that raising taxes dramatically on the rich won’t affect inequality of income — except maybe in the long run when and if higher taxes translate into lower economic growth and lower income for all.

Now, my liberal friends would say (and, in fact, they do say), “There are other taxes besides federal income taxes. We barely have a progressive system when all taxes are considered.” First, the OECD data includes all federal taxes, including the more regressive payroll tax and the impact of the payroll-tax cap, not just the federal income tax.




Second, while this objection is the equivalent of changing the debate, I will try to address it since it is a recurring response to any discussion about the progressivity of the federal tax code.

State and local taxes often prove to be more regressive (except for the state income tax, but then, the higher the tax paid, the higher the federal deduction) so if we were to add them, the system would be flatter. With 47 percent of taxpayers paying no federal income tax and with 14 percent paying no federal tax at all (because 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), lower-income people are faced mostly with regressive state and local taxes.

However, after thinking a while about it I have to say that I don’t think this is a truly valid point. First, if we are going to add state and local taxes to the picture, shouldn’t we also add payments by the government and deductions? The Tax Foundation has done the work and it finds that when we take under consideration benefits and taxes paid at all levels of government, the system remains fairly progressive:

Using a microdata model we estimate the distribution of federal, state and local taxes and spending between 1991 and 2004. We find households in the lowest quintile of income received roughly $8.21 in federal, state and local government spending for every dollar of taxes paid in 2004, while households in the middle quintile received $1.30, and households in the top quintile received $0.41. […] Overall, tax payments exceeded government spending received for the top two quintiles of income, resulting in a net fiscal transfer of between $1.031 trillion and $1.527 trillion between quintiles. Both taxes and spending appear to have large distributional effects on households, and these effects have grown since 1991.



Maybe more important, I really don’t think it is valid to try to address problems or injustices (perceived or real) at the state levels through the federal tax system. We have a federalist system for a reason. If some people think that tax system is too regressive — and hence unfair — at the local and state levels, then they should fight to change state and local taxes. Making the federal tax more progressive isn’t the appropriate recourse.

Also, I should add that the current debate surrounding tax reform is focused on the federal level, not the state and local level. And while state and local taxation are definitely important and should not be ignored when considering a household’s overall tax burden, federal taxes are what pay for national defense, Social Security, interest on the debt — those categories of spending that threaten to bankrupt America. For this reason, I think it is appropriate to focus on federal taxes.

Now, I would conclude by saying that while I would rather not see taxes go up and would like to see a fundamental reform of the overall tax system, I am absolutely against the current state of affairs where we keep pushing the bill for our current spending onto future generations. That means that I agree with David Stockman that if no one is ready to cut spending significantly (and not just spending on the poor, which is often the only area that politicians seem willing to touch, but also defense spending and entitlement spending) we need to raise taxes on everyone, not just the rich, to pay for this spending. And when I say everyone I mean everyone.


As always, here is an excellent post by The Money Illusion’s Scott Sumner on the issue of progressivity and liberal wishful thinking.