AMERICANS hoisting the banner of the 99% versus the 1% often argue that income distributions and taxation burdens in America ought to look more like those in Europe, where things are less unequal. This raises the question of what all those Occupy activists in Berlin, Rome and Amsterdam have been doing. But it's true: incomes are markedly less unequal in every European country (not to mention Japan) than in America. And one might assume that this is because of more progressive levels of taxation and redistribution.

This is where things get interesting. The Netherlands is one of those countries progressives often cite as a model in this respect. Using the Gini coefficient, the standard measure of inequality, the OECD puts income inequality after taxes and transfers in the Netherlands at 0.29, not as low as Denmark or Norway's 0.25 but far lower than America's score of 0.38 (which puts us 32nd of the OECD's 35 countries, followed only by Turkey, Mexico and Chile). You'd think this must be largely because the tax burden in the Netherlands falls heavily on high earners. But according to an obscure, authoritative article I was reading yesterday, this is completely wrong. In the latest Economisch Statistische Berichten (paywalled), Rens Trimp of the Central Bureau for Statistics and Flip de Kam of Groningen University show that while income taxes in the Netherlands are highly progressive, all the other taxes (VAT, social insurance, excise taxes and so forth) are so regressive that the total burden of taxation is almost flat across income groups. Everybody pays about 40%.

Here's their table showing a breakdown of taxes by income decile. The income groups run across the top of the graph; the bottom 20% are lumped together as 1+2 because it was too hard to generate separate data for them.

The "inkomstenbelasting" (income tax) is very progressive. (The top marginal rate in Holland is 52%.) But the "indirect taxes", mostly VAT, are extremely regressive, so the total is pretty much flat. Here's the bar graph of each decile's share of total income and of total taxes paid:

The black bar is before-tax income; the dark-blue bar is income tax; the light-blue bar shows the total tax including social insurance, VAT and so forth. For each group, the share of total national income is about equal to the share of total national taxes paid.

This means the overall progressivity of taxes isn't that different in the Netherlands than in America. Federal taxes in America are progressive, but that's in part because the federal government doesn't have a VAT. (Though Thomas Piketty and Emmanuel Saez found that even so, pre-tax and post-tax income shares are pretty much identical, meaning any federal tax progressivity doesn't affect inequality much.) The better way to do the comparison is to include state and local taxes, especially sales tax, which is the closest thing we have to a VAT (though it's much lower than the VATs in Europe). Lane Kenworthy's figures on this show that the total effective tax burden in America is pretty much flat, too, with each quintile paying about 30%.

So you might conclude that the low levels of inequality in the Netherlands aren't because of progressive tax rates, but because of transfers. Those taxes must be getting spent on the lower-income folks, evening out the general income curve more than in America. But this is where it...stays interesting. According to the OECD, as we saw, the Gini coefficient in the Netherlands for income after taxes and transfers is 0.29. That put it at number 14 among the 35 OECD countries. But the Gini coefficient before taxes and transfers was 0.42, which put it at number 8 in the OECD. In other words, yes, transfers do a lot in the Netherlands to smooth out inequality. But the main reason the Netherlands has low levels of inequality is that incomes in the Netherlands just aren't very unequal, even before taxes or transfers.

Indeed, looking down that OECD list of pre-tax inequality, you see some surprising things. After taxes and transfers, the Netherlands has about the same level of inequality as Germany and somewhat less than France or Italy. But before taxes and transfers, Germany, France and Italy are far more unequal; in fact gross income in Germany and Italy is more unequal than in America. You can't really say "in Europe, they have higher taxes and more transfers, which is why inequality is lower." That's true in parts of Europe. In other parts, inequality is lower because people just tend to earn relatively equal amounts of money.

Why is this? I would make two guesses. The first is a sociological and historical issue: people in the Netherlands and Scandinavia have a longstanding cultural and political antipathy to vast disparities in income. This is reflected in lower multiples of CEO-to-employee pay rates. The second is that Germany, France and Italy, like America, are big countries. The bigger the economy, the greater the rewards for superstars. In small countries, people's social and economic characteristics may start out relatively homogenous, and outrageous pay disparities may be limited by a sort of social-disapprobation small-town effect. In big economies, limiting tremendous disparities in wealth may require more government action.

Oh, and the final and relatively obvious lesson is that if you raise consumption taxes, as many in America are sensibly proposing, you have to compensate by making income-tax rates more progressive. Otherwise you end up with poor people actually paying a higher share of their income in taxes than rich people do.