The top 10 percent of households in the United States earn about 33.5 percent of all income, but they pay 45.1 percent of income-related taxes, including Social Security and Medicare taxes. In other words, their share of all income-related taxes is 1.35 times
larger thanas large as their share of income. That is the most progressive income tax share of any OECD nation. In Germany, the top 10 percent earn 29.2 percent of the income and pay 31.2 percent of income-related taxes, 1.07 times their share of income. The French top 10 percent earn 25.5 percent of the income and pay 28.0 percent of the income taxes, 1.10 times their share of income.If the top earners pay a smaller share of income taxes in other countries, that means everybody else pays a greater share. In the United States, the top 10 percent of income earners pay 7.6 percent of GDP in income-related taxes, and the bottom 90 percent pay 9.2 percent. In Germany, the top 10 percent of earners pay a similar 7.4 percent of GDP in income-based taxes, but the remaining 90 percent in Germany pay 16.4 percent of GDP, 77 percent more than in the United States. In France, the top 10 percent pay 7.1 percent of GDP; the remaining 90 percent of taxpayers pay 18.2 percent of GDP, 97 percent more than in the United States. Even in Sweden, the top 10 percent of earners pay only 5.9 percent of GDP in income-related taxes, 22 percent less than in the United States; the other 90 percent of earners pay 16.3 percent, 77 percent more than in the United States.
This is from page 54 of Phil Gramm, Robert Ekelund, and John Early, The Myth of American Inequality: How Government Biases Policy Debate. It was published in September.
The book is first rate and their deep dive into the data is very careful. I learned a lot. My review of the book will be published on the Hoover Institution’s Defining Ideas site tomorrow. It’s a long review and so I didn’t have space to deal with the comparison between taxes in the United States and taxes in the OECD countries, most of which are in Europe.
When I first read the paragraphs above, I said to myself, “Well, of course; that’s because most of the European countries have a stiff value-added tax (VAT.)” Then I read the paragraphs more carefully and saw that it’s about simply taxes on income and, therefore, doesn’t include the VAT.
They drive that point home in the very next paragraph, on page 55, writing:
Even these numbers understate just how progressive the total tax burden is in America. The United States collects only 35.8 percent of all tax revenues from sources other than income, such as sales and excise taxes, the smallest share of any country in the OECD. Most OECD members have large value-added taxes (VATs). These taxes are paid on most purchases by all consumers. The VAT is one of the most regressive forms of taxation, which means that the tax systems of the rest of the developed world are even less progressive than indicated by the income tax comparisons.
Wow! Remember that two thirds of OECD countries have a VAT of 20 percent or more.
READER COMMENTS
JFA
Nov 3 2022 at 9:57am
You probably get into this in your review, but the progressivity of a fiscal system includes taxes and spending. I recall reading about this about a decade ago and remember lots of variation across OECD countries, with quite a few ending up near a flat tax structure. I haven’t read any updates, though.
Fazal Majid
Nov 3 2022 at 10:37am
VAT of 20% is particularly regressive, as are fuel taxes that are a big component of state revenues. To use the example of France, in 2018 income tax was €78B, corporate tax €59B, fuel tax €33B, all eclipsed by VAT of €208B.
Conversely, Americans pay 10% of GDP more than Europeans due to the government-enforced AMA, hospital and pharma cartels.
Matthias
Nov 3 2022 at 10:50pm
How are VAT and fuel taxes regressive? They seem perfectly flat (in regards to consumption) to me.
Mark Brophy
Nov 5 2022 at 4:59pm
Rich people save a large portion of their income rather than use it to consume.
Brandon Berg
Nov 3 2022 at 11:59am
VATs and other consumption taxes are preferable to income taxes because they don’t distort the trade-off between present and future consumption. Income taxes heavily penalize people who save and invest.
The idea that consumption taxes are regressive stems from a category error, IMO. They’re not income taxes, and they shouldn’t be evaluated as if they were. They’re flat taxes on consumption. And in the very long run, all income gets either consumed or donated to charity; much of the “regressivity” is just an artifact of ignoring consumption smoothing and pretending that all consumption in a given year is funded by income earned in the same year.
Furthermore, since consumption of government services doesn’t scale linearly with consumption, even a flat tax on consumption will result in the rich subsidizing the poor. We don’t need an inefficient tax system for that.
robc
Nov 3 2022 at 12:33pm
Single Land Tax is even better than consumption tax or income tax.
Both of the latter are taxes on production.
vince
Nov 3 2022 at 2:23pm
It sure is. But I’m not sure how you fairly implement it.
Matthias
Nov 3 2022 at 10:52pm
What problems do you see?
You can look at some existing land taxes throughout the world and throughout history.
Honestly even a property tax is already preferable to most other taxes (including VAT, income taxes and capital gains taxes).
David Henderson
Nov 3 2022 at 1:04pm
All good points.
The reason I don’t favor a VAT is that we’re not starting from scratch. If we get a VAT, it will be added on and will support growth in government spending.
vince
Nov 3 2022 at 4:35pm
It wouldn’t be so much starting from scratch if it were a sales tax, which almost every state already has. States piggyback the federal income tax. The Fed can do the same with the states’ sales taxes.
” If we get a VAT, it will be added on and will support growth in government spending.”
Isn’t there a push for increased government spending regardless of the tax system? The VAT could be added as part of a bigger tax reform, such as reduced and simplified income taxes. One example is a low rate tax on AGI. No deductions. Some states do this.
Scott Sumner
Nov 3 2022 at 12:27pm
Excellent post. Progressives often fail to understand that in order to raise the large share of GDP typically seen in Western Europe (as much as 50%), governments have found it necessary to make their systems less progressive. That’s an implicit acknowledgement that Laffer Curve effects are real.
As an aside, lower income people in the US do face high implicit marginal tax rates, but that’s mostly because they lose benefits as they work more hours.
David Henderson
Nov 3 2022 at 1:05pm
Thanks, and good point.
Matthias
Nov 3 2022 at 10:53pm
The loss of benefits leading to high marginal rates for poor people is a thing in Europe, too, isn’t it?
Rob Rawlings
Nov 3 2022 at 12:28pm
Does the data include state taxes ?
Johnson85
Nov 3 2022 at 12:45pm
I know the scope would be much more significant, but I’d be interested to see healthcare accounted for in some way, since that’s a pretty significant expenditure for people not on medicaid or medicare.
I am not in favor of expanding government provided healthcare, but it is a huge difference. A low income worker paying an extra 5% effective tax rate but not having to worry about health insurance or copays/coinsurance would be a pretty good deal, even if there are tradeoffs in the availability or quality of care.
vince
Nov 3 2022 at 2:20pm
There’s another problem measuring tax burden solely in relation to income. How much do you get in exchange for your tax payments? I’m sure the overwhelming answer is, not enough.
Matthias
Nov 3 2022 at 10:54pm
Depends heavily on jurisdiction, I guess?
Here in Singapore we get excellent bang for our tax buck. At least compared to anywhere else I’ve lived.
Anonymous
Nov 3 2022 at 3:39pm
Maybe not as much anymore, since insurance is heavily subsidized at lower income levels now.
vince
Nov 3 2022 at 4:26pm
That’s true, depending on how you look at it. Our healthcare system is so chaotic and has so much government intervention that one might be able to argue that insurance is like a tax. With the ACA, payments are capped at 8.5 percent of income (in a convoluted way). Those who earn 400 percent above the poverty level pay 8.5 percent. Those who earn multi-millions are paying much lower than 8.5 percent.
My point about not enough is doubt that we get $1 worth of work for $1 of government pay.
MarkW
Nov 3 2022 at 12:59pm
A low income worker paying an extra 5% effective tax rate but not having to worry about health insurance or copays/coinsurance would be a pretty good deal, even if there are tradeoffs in the availability or quality of care.
How low an income? I have a relative who was hit by a series of serious medical problems that left him unable to work, and he ended up having those medical problems while on Medicaid. How’d that work out? No deductibles and no-copays for world-class cancer treatment at our state’s flagship U’s medical center (a ~top 10 hospital in the US). Then they he was granted permanent SSDI disability and was covered by Medicare instead. Yay? No, boo (from his point of view) Medicaid plans are not 100% free as he was accustomed to.
vince
Nov 3 2022 at 1:49pm
A shortcoming of percentages is that it doesn’t give income amounts. With 157 million tax returns in 2020 and a population of 330 million, the average tax return represents 2.1 people.
According to IRS statistics of income in 2020, the top 10% of income tax returns have an average Adjusted Gross Income (AGI) of $394,000. What do the bottom 90% make?
At a household size of 2.1, the average AGI of the bottom 90% is $45,000. That doesn’t leave much to pay taxes.
The top 1% has an average AGI of $1.8 million and pays an average rate of 26 percent. Basically, they pay 2 percent more than the flat capital gains tax rate.
Anonymous
Nov 3 2022 at 3:42pm
“The top 1% has an average AGI of $1.8 million”
Whoa! Really?
vince
Nov 3 2022 at 4:38pm
It’s from IRS statistics of income. Median, of course, would be lower–and that would be true for each grouping of income levels.
Everett
Nov 4 2022 at 1:26pm
Exactly, and you made the point better than I did. I was just going to say that this analysis is meaningless without a GINI analysis for these arbitrary percentages.
vince
Nov 3 2022 at 2:11pm
Another problem is measuring tax burden against income. Why not wealth? After all, wealthiness depends on wealth, not income.
According to the Washington Center for Equitable Growth, in 2016, the bottom 90 percent held 25 percent of all wealth, 90-99 held 35 percent, and the top 1 percent held 40 percent.
Families with wealth of less than $10,000 represent 25 percent of the population.
Anonymous
Nov 3 2022 at 3:44pm
There is no wealth tax, I think that’s why
vince
Nov 3 2022 at 4:15pm
You can still measure tax burden against it. And maybe we should.
Mark Z
Nov 3 2022 at 9:26pm
Why? Tax revenue isn’t analogous to wealth; it’s the state’s income, so it makes more sense to assess what fraction of the state’s annual income is derived from one cohort’s annual income vs. another’s as opposed to wealth.
And ‘wealthiness’ does ultimately depend on income. All wealth was originally income.
Matthias
Nov 3 2022 at 10:56pm
Wealth is also hard to measure, even in principle.
If we legalised organ markets tomorrow, all of a sudden we would have a market price for kidneys. Should we then add the price of one kidney to (most) people’s networth?
Everett
Nov 4 2022 at 1:34pm
@Matthias
Yes, we would, but then we’d also have to factor out the cost of a loss of said organs to the person. They’d effectively cancel out.
The BLS does something similar with owner’s equivalent rent.
@Mark Z
A reason to factor in part of wealth is that capital gains are wealth-derived, yet are not typically considered “income”, and I wonder whether they are so considered in the analysis here.
vince
Nov 5 2022 at 1:50pm
It’s incomplete to measure burden of taxation without measuring the benefits of government spending.
vince
Nov 5 2022 at 2:06pm
Consider someone with a $10 million portfolio invested in tax-exempt bonds. His income would be about 350,000 per year and his tax based on income would be zero.
Regardless, those with wealth receive benefits from government spending whether they have income or not.
Thomas Lee Hutcheson
Nov 3 2022 at 4:19pm
It is surprising to hear VAT referred to as on of the most “regressive.” It surely is less regressive that the capped wage tax that (less than adequately) finances SS and Medicare. Replacing the wag tax wit a VAT would make the system less regressive and could hel reduce the structural deficit.
It is also worth pointing out that capital gains “stepped up” on inheritance never get counted as “income” and taxed at all.
steve
Nov 3 2022 at 7:54pm
“but they pay 45.1 percent of income-related taxes,”
Why limit it to taxes that are income based? There are other taxes. If someone is going to concentrate on just one set of numbers when discussing this topic I assume they have an agenda. For example why not look at total taxes paid as a percentage of income? How do we account for hidden income? Why does Gramm do this for the top 10% and not the top 1% which is where most of there disagreement concentrates? How do you factor in government payments or as with Buffett interest free loans?
Steve
Matthias
Nov 3 2022 at 10:58pm
Those are good questions. At some point you will also have to add considerations of tax incidence into the mix; ie who bears the economic burden of a specific tax, and not just who writes the cheque.
Similar for subsidy incidence.
diz
Nov 4 2022 at 12:20pm
It gets even more dramatic if you calculate taxes paid net of direct transfer payments received. Is someone who pays $1000 in taxes and receives $2000 in direct benefits really a “taxpayer”? More of a taxreceiver.
There is a government report that calculates this by quintile I have seen on occasion. It turns out the bottom 3 quintiles of income are all fairly large tax receivers. The 2nd quintile essentially pays for its own benefits, and really only the top quintile pays net taxes for roads, military, etc.
Everett
Nov 4 2022 at 1:40pm
Any sophist can nitpick this argument apart.
If you aren’t choosing a “benefit”, you may not value it at the actual cost of it. Should you be imputed the full cost of a $2000 benefit if you’d rather have what your $1000 could buy instead?
What’s the value of the benefit of being allowed to form a corporation? Which can engage in international commerce? Of having the infrastructure and treaties in place and enforced which protect patents and other intellectual property? Almost none of this protects any rights that the lower quintiles exercise, yet (when factoring in the military, and international relations in general) is quite costly to create and enforce.
Mike Burnson
Nov 4 2022 at 5:51pm
The VAT is an utterly terrible and corrupt tax, and we should never consider it under any circumstance.
First, it is hidden. The consuming public only see the price tag of their purchase, not the amount of tax inherent in it. Giving cover to cowardly politicians is exactly why they want it.
Second, it is grossly inefficient. It is applied at every stage of any product’s delivery to market. Let’s say that ten separate companies contribute to the production of a product. All have to file paperwork and waste time in accounting determining said added value and paying the tax. That’s enormous overhead and paperwork that costs far more than the 20% tax itself.
A national sales/consumption tax is vastly superior because the consumer sees how he is being hit – and will likely hit back.
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