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Taxes in the U.S. Are Low and Progressive

Nobody seems to really like the U.S. tax system. Conservatives complain that taxes are too high, while liberals say the system isn’t progressive enough. Both may well be right. But, as Lucy Barnes recently explained, the surprising truth is that taxes in the U.S. are both relatively low and relatively progressive.

As I have argued, the total tax burden—including federal, state, local, sales and other taxes—is low in the U.S. both by historical standards and compared to other rich countries. That’s not necessarily to say that it isn’t painful to pay them or that they shouldn't be even lower. But it is difficult to run an advanced country and provide the services its citizens demand for much less than we do. Among OECD countries, only Mexico and Chile tax their citizens at a lower rate. The federal government collects a lower percentage of the GDP than it has since before the brief period between WWII and the Cold War, when the U.S. military was a lot smaller and cheaper than it is today. Considering that we now spend almost as much on our military as the rest of the world combined, it should be no surprise we can’t be pay our bills.

Barnes, who is postdoctoral fellow at Oxford, explains that contrary to conventional wisdom the U.S. tax system is also relatively progressive. A recent survey of tax systems by Monica Prasad and Yingying Deng found that the U.S. system is actually more progressive than its European counterparts. In other words, the wealthy in the U.S. do pay taxes at a moderately higher rate on average than people with lower income. But the European systems in the study—even in the famously liberal welfare state of Sweden—were actually regressive. This is largely because countries like Sweden rely to a much greater extent on sales and excise taxes, which generally fall more heavily on lower income people, who have to spend a larger percentage of what they make just to get by.

Nevertheless, as Barnes says, that doesn’t mean that the idea that the U.S. government does a lot compared to other governments to redistribute income. Economic inequality has been growing in the U.S. since the 1980s, as the rich take home a larger and larger share of the national income. And, as Brad DeLong notes, a quick look at OECD data shows that the U.S. government actually does less to reduce inequality than most other countries. This apparent contradiction, Barnes writes, can be explained by the fact that while taxes in the U.S. are relatively progressive, they are also relatively low. So while the rich in the U.S. do pay a larger share of their income than people who make less, the effect on inequality is smaller than it would be in countries where the overall level of taxes was higher.

In addition, European countries also spend a larger share of their tax revenue on programs that benefit lower-income people. So while their tax systems considered by themselves may actually be regressive, when you consider both taxes and spending, their governments actually do more than the U.S. government does to redistribute income. In fact, political economists have found that—although it’s not clear exactly why—countries like the U.S. that have more progressive tax systems as a general rule actually do less to reduce economic inequality than countries with less progressive tax systems. In that sense, the Occupy Movement is right that the growing income inequality in the U.S. is partly the consequence of government policy. Just because taxes are progressive doesn’t mean the overall system is.

Tax form image from Garry L. / Shutterstock.com

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