Thursday, March 24, 2011

How Progressive Do We Want To Be?

I came across this interesting data (via Powerline) compiled by the Tax Foundation that the United States has the most progressive tax system among all industrialized nations.  Simply stated, the highest 10% of income earners in the United States pay 45.1% of the tax burden in this country.  Their share of total income is 33.5%.  Therefore, a pure flat rate tax system would mean they should pay 33.5% of the  tax burden.  A flat tax would produce a 1.00 average dividing their share of taxes by their share of income.  In the U.S. the actual ratio of taxes paid to income earned is 1.35.  The OECD average is 1.11.

This provides a little context to the continual cries from the liberal left that the rich are not paying their fair share.  What is fair?  How is that determined?  The chart below shows how this question is viewed in other countries.

Table 4.5. Alternative measures of progressivity of taxes in selected OECD countries,
B. Percentage share of richest decile
1. Share of taxes of richest decile2. Share of market income of richest decile3. Ratio of shares for richest decile (Column1/2)
Czech Republic34.329.41.17
New Zealand35.930.31.19
Slovak Republic32.028.01.14
United Kingdom38.632.31.20
United States45.133.51.35
Source: Computations based on OECD income distribution questionnaire.

It is often argued by the left that there is a higher concentration of income at the top levels in the U.S and this justifies our progressive income tax system.  This is true.  The United States has a higher proportion of income in the top decile than most other industrialized countries.  However, the concentration of income in the top decile is actually higher in Italy and Poland (Yes, that is the former Communist Poland) than in the U.S.  In Poland, the rich don't even carry their own weight in taxes. Rich Poles come in at .84 on the ratio of taxes to income.  It is much better to be wealthy in Warsaw than in Washington, Wisconsin or Waukegan.

Belgium, Iceland, Norway and Switzerland are other countries where the top decile in earners are paying less than they would in a flat rate tax system.  In those countries the bottom 90% is redistributing their income upwards to those with even more income at the top of the scale. Austria, Denmark, Germany, France, Japan and Sweden are at 1.10 or below.  Most of these countries are normally considered to be far more socialist than the U.S. However, it is the United States that is redistributing more income than any of them.  Is it any wonder we have become The United States of Redistribution? (See my earlier post) February 19, 2011.

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