America leads the world in many fields, but for those keeping score, the nation apparently has yet another superlative to add to its column. According to The Tax Foundation, the U.S. currently can lay claim to having the most progressive income tax among all industrialized nations.
In the mid-2000s, the top 10 percent of households in the U.S. were responsible for 45.1 percent of all income tax revenues, according to numbers compiled by the foundation. That same decile, however, only earned 33.5 percent of the market income – which makes the ratio of income tax paid to market income earned the highest of any industrialized country, at a whopping 1.35. For comparison, France stands at 1.10, Belgium at 0.94 and Switzerland at 0.89.
American Enterprise Institute economist Alan Viard told The Daily Caller that while America’s tax code is extremely progressive, it is not as redistributive as many other nations because the overall tax system is smaller.
“As a country imposes a larger volume of taxes and as the public sector gets bigger, it is almost certain that they are not going to remain as progressive in how they raise their revenue,” Viard said. “Progressivity has certain economic costs. It tends to undermine incentives to work and to save… It will be more and more costly for a country to stay that progressive as their tax system gets bigger. ”
Former economic adviser to President Ronald Reagan, Art Laffer, told TheDC that there are problems associated with squeezing the rich, foremost among them being the wealthy’s ability to change their behavior to avoid taxes.
“Rich people can do lots of things middle class and poor people cannot. They can change the location of their income — I moved from California to Tennessee for no other reason than to escape the income tax,” Laffer said. “Rich people can change the location, move their funds off-shore….hire lawyers, they can hire accountants, they can hire deferred income specialists, they can hire congressmen, senators.”
Laffer said that while progressives may think it makes sense to tax the rich, doing so does not raise more revenue.
“The top decile pays most of the taxes that is true but you don’t collect more money by raising rates on them,” he said. “Every single time in the history of the tax codes that they have raised taxes on the rich they’ve collected less money from the rich.”
High consumption taxes in European countries also play a role in dispelling the notion that tax systems abroad are more progressive than America’s. Viard told TheDC that as the government expands and needs more money, countries often raise the money through a consumption tax, which is regressive.
“It is a pretty consistent pattern that countries that have bigger public sectors and therefore need more taxes tend to be less progressive in how they raise their revenue and that shows up is by putting more reliance on consumption tax, particularly a value added tax,” said Viard.
