Why America's Tax Code Is the Least Progressive in the Industrialized World

On Tax Day, amidst all the right-wing rhetoric about how the poor are undertaxed, and liberal arguments about how the rich should pay more, we should take a second just to go over how the U.S. tax structure works. Americans fund a lot of their essential social services, public schools, for example, primarily at the state and local level. Consequently, relative to other industrialized democracies, we have a tax burden that falls more heavily at the state and local level and less at the national level.

So, we have federal income-tax rates that are lower than most of our competitors, and are not unusual in terms of their degree of progressivity (although they are much less progressive than they used to be). But those facts are misleading. Payroll taxes for Social Security and Medicare are levied at a flat rate, but only up to $106,800, making them regressive (e.g., you pay a higher proportion of your income in payroll taxes if you make $40,000 per year than if you make $240,000). State and local sales taxes are nominally flat, in that everyone pays the same amount per dollar spent, but since poorer people spend a higher proportion of their income, they too are regressive. Property taxes may have some correlation to income (richer people tend to own more valuable homes), but they are far from a perfect proxy for it.

The total result is that different strata of society pay roughly the same share of total taxes as they take home in income. And then you must consider that even the federal income-tax code is riddled with loopholes that favor the wealthy: charitable donations are tax deductible, as are mortgage interest payments, but housing rental payments are not. Capital gains—unearned gains in wealth, like a profit from a stock transaction—are taxed at a lower rate than income. This situation generally benefits the wealthy more than the poor, and it does a lot of good for hedge-fund managers but no apparent good for the rest of society.

When all of these factors are accounted for, our effective total tax rate is essentially fl, making us the least progressive taxer in the industrialized world.

As Jon Stewart capably demonstrated, Fox News's claims about all those janitors unfairly living large on their Earned Income Tax Credit are inaccurate. But Fox and its friends are, probably unwittingly, onto something. As Matthew Yglesias is fond of pointing out, European tax codes, what with their large Valued Added Tax (essentially a national sales tax), are hardly as progressive as liberal Americans imagine. But overall tax rates in Europe are much higher. Yes, that means they take from the poor as well as the rich, but the programs that they are funding with those revenues are generally progressive: high-quality, free public education and university, publicly funded health care, efficient mass transit, support for the arts, and so on. Yglesias argues that liberals would do better to focus on increasing the overall tax base rather than refusing to raise taxes on anyone making less than $250,000 per year, since the end result would be a more egalitarian society after you account for the effects of all government intervention.

So if conservatives mean what they say about how the bottom 47 percent should be paying more in taxes, I think liberals would be smart to offer them the following deficit-reducing compromise: raise taxes on everyone—more on the rich than the poor, but broaden the tax base. Why do I suspect that this isn't going to happen? Ah yes, because Obama ran on a pledge to extend the Bush tax cuts for everyone making less than $250,000, and Republicans are demanding that they extend them even for people making more than that. Forget it, Jake, it's Washington.