November 13, 2008
Does the United States favor the rich in comparison to other countries, asks the National Review's Kevin Hassett?
We can plot on a chart for the years 1981 through 2007 the ratio of the tax rate faced by the rich to the tax rate faced by a typical blue-collar worker. If a country's tax code is highly progressive, then this ratio will be quite high, as the rich will have tax rates that are much higher than those faced by the poor. In a flat-tax economy, the ratio would be 1.0, since everyone would face the same tax rate.
How does the United States do?
- We have a top statutory income-tax rate of 35 percent; the Social Security tax does not raise this rate, as it goes to zero for incomes above $102,000, but the Medicare tax of 1.45 percent on employers and employees does raise it, making the top rate on labor income in the United States about 38 percent.
- In 2007, a person who earned half of the average income (as measured in gross domestic product per capita) earned about $23,000 and faced a federal income-tax rate of 15 percent; this person also, however, faced Social Security taxes and Medicare taxes.
- Accounting for these, the income received by the lower-wage worker faced a combined tax rate of about 30 percent, and the ratio of the top rate to this one was about 1.3.
When one performs such a calculation for a typical European country, one finds a lot more flatness in the tax code, says Hassett. This occurs for a simple reason: While income taxes tend to be quite progressive, payroll and sales (or value-added) taxes are paid by just about everyone, and large governments around the world have to rely on all of these tools to raise the revenue they need to spend more than 40 percent of GDP.
What does it all mean? We redistribute far more than does the typical developed country, explains Hassett.
The United States redistributed more than its major trading partners when Ronald Reagan took office and the top marginal tax rate was 70 percent. Reagan then drastically reduced that top rate, but the progress was reversed first by George H. W. Bush and then by Bill Clinton. Ever since the early 1990s, we have been one of the more redistributive countries in the OECD.
The notion that U.S. tax policy is out of whack with the practices of our main trading partners is absolutely correct: We redistribute more than they do, even with rates where they are, says Hassett.
Source: Kevin A. Hassett, " Re: Distribution," National Review, November 17, 2008.
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