NCPA - National Center for Policy Analysis

Taxation, American Style

May 8, 2012

Contrary to common belief, the American tax system is more progressive than those of most industrialized democracies.  A 2008 report by the Organization for Economic Cooperation and Development (OECD) found that the United States has either the most or second-most progressive tax structure of the 24 countries included in the study, says Veronique de Rugy, a senior research fellow at the Mercatus Center at George Mason University.

This undermines common conceptions about the American government structure.  After all, U.S. government spending as a percent of gross domestic product (GDP) is about 16 percent smaller than the average for the European Union.  However, this says little about the source of that government revenue, which in the United States is disproportionately provided by the wealthy.

  • The top marginal income tax rate in the United States kicks in at $379,000, while the top rate in France starts at $96,000.
  • America's relatively heavy reliance on this highly progressive income tax lends to its overall characterization as a progressively taxing government.
  • Most other OECD countries, on the other hand, impose substantial regressive consumption taxes like retail sales taxes, gasoline taxes and tobacco taxes that hit all income brackets.

It is not simply the income tax structure that establishes the progressivity of America's tax structure: its treatment of tax breaks allows it to dole out special treatment for low-income earners, furthering its reliance on high-income individuals for revenue.

  • The child tax credit and the earned income tax credit, as a percentage of income, disproportionately aid low-income taxpayers.
  • Data show that the United States offers more tax breaks for social purposes as a share of GDP than any other country (almost 2 percent as opposed to the 0.5 percent OECD average).
  • Aggregately, net social welfare outlays in the United States consumed 27.5 percent of GDP in 2007 -- above the OECD average of 23.3 percent.

Much of this information is not captured by standard budgetary metrics (such as looking at the government's budget as a share of GDP) because it is revenue that the government doesn't actually take in.  Nonetheless, the fact that low-income individuals pay very little into these programs but benefit significantly from them is the root of American progressivity.

Source: Veronique de Rugy, "Taxation, American Style," Reason Magazine, May 2012.

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