News To Obama: The OECD Says The United States Has The Most Progressive Tax System!

October 29, 2008

News To Obama: The OECD Says The United States Has The Most Progressive Tax System

by Scott A. Hodge

Barack Obama's admission that his policies would "spread the wealth around" has ignited a nationwide discussion of how progressive the tax system should be and how it should be used to redistribute income among Americans. Obama has been very successful in bolstering the conventional wisdom that the U.S. tax system does not place a significant enough burden on wealthier households and places too much of a burden on the "middle class."

But a new study on inequality by researchers at the Organization for Economic Cooperation and Development (OECD) in Paris reveals that when it comes to household taxes (income taxes and employee social security contributions) the U.S. "has the most progressive tax system and collects the largest share of taxes from the richest 10% of the population." As Column 1 in the table below shows, the U.S. tax system is far more progressive—meaning pro-poor—than similar systems in countries most Americans identify with high taxes, such as France and Sweden.

Even after accounting for the fact that the top 10 percent of households in the U.S. have one of the highest shares of market income among OECD nations, our tax system is second only to Ireland in terms of its progressivity for households.

The table also shows that the U.S. collects more household tax revenue from the top 10 percent of households than any other country and extracts the most from that income group relative to their share of the nation's income.

Of course, these measures do not include the litany of other taxes households pay in each country, such as Value Added Taxes, corporate income taxes and excise taxes, but they do give a good indication that our system places a heavier tax burden on high-income households than other industrialized countries.

The study also shows that while most countries rely more on cash transfers than taxes to redistribute income, the U.S. stands out as "achieving greater redistribution through the tax system than through cash transfers."[1]

Overall, the study finds that income transfer systems (social insurance, welfare) are "significantly more efficient than tax systems at reducing inequality, as well as more effective..."

Obama has started an important debate for America, but it is too bad he did so with less than one week before the presidential election.

Table 4.5. Alternative measures of progressivity of taxes in selected OECD countries, mid-2000s

See CHARTS

Source: Computations based on OECD income distribution questionnaire.
http://dx.doi.org/10.1787/422013187855