Critics of proposals to make the tax system more progressive or to take other steps to help lessen widening income inequality[2] sometimes cite a 2008 Organisation for Economic Co-Operation and Development (OECD) report stating that the United States has the most progressive tax system among developed countries. Consider an income tax system that levies a tax of $1 on the highest-income individual and nothing on anyone else. http://washingtonexaminer.com/u.s.-already-has-a-steeply-progressive-tax... http://taxfoundation.org/blog/news-obama-oecd-says-united-states-has-most-progressive-tax-system, http://www.oecd.org/els/soc/growingunequalincomedistributionandpovertyinoecdcountries.htm, http://umdcipe.org/conferences/oecdumd/conf_papers/Papers/The%2520OECD%2520Approach%2520to%2520Measuring%2520Income%2520Distribution%2520and%2520Poverty.pdf, http://www.offthechartsblog.org/gini-index-from-census-confirms-rising-inequality-over-four-decades/. Some progressive tax changes have taken effect in the United States in the past few years, particularly the rise in the top marginal income tax rate under the American Taxpayer Relief Act (ATRA) and the taxes under the Affordable Care Act (ACA). The bars represent the relative contribution of the top income earners in those 24 countries from the middle of the last decade. In 2010, taxes and cash transfers did less to reduce inequality in the United States than in any other OECD country examined except Korea, Chile (which didn’t join the OECD until 2010), and Switzerland (which didn’t start producing the relevant data until 2009). [11] U.S. transfer payments were also below the OECD average for progressivity. [10], Second, any fair evaluation of the degree to which public policies reduce inequality must take into account government transfers as well as taxes. But to cite the report’s finding on the progressivity of the U.S. tax system while ignoring its other findings amounts to cherry picking and distorts the report’s overall findings. The answer is that tax progressivity by itself gives an incomplete picture of how much taxes and cash transfers reduce inequality. This week, Mercatus Center Senior Research Fellow Veronique de Rugy shows that the United States has the most progressive income tax system among industrialized nations. ), The 2008 OECD report found that U.S. tax system was the most progressive among the OECD countries studied. The Gini measure is most sensitive to changes in incomes in the middle of the income distribution, while some other measures give more information about inequality at other parts of the income distribution (for example, by comparing changes in incomes at the 20th and 80th percentiles). This finding mostly reflects the structure of the U.S. tax system — for instance, its graduated rates and refundable tax credits for low- and moderate-income people. Another important limitation of the OECD report is its age; while commentators still cite it regularly, it was published in 2008 and used data from the mid-2000s. In addition, when examining data on inequality, it should be noted that different inequality measures can be informative about different things. The report also shows that the United States does less to reduce income inequality than every other OECD country examined except Korea, when one considers both various taxes and cash transfer programs such as Social Security, unemployment insurance, and means-tested assistance programs. The 2008 OECD report shows that in the mid-2000s, income taxes and employee payroll taxes made up 25.6 percent of household disposable income in the United States, less than the average of 28.3 percent for the 25 OECD countries examined (and 29.3 percent for the 24 OECD countries excluding the United States). First, even if a tax system is highly progressive, it will do less to reduce inequality if it raises only a relatively modest amount of revenue. In 2010, it had the tenth-highest level of inequality before taxes and transfers (see Figure 2), but the fourth-highest level of inequality after taxes and transfers are considered (see Figure 3). The OECD report primarily uses the Gini coefficient to measure income inequality, and measures similar to the Gini coefficient to measure the progressivity of tax and transfer systems. (See Figure 1.). (See Figure 1. The OECD forecasts that total government receipts in 2014 will be smaller as a share of gross domestic product (GDP) in the United States than in all other OECD countries (see Figure 4). ©2015 Center on Budget and Policy Priorities. Local Phone: (703) 993-4930 - [13] OECD, Figure 4.6. [2] See, for example, Veronique de Rugy, “U.S. Taking these policies into account, income inequality falls in all OECD countries, which shows that all OECD countries have a tax and cash transfer system that is progressive overall. With the OECD average at 31.6 percent of total tax share from top earners, the U.S. income tax is roughly as progressive as income taxes in Italy, Ireland, Canada, Australia, the Netherlands, and New Zealand. [3] Organisation for Economic Cooperation and Development (OECD), Growing Unequal? The 2008 OECD report shows that in the mid-2000s, the United States did less to reduce inequality than any other OECD country except Korea. This finding mostly reflects the structure of the U.S. tax system — for instance, its graduated rates and refundable tax credits for low- and moderate-income people. What Do OECD Data Really Show About U.S. Taxes and... Lone Group Taxed Into Poverty Should Receive a Larger... A State-by-State Look at the EITC and Child Tax Credit. The OECD’s main measure of progressivity, the “concentration coefficient,”[9] would rate this as the most progressive tax system possible. Each week, we will send you the latest in publications, media, and events featuring Mercatus research and scholars. [14] But it also showed that the United States was the most unequal (by the Gini measure) of the 19 countries for which the OECD had this data regardless of whether the non-cash transfers were taken into account. Follow everything happening at the Mercatus Center from week to week by subscribing to This Week at Mercatus. The 2008 OECD report is careful to note gaps in the data (primarily caused by lack of comparable data between countries) and explains how its methods of analysis affect its results. Fax: (703) 993-4935 - Follow everything happening at the Mercatus Center from week to week by subscribing to This Week at Mercatus. 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." Figure 2 presents this information using the OECD data from 2010, the most recent available. For example, the OECD data do not include the following: It is unclear how including all of these factors would alter the analysis. These data have not been updated for 2010. But it also reflects this country’s high level of income inequality before taxes. Income Distribution and Poverty in OECD Countries, 2008, http://www.oecd.org/els/soc/growingunequalincomedistributionandpovertyinoecdcountries.htm. It also omits some in-kind transfers, such as for health care and education. It is important to note that the OECD analysis omits some taxes and transfers due to data limitations (see Appendix). [5] Similarly, the 2008 OECD report, using data from the mid-2000s, showed that the United States ranked 20th of 30 OECD members in income equality before considering various taxes and transfers but fell to 27thafter considering them. OECD, Table 4.3. [7] The 2008 OECD report also presented an alternative measure of the effectiveness of tax and transfer systems in reducing inequality (OECD, Figure 4.4). Also see Katy O’Donnell, “For Poverty, Tax Code Debate Offers Little Consensus,” CQ Roll Call, Jan. 8, 2014. There are two main reasons for the United States’ comparatively poor performance in reducing inequality: As a result, the latest OECD data show that while the United States has the tenth-highest level of income inequality of the 31 OECD countries examined before considering taxes and transfers, it has the fourth-highest level of inequality after considering them.[5]. It is unclear how including all of the missing pieces would affect the findings. As Figure 1 above shows, in 2010, U.S. taxes and cash transfers did less to reduce inequality than all countries for which data are available except Korea, Chile, and Switzerland. Such adjustments push up the SNA’s measure of both spending and receipts in the United States by roughly 4 percent of GDP compared with the measure tallied by the U.S. Bureau of Economic Analysis. Why does the U.S. tax and cash transfer system do relatively little to reduce inequality in household cash incomes, despite the progressivity of the U.S. tax system? As the OECD report notes, if two countries have identical tax schedules that include graduated marginal rates, the tax system will have a more progressive impact in the country with higher pre-tax inequality, because a larger share of that country’s income will be taxed at the top rates.[8]. [1] Former CBPP Research Associate Krista Ruffini contributed initial research to this report. These data have not been updated for 2010. A value of zero means that all income groups receive an equal share of household transfers or pay an equal share of taxes. [9] The concentration coefficient is similar in concept to the Gini measure of market income inequality. This means that the taxes and cash transfers the OECD studied do less to reduce inequality in the United States than taxes and transfers do in almost all of the other OECD countries examined. The richest 10 percent of households in the United States (those making $112,124 or more) contribute a greater share of taxes (45.1 percent of all income taxes) than their counterparts in any other industrialized nation. But it would do virtually nothing to reduce inequality. OECD data (from the 2008 report, as well as the more recent data from 2010) show that before taxes and cash transfers, the United States has higher inequality in household cash incomes than the OECD average, as measured by the Gini coefficient. Policy Brief: Failed Reopenings Highlight Urgent Need... Failed Reopenings Highlight Urgent Need to Build on... ACA Repeal Lawsuit Would Cut Taxes for Top 0.1 Percent... U.S. state and local sales taxes, federal and state excise taxes, or national consumption taxes (which are common in OECD countries); households’ non-cash income, such as unrealized capital gains; households’ share of undistributed corporate earnings, or corporate income taxes paid on their shares of corporate income; and. Most importantly, the SNA counts the charges that users pay for many public services, like state-university tuition and public-hospital fees, as government receipts.
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