U.S. already has a steeply progressive tax system | M ...

On Tuesday, the Congressional Budget Office announced that the United States will face yet another $1 trillion deficit this year and is likely to be drowning in debt for the foreseeable future.

This news is likely to revive the call by President Obama and many Occupy Wall Street protesters for an increase in taxes on the top 1 percent of income earners.

They claim that high earners aren't paying their fair share of taxes and that increasing the progressivity of the federal tax system would solve our fiscal problem and achieve broader prosperity for all.

Yet making the U.S. tax system more progressive won't solve any of these problems. First, our financial troubles are so big that simply increasing taxes on the top income earners won't get us anywhere close to balancing our budget. And that's leaving aside the effect on economic growth of raising marginal rates significantly on the top 1 percent.

Contrary to common belief, the United States already has a more progressive tax system than do the most industrialized democracies worldwide. The nearby chart uses data from a recent report by the Organization for Economic Cooperation and Development on the share of taxes (both personal income and payroll taxes combined) paid by the richest 10 percent of households in 24 industrialized countries. The bars represent the share of the total taxes collected that are paid by top earners in these 24 countries.

The richest 10 percent of U.S. households (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.

Meanwhile, the average tax burden for the top 10 percent of households in OECD countries is 31.6 percent of the revenue collected, well below the percentage in America.

Interestingly, in France, a notorious welfare-state government, only 28 percent of revenue comes from the top 10 percent of income earners. As for the top 1 percent of Americans, their share of federal taxes paid is roughly 30 percent.

In part, this finding reflects the greater role played in the U.S. tax system by refundable tax credits, such as the Earned Income Tax Credit and the Child Tax Credit, and it also reflects the higher earnings of the wealthiest here.

This data shows that focusing on a perceived lack of progressivity in the federal tax system in the United States is not only the wrong target; it will also fail to address the president's and OWS's demands.

For instance, progressive public finance experts like Peter Lindert have shown that most European tax regimes are able to collect more revenue than ours (as a share of gross domestic product, not in total) by having a more regressive -- not progressive -- tax system.

In other words, European Union governments understand that in order to feed their welfare states, governments must collect taxes from all citizens, including those at the bottom of the income ladder.

So the U.S. tax system is more progressive and collects less tax revenue as a share of GDP. But there is something else that should give pause to OWS sympathizers and progressives in Congress.

Government spending here is significantly less progressive than it is in Europe. According to the OECD, European countries devote a significant share of their budget to progressive social transfers.

In the United States, on the other hand, only 14 percent of the budget goes to lower-income Americans. That's because much of the budget is spent on the middle class and better-off members of our society -- among other things in the form of Social Security and Medicare payments.

The tax code shouldn't be used to maximize tax revenue for revenue's sake. Instead it should be used to collect the amount of money that the government needs to pay for essential public services, while creating the least possible amount of economic distortion.

The great news is we could reduce inequality and address our debt problems, while improving the efficiency of our tax system by shifting government spending away from those who should be taking care of themselves and toward low-income earners and the poorest in society.

Making the tax code more progressive, on the other hand, would achieve neither of these goals.

Examiner contributor Veronique de Rugy is a senior research fellow of the Mercatus Center at George Mason University.

Source: http://m.washingtonexaminer.com/2089105/?utm_source=rss&utm_medium=rss&utm_campaign=u-s-already-has-a-steeply-progressive-tax-system

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