Adam N. Michel
The United States places an unusually heavy share of the tax burden on higher earners. You wouldn’t know this from hearing some politicians claim that the rich escape next to tax-free or deserve to be taxed at higher rates. In reality, the data show the opposite. The most recent example is a study by the Fraser Institute, which shows the US ranks first out of 33 developed countries as having the most progressive tax system.
Progressive tax systems, where tax rates and tax shares increase with income, are often idealized by big-government redistributionists, but they come with trade-offs. As tax systems become more progressive, they make each additional hour of work or investment less rewarding, weakening incentives to work longer hours, take entrepreneurial risks, start new ventures, or invest in continuing education. Over time, these effects compound, slowing economic progress and material well-being for everyone. Highly progressive tax systems are also more volatile revenue sources, unfairly treat similar citizens in vastly different ways, encourage avoidance and evasion, and increase administrative complexity.
The Fraser Institute authors construct an index of five measures of a tax system’s progressivity, capturing differences between the top and bottom income tax rates, the top bracket threshold and personal exemptions as a share of the average wage, the income tax share of total revenue, and the consumption tax share of total revenue. The final index, summarized in Figure 1, ranks countries from 0 to 10, with 10 being the most progressive tax system.
The index separates out subnational governments with significant taxing authority and evaluates combined national and subnational tax systems. On this measure, California tops the chart, pairing the top US federal income tax rate (37 percent) with the highest state income tax rate in the country (13.3 percent) and ranking highly on the other measures of progressivity. California is followed by Newfoundland and Labrador, the most progressive Canadian province, with a top provincial tax rate of 21.8 percent, combined with Canada’s federal income tax of 33 percent. The combined top rate is higher than California’s, but the rest of the Canadian tax structure is less progressive, giving California the top spot.
Texas comes in fourth, serving as the US benchmark for the least progressive state tax system, since it levies no state income tax and thus reflects only the federal income tax. All other US states fall between California and the seven no-income-tax states, like Texas, on the progressivity scale. At the bottom of the index are Hungary and Estonia, both of which operate flat national income tax systems.
Taking a simple average of the highest- and lowest-progressivity states or provinces, the United States as a whole outranks every other country in the dataset, giving it the most progressive tax system.
The structure of the US tax code plays a central role in the rankings. The federal income tax is highly progressive, with a relatively low marginal rate of 10 percent for lower-income filers and a top rate of 37 percent for higher incomes. Combined with the absence of a broad-based national consumption tax (like a value-added tax), the result is a highly concentrated tax burden on the highest-income Americans.
This is not a novel result. Research by the World Inequality Lab concludes that “the US stands out as the country with the highest level of tax progressivity: the top decile faces a tax rate that is more than 70 percent higher than that of the poorest half of the population.” And recent research from Emmanuel Saez, Gabriel Zucman, and co-authors finds that US billionaires pay higher tax rates than their counterparts in the Netherlands, Sweden, Norway, and France. (I reviewed their study here.)
The United States is unique among developed nations in relying on such a narrow portion of taxpayers to finance such a large share of government revenue. We can sustain this structure largely because overall US tax levels are relatively low. Taxes as a share of GDP in the US are almost ten percentage points lower than the European average. Historically, low taxes have benefited American workers and businesses. However, if federal spending remains on its projected path, the size of the American government will match average European levels, necessitating a European level and mix of taxation.
We would be better off cutting spending to keep taxes low. But the lesson from the rest of the world is that high spending requires less progressive tax systems and high taxes on the poor and the middle class, not just the rich.