- For many years, left-wing intellectuals have exalted Western Europe as the paragon of redistributive equity.
- The fiscal cliff agreement resulted in a tax system more progressive than the systems of most European nations.
- From now on, the European Left should point to the US as a redistributive paradise writes @AEIecon’s Kevin Hassett.
This article appears in the January 28, 2013 issue of National Review.
For many years, left-wing intellectuals have exalted Western Europe as the paragon of redistributive equity, contrasting it with the trickle-down nightmare that is America. But on tax policy, at least, that characterization is flat-out wrong, especially after the latest round of tax increases.
President George W. Bush cut taxes for everyone. The “fiscal cliff” dispute was not over most of those tax cuts, but just the ones for the “rich.” After the dust settled on the deal, we were left with a permanent extension of Bush’s tax rates for lower brackets and a large increase in the marginal tax rate on incomes above $400,000 for individuals and $450,000 for married couples filing together. The top rate climbs to 40.8 percent once the phasing out of deductions and exemptions is accounted for.
This agreement locked in big tax cuts for low- and middle-income Americans and a much higher rate for those with high incomes. The resulting tax system, then, is more progressive than the system Bush inherited from President Clinton. As the nearby chart shows, it is also more progressive than the systems of most European nations.
The chart compares our tax structure with those of countries in Western Europe (plus Canada). It provides a snapshot of the relative progressivity of the tax systems by plotting the ratio of the top marginal income-tax rate in each country in 2011 to the rates that applied to incomes of $30,000 and $80,000 that same year. The higher the ratio, the more progressive the system. $30,000 was the average income of the second income quintile in 2011, and $80,000 was the average income of the fourth quintile that year, so these two income levels roughly represent a typical lowerclass family and a typical family from the upper middle class. The U.S. ratios for both 2011 and 2013—before and after the recent deal—are shown.
Before the recent hikes, the top bracket in the U.S. faced a marginal income-tax rate (35 percent) more than two times as high as that of someone making $30,000 (15 percent). Someone making $80,000 paid taxes at a 25 percent marginal rate, so the ratio there was a bit greater than 1.
This year, the highest earners will face a marginal tax rate of 40.8 percent—almost three times as high as that of a worker making $30,000. As of 2011, only four countries had a more progressive federal income-tax schedule by this measure: Finland, Germany, France, and the Netherlands.
Interestingly, the U.S. was comparatively progressive even before the tax increases. One reason is that the massive welfare states finance themselves by taxing everyone. In Belgium and Austria, for example, workers making $30,000 pay a marginal tax rate of more than 40 percent to the central government. An equivalent U.S. worker pays a 15 percent marginal tax rate.
European nations also finance themselves with huge value-added taxes (VATs), which this chart does not include. Since VATs are regressive, adding them to the analysis would only make the U.S. look more progressive.
This is not the only way in which the U.S. tax system looks progressive in comparison with its European counterparts. An OECD study in 2008 found that the wealthiest 10 percent of Americans paid 45.1 percent of taxes (including direct taxes, such as income and payroll taxes, national and local, but excluding sales and other indirect taxes), compared with the OECD average of 31.6 percent; and wealthy Americans paid more than the wealthy in any other OECD country even if one takes into account their share of total national income.
In other words, from now on, the European Left should point to the United States as a redistributive paradise.
-Kevin Hassett is the John G, Searle Senior Fellow and Director of Economic Policy studies at AEI