Your taxes are too low

The U.S. tax system is extremely progressive by international standards, but our total tax receipts and our top marginal income-tax rates are too low for that to make much difference.

If you have sufficient leisure in your day job to read this, then you probably paid too little in the federal income tax that came due today.

As the chart above demonstrates (more here), the United States ranks close to the bottom of all advanced industrial democracies in its overall level of taxation, defined quite reasonably as the ratio of taxes to Gross Domestic Product.

Our paltry tax receipts help explain why the U.S. tax system does comparatively little to address income equality even with a tax system that’s more progressive than that of almost any other country in the world. Forty-five percent of U.S. tax revenues come from personal income taxes, as compared to 24 percent among the other members of the Organization for Economic Co-operation and Development. Only 7 OECD countries are more reliant on income taxes. Twelve percent of U.S. tax revenues come from property taxes, as compared to 6 percent among the other OECD countries. Property taxes are a form of wealth tax, and in this limited respect the U.S. confiscates more of its citizens’ wealth than almost any other OECD nation. We don’t have an annoyingly regressive value-added tax, as many OECD countries do, though we’re more reliant than they are on straight-up sales taxes. Except for corporate taxes, which account for only a pitiful 4 percent of U.S. tax revenues compared to 10 percent in the OECD, the U.S. tax system is, structurally, much more left-wing compared to the other OECD nations than most people suppose.

The catch is that we don’t collect enough in taxes for that to make much difference. That’s mainly because our top marginal rates are ridiculously low. According to a 2019 calculation by the Tax Foundation, among advanced world economies Sweden has the highest top effective marginal tax rate (76 percent), defined as the top marginal income-tax rate plus various payroll taxes plus consumption taxes. The U.S. ranks 32nd among 41 countries surveyed, with a top effective marginal tax rate of 47 percent. That puts us just below the Czech Republic and just above Cyprus.

Sweden also has the highest marginal income-tax rate in the OECD. It isn’t as high as you might expect (57.1 percent), but it applies to income at a surprisingly low level (one and a half times the country’s average income, or about $70,000, according to a March 2019 calculation by the Council on Foreign Relations). By contrast, President Joe Biden has pledged not to raise taxes on anyone earning less than $400,000. That ceiling is way too high. (For more on this, see my earlier Backbencher post, “Walter Mondale, Martin Buber, and the 1984 convention.”)

Don’t get me wrong. Rich people in the U.S. need to pay a lot more in taxes. It’s way too easy for them to avoid paying the taxes they owe, and the taxes they owe are paid at a much lower rate than they should be. It’s a myth that the rich had more opportunities to evade taxes when top marginal rates were 70 and even 90 percent. The golden age of tax shelters was not the 1950s and 1960s, but rather the 1980s up to the present day; tax shelters proliferated even as top marginal rates tumbled downward during the Reagan years, as the top capital gains rate started to plummet under President Bill Clinton, and as corporate taxes fell under President Donald Trump.

But the affluent non-rich need to pay more in taxes, too, if the nation is to address income inequality and insufficient access to health care and various other problems that the Democrats are bent on easing. A welfare state can’t be run on the cheap, and that’s what we’re doing right now. We already have an admirably progressive tax system, globally speaking; we just need to adjust it a bit to collect more taxes.