The Washington PostDemocracy Dies in Darkness

Other countries don’t have a “47%”

If you've been reading Wonkblog this week, you'll know it's very tough to cleanly split the American population between "makers" who fund the government and "takers" who reap its benefits. The percentage of people not paying income tax turns out to be among the worst ways of trying to make that distinction.

Indeed, looking at the tax code alone in discussions about progressivity is always somewhat misleading. Everyone knows that Europe's welfare states are much more progressive than the United States', in that they reduce inequality by a much greater percent. Among OECD members, only Iceland, Turkey, South Korea, Chile and Mexico have less progressive overall systems:

But as the Northwestern sociologists Monica Prasad and YingYing Deng have found (pdf via Lucy Barnes), the progressivity of taxes alone in the United States is much higher than that of European tax systems. Indeed, most European tax systems are straight-up regressive. Here's how direct taxes alone (that is, excluding value-added and sales taxes) compare:

The United States has by far the most progressive income, payroll, wealth and property taxes of any developed country. Scandinavian social democracies like Denmark, Sweden and Norway have quite regressive direct taxes, as do the Netherlands and Switzerland. Foreign British territories are more progressive, but neither Australia nor Canada is nearly as progressive as the United States.

The disparity is even starker when you bring sales taxes into the mix, as VATs are an extremely important source of revenue for most European countries as well as Australia and Canada:

Belgium, for example, goes from mildly regressive to extremely regressive once the VAT is taken into account.

What's going on here? Basically, all of the progressivity of our fellow developed nations' welfare states comes on the spending side. They spend a whole lot more on transfer programs, education and health services, and other initiatives that are redistributive in impact. We, by contrast, tax progressively, and then spread the money around in a less progressive fashion.

This isn't an accident. UC Davis's Peter Lindert has argued in his book "Growing Public" that European social democracies were only able to develop the programs they did because they used efficient consumption taxes that didn't lower growth as much as progressive income taxes, particularly those on capital income. European countries needed tax systems that could raise a lot of money without hurting growth, and only regressive consumption taxes fit the bill.

But in addition to troublesome growth effects, taxes on capital income and savings tend to produce taxpayer backlashes. Monica Prasad, who co-produced the above charts, has argued that countries like the United States with progressive tax codes saw a strong conservative reaction against high taxes and welfare policies, with the net effect being that the redistributive agenda lost ground. In any case, Prasad and Deng found that when the progressivity of countries' tax codes is negatively correlated with the amount of redistribution they do. In English: The less progressive the code, the more progressive the system.

It's usually conservatives like Mitt Romney you hear bemoaning the 47 percent who don't pay income taxes. But liberals who admire Europe should bemoan that number too.

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