WOW: no country effectively “soaks the rich” more than… the USA?!

Tax law professor Paul Caron has some eye-opening data on his blog.

You see, high marginal personal income tax rates are one thing: but “soaking the rich” in this manner, regardless of whether or not this is moral, is a mere exercise in intellectual self-gratification unless it actually brings in more revenue. As a rule, “the rich” have much more access to (legal) tax evasion/tax exposure minimization tools and techniques than the average citizen — quite aside from the fact that an overtaxed rich person may simply decide to voluntarily reduce his income and enjoy more leisure time (“going Galt”).

A more objective measure for how much any given country “soaks the rich” or “leans on the rich” would be how great the share they contribute to total tax revenue is relative to their share of total earnings. The study quoted by Dr. Caron considers the top decile (to 10% earners), across the OECD. (Israel is not on the list as it was only just admitted to the OECD.)

On average, across the OECD, the top decile (top 10% earners) bring in 28.4% of all income, and contribute 31.6% of all tax revenue. 31.6/28.4 yields what I might call a “revenue contribution coefficient” (RCC) of 1.11, where values below 1.0 would represent a windfall to the “rich”, values above 1.0 would represent “leaning” on them, and 1.0 would be neutral.

Now admittedly, in the USA, the top decile earns 35.1% of all income (considerably higher than the OECD average), but they also contribute… 45.1% of all tax revenue. This leads to an RCC of 45.1/35.1=1.35, the very highest in the OECD. Australia (RCC=1.28) and the Netherlands (RCC=1.25) come 2nd and 3rd in the OECD, respectively, while, surprisingly, famously “high-tax” Belgium, Sweden, and Norway all have RCCs below one!

The real world is rather different from economic fantasyland.

6 thoughts on “WOW: no country effectively “soaks the rich” more than… the USA?!

  1. Your argument is purely emotional. Back in 2001, 10% of the population owned 71% of the wealth in the U.S. That percentage of wealth is even greater now. Therefore, they should pay 71% of the taxes.

    • My argument is “purely emotional”? Best joke I heard all day. Au contraire, it is purely pragmatic, in that EVEN IF YOU BELIEVE THAT IT IS SOCIALLY JUST to, say, tax 10% of the population at confiscatory marginal tax rates (say, 90%), this is just a “feelgood” exercise unless you can actually generate more tax revenue from them that way.

      I have lived in countries with MUCH higher marginal tax rates than the US (does 72% marginal tax sound more to your liking? Or even 50%, plus 12.5% national health insurance tax). Received wisdom has it that such countries are able to “lean” much more on the rich taxpayer. In actual fact, however, the US tax system, with its comparatively low marginal tax rates, manages to extract a substantially greater portion of its revenue from the top 10% earners.

      What these data are really saying is that the US is much closer to the maximum/optimum in the Laffer Curve (taxation revenue as a function of rate) than these other countries.

      Unless of course one’s position is that revenue doesn’t matter, only forced redistribution in the name of “cosmic justice”. The road to Zimbabwe is paved with this idea.

  2. “a tax rate comparable to ours” means what precisely? Highest marginal tax rate? At least as of 2009, Canada (!) actually had a lower marginal income tax rate. Percentage of tax revenue from aggregate income (i.e., effective average taxation rate)? Aggregate tax revenue as a percentage of GDP? For the latter, check out
    South Korea, Switzerland, and Australia, to just name three, are in the same ballpark as the USA. So is Japan, but Japan’s economy has been ailing for some time for a variety of reasons. Note that some countries with MUCH higher marginal rates than the USA actually bring in nearly the same percentage of GDP as tax revenue, which proves my original point. I can tell you from family experience that in Italy, for example, a VERY nontrivial percentage of the economy (by some estimates as much as 1/3) is ‘cash only, off the books, no receipts’. In Belgium too (where effective total taxation could easily reach 67% when I lived there), in many trades it was taken for granted that people did just enough ‘on the books’ work not to make tax assessors too suspicious, and earned the bulk of their income off the books.

    The true difference isn’t between “liberal” and “conservative”. It is between making policy in terms of (an idealized vision of) what human nature ought to be vs. in terms of what it actually is, and has been since Antiquity. It just happens that there is a strong overlap between the “oughters” and the “liberals” in matters of economy and defense, whereas in some matters of personal morality it’s the “conservative” side that easily slips into wishful thinking.

    • You can’t really compare the economies of different countries because they all have different issues to deal with. What you can do is go back 12 years to when we had a balanced budget in America and compare that to what we had after the tax cuts of 2001 and 2003. We were running massive deficits even when there was economic growth. Some of that is due to increases in defense spending. We also established tax policies that encourage the offshoring of jobs, which reduces tax revenues.

      • Well, well. First a challenge to compare with other countries, then when the results aren’t to your liking one cannot really make the comparison. How predictable.

        And this famous balanced budget really had nothing to do with (a) a GOP majority in Congress forcing Clinton to the center economically; (b) the dot-com bubble (the bursting of which was inherited by Bush 43)?

        And of course the Bush tax cuts are also responsible for BHOzo and his Insane Clown PosseTM enlarging the deficit more in a single MONTH than Bush 43 did in a year? Or for a massive Porkulus that was absolutely necessary to keep unemployment from going below 8% (ahem)?

        You see, fiscal conservatives grumbled at Bush’s fiscal profligacy, but he was a choirboy compared to his successor.

        As for offshoring, this is one area where short-sightedness on both sides exacerbated the problem (itself an inevitable consequence of globalization). Not that the types of low-paying jobs that are easily off-shored contribute (in the aggregate) all that much revenue anyhow — but at least people working aren’t a net drain on the public treasury.

        Now with entire CORPORATIONS moving abroad, one can expect a bigger hit in overall revenue — dirty secret: the US is tied with Japan for highest CORPORATE taxation rate worldwide, half again as high as the OECD average.

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