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.

Do high marginal taxes actually bring in more revenue?

Veronique de Rugy (via Insty) has a graph that says more than a thousand words. Below are plotted two variables as a function of time: the highest marginal tax rate in the USA, and the percentage of aggregate taxpayer income that is raised as actual tax revenue. Surprise, surprise… even when the top marginal tax bracket exceeded 90%, the Federal gov’t did not manage to capture more than about 20% of aggregate taxpayer income as revenue.

US marginal tax, and tax revenue as a percentage of aggregate income, over the years

So ideas about solving the deficit by “soaking the rich” may make wealth distributionists feel good, but will not materially solve anything. They aremere exercises in intellectual self-gratification — which some would argue is the true essence of left-liberalism.

The interesting part for me isn’t that “soaking the rich” just won’t work (this doesn’t surprise me) but how the aggregate tax revenue exhibits, all things considered, such low sensitivity to wild variations in the highest marginal bracket.