Oh dear Professor Delong, oh dear

No, I\’m sorry, this does not work.

Could she possibly be right? Is the U.S. tax system unusually progressive?

That is an interesting question. And this is the wrong way to answer it:

Looks to me like only 6 OECD countries have less progressive systems, and 21 OECD countries have more progressive systems…

Because the question is about the tax system. The answer is about the tax and benefits system.

The US federal tax system is indeed more progressive than the tax system of many, if not most, other OECD countries. Quite simply because the federal tax system includes very little in the way of consumption taxes (such as a VAT, a regressive tax) and concentrates almost entirely (things like the small gas tax aside) upon incomes.

Adding in the State and local tax systems makes, well, actually, it\’s difficult to tell precisely, because there are income taxes in some places, not in others, but probably makes the system less progressive because that\’s where almost all of the consumption taxes are.

But that tax system is still more progressive than in nearly all other OECD countries.

The entire tax and benefit system, on the other hand, is markedly less progressive in the US than it is in most other OECD countries. For the really quite simple reason that the US system as a whole redistributes much less income than those other countries. Govt as a whole in the US is 30% ish (very rough figure) of the economy, in other places it\’s 40-50% of it. And that difference isn\’t really in the goods and services that government provides. Similar amounts as a portion of GDP are spent on free at the point of consumption education, health care (yes, really, US government health care spending is of a similar order as total health care spending in many other places) and more on the military and possibly the criminal justice system.

The difference is the amount of the national income which is redistributed from rich to poor through the benefits system.

Other places have more progressive systems as a whole because they tax more and redistribute more: not because the tax system itself is more progressive.

Indeed, there\’s a school of thought that insists that in order to be able to have that greater redistribution, that more progressive system as a whole, it is necessary to have a less progressive tax system. For the only way you can raise enough cash, without entirely killing growth, to do the redistributing is by taxing consumption. Which is normally regressive.

3 comments on “Oh dear Professor Delong, oh dear

  1. Never gonna stop pointing out that VAT is not a consumption tax. It’s a production tax. It falls equally on consumption of income and saving of income. The only thing it exempts is leisure.

    As for progressivity vs. regressivity, with linear labour supply curves the tax is progressive because rich people produce more. With hyperbolic labour supply curves it seems to be a bit more ambiguous: people with the same market wage who are richer because their reservation wage is higher pay more tax because the market wage intersects their labour supply curve at a more elastic section. But the opposite is true with a fixed reservation wage and a higher market wage for the rich; they pay less tax because their market wage intersects a less elastic portion of the labour supply curve.

    The cost of a tax is measured in terms of utility, of course. The most destructive tax raises no revenue because it cancels all mutually beneficial trades.

  2. It’s a production tax.

    Yet, no matter how much I produce, HMRC don’t come demanding the VAT until I’ve sold it. If I stockpile …

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