No Country Leans on Upper-Income Households as Much as U.S.

During my recent testimony before the Senate Budget Committee (found here), I cited an OECD statistic that the U.S. has the most progressive income tax system among industrialized nations.[1] This prompted one Senator to point out that if the richest 10% of taxpayers earn the most of any OECD country, shouldn't it make sense that they bear the largest tax burden of any country?

The answer can be found in the OECD table below. This table shows the share of taxes paid by the richest 10 percent of households, the share of all market income earned by that group, and the ratio of what that 10 percent of households pays in taxes versus what they earn as a share of the nation's income.

The first column shows that the top 10 percent of households in the U.S. pays 45.1 percent of all income taxes (both personal income and payroll taxes combined) in the country. Italy is the only other country in which the top 10 percent of households pays more than 40 percent of the income tax burden (42.2%). Meanwhile, the average tax burden for the top decile of households in OECD countries is 31.6 percent.

By contrast, column #2 shows that the richest decile in America earned 33.5 percent of the market income in the country in 2005 - the year in which this snapshot was taken, but little has changed since then. But, a few other countries do have a greater or similar concentration of income as does the U.S. For example, the OECD table shows that the wealthiest decile of households in Italy and Poland earn a greater share of their country's market income than do our "rich" - 35.8 percent and 33.9 percent respectively - while the share of income earned by the top decile of households in the U.K. is about on par with those in the U.S. at 32.3 percent.

The table then adjusts for the underlying allocation of income by showing the ratio of income taxes paid to the share of income earned by the top decile in each country. The ratio for U.S. households is 1.35, far greater than the ratio of taxes to income in any other country. Even in the three countries with a comparable distribution of income, the ratio of taxes to income was less, 1.18 in Italy, 0.84 in Poland, and 1.20 in the U.K.

Interestingly, countries with top personal income tax rates that are higher than in the U.S., such as Germany, France, or Sweden, have ratios that are closer to 1 to 1. Meaning, the share of the tax burden paid by the richest decile in those countries is roughly equal to their share of the nation's income. By contrast, we prefer to have the wealthiest households in this country pay a share of the tax burden that is one-third greater than their share of the nation's income.

Table 4.5. Alternative measures of progressivity of taxes in selected OECD countries, mid-2000s

	B. Percentage share of richest decile
	1. Share of taxes of richest decile	2. Share of market income of richest decile	3. Ratio of shares for richest decile (1/2)
Australia	36.8	28.6	1.29
Austria	28.5	26.1	1.10
Belgium	25.4	27.1	0.94
Canada	35.8	29.3	1.22
Czech Republic	34.3	29.4	1.17
Denmark	26.2	25.7	1.02
Finland	32.3	26.9	1.20
France	28.0	25.5	1.10
Germany	31.2	29.2	1.07
Iceland	21.6	24.0	0.90
Ireland	39.1	30.9	1.26
Italy	42.2	35.8	1.18
Japan	28.5	28.1	1.01
Korea	27.4	23.4	1.17
Luxembourg	30.3	26.4	1.15
Netherlands	35.2	27.5	1.28
New Zealand	35.9	30.3	1.19
Norway	27.4	28.9	0.95
Poland	28.3	33.9	0.84
Slovak Republic	32.0	28.0	1.14
Sweden	26.7	26.6	1.00
Switzerland	20.9	23.5	0.89
United Kingdom	38.6	32.3	1.20
United States	45.1	33.5	1.35

OECD-24	31.6	28.4	1.11

Source: Computations based on OECD income distribution questionnaire.

http://dx.doi.org/10.1787/422013187855