One of President Donald Trump’s critical action items is a “massive” tax reduction, especially for upper-income taxpayers. Understanding the workings of the current tax system will help progressives evaluate his proposals.
Taxes and Inequality. The American federal tax system is actually fairly progressive in the sense that, compared with most advanced countries, the rich pay more taxes per dollar of income than the poor. Conservatives love to point out that fact, of course, but they obscure the nature of federal taxing and spending practices. In the first place. American taxes of all kinds—federal, state, and local—are among the lowest of advanced countries. As of 2015, the Organization for Economic Cooperation and Development (OECD), calculated that the total American tax bite, measured as a percentage of GDP, was 26.4 percent, the thirty-second lowest of the thirty-six countries in the OECD, above only Ireland, Chile, South Korea, and Mexico. The average tax burden in the organization’s member states was 34.3 percent, and the top, in Denmark, was 46.6 percent.
The progressivity in most European financial systems is to be found in their spending patterns, not the incidence of tax levies. Sweden and Denmark, two of the highest-tax countries, have a fairly flat tax rate that runs from about 30 percent to 60 percent for the top brackets. That’s acceptable, however, because government spending is primarily directed at improving the quality of life for the whole population—schools, excellent health care, readily available child care, generous leave provisions, and well-maintained public infrastructure.
The contrast with the United States is stark. Military spending consumes far more of the budget than in any other advanced country. After Social Security, Medicare, and Medicaid, there is little left for public infrastructure and social spending. U.S. infrastructure investment is at a rate only about half that in Europe, and no other rich country has so mean an attitude toward its low-income citizens. Our government’s cash transfers to the poor, besides their notable stinginess, actually reduce the progressivity of the system. The United States had the tenth-highest income inequality of the OECD countries before taxes and cash transfers, but was the fourth most unequal after taxes and transfers. Those data were compiled before the full rollout of the Affordable Care Act, which would have ameliorated the skew in transfers, but those subsidies are clearly in danger under the Republicans.