US Already Has Most ‘Progressive’ Tax System in Industrialized World

Commentary

After a surge in calls for economic justice, several major U.S. cities have proposed increasing personal income tax rates on high earners. These efforts are part of a broader push to make tax systems more “progressive”—that is, to shift more of the tax burden onto wealthier individuals. Although these proposals are often framed as necessary steps toward fairness, they raise a crucial question: How progressive is the U.S. tax system compared to the systems of other industrialized nations?

Tax progressivity is the degree to which the tax system imposes a higher tax burden on people as they earn more income, thereby affecting how the tax burden is distributed across people with different incomes. Governments can design their tax systems to be more or less progressive. For instance, federal personal income taxes increase progressivity by imposing increasingly higher tax rates as you earn more income, while exempting some initial amount of income from income taxes altogether. This design shifts more of the tax burden onto higher-income earners and away from lower-income earners.

State governments also play a role. Some states (including New York and California) layer on their own state-level income taxes (which increase progressivity), while others (including Texas and Florida) forgo state income taxes altogether. Moreover, many states collect sales taxes that lower tax progressivity by imposing a relatively higher burden on middle- and low-income earners.

Given the popular belief across the country that taxes should be even more progressive (for example, higher for high-income earners), Americans should ask: How progressive is the United States compared to other countries?

According to a new study published by the Fraser Institute, California—which imposes the highest top combined federal/state personal income tax rate in the country—is the most progressive jurisdiction out of 45 high-income jurisdictions in the Organisation for Economic Co-operation and Development, while Texas (which represents states that impose no state-level income tax) ranked as the fifth-most progressive. Put simply, the United States maintains the most progressive tax system in the industrialized world, with little variance between states.

In fact, both California and Texas maintain more progressive tax systems than every European jurisdiction (except Austria, which ranked fourth overall, just ahead of Texas). Scandinavian countries Finland (36th), Norway (37th), and Sweden (41st)—which are often praised as successful socialist models—also ranked far below the United States and actually have some of the least progressive tax systems in the Organisation for Economic Co-operation and Development. In other words, to pay for their generous welfare systems, Scandinavian countries place a much larger share of the tax burden on average families instead of assuming that the wealthy can pay for it all.

But greater progressivity is not without its costs. Since a progressive tax system imposes higher tax rates as you earn more income, it discourages people from moving for a new job, working more hours, starting a business, or investing their savings, all of which help grow the economy.

Moreover, a highly progressive tax system can make it harder for a city, state, or country to attract and retain high-earning professionals such as doctors and engineers, entrepreneurs who start and build businesses, and investors who finance new and existing businesses.

Like any policy debate, conversations about the progressivity of the tax system should be grounded in reality. And in reality, the United States already maintains the most progressive tax system in the industrialized world.

Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.