A Weblog Dedicated to the Discussion of the Christian Faith and 21st Century Life

A Weblog Dedicated to the Discussion of the Christian Faith and 21st Century Life
I do not seek to understand that I may believe, but I believe in order to understand. For this also I believe, –that unless I believed, I should not understand.-- St. Anselm of Canterbury (1033-1109)

Tuesday, March 22, 2011

Upper Income Households and the Tax Burden

This should stir up a little controversy. What do you think?

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 [link here]. 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.


Bruce said...

Allan, no controversy. Perhaps a note or two, and maybe a question or two. It appears that the questionaire and resulting statistics are less than open about context. Anyone can use and abuse statistics. In this case the very regressive social security tax paid by Americans is not figured into the graph. Low income earners pay 100% of ss taxes. High wage earners pay the tax up to approx. $110,000. After that, they are not taxed. It is ok for someone with annual wage of $20,000 to pay the full tax. Someone making $2,000,000 a year pays only the first $110,000. The rest of that money is ss tax free. Take this into account and things do not look quite so bleak for the top wage earners.
Does the data reflect national sales taxes? If not then of course other nations will appear to pay less income tax. The shortfall is made up by the national sales tax. Americans do not pay a national sales tax. A national sales tax may be an idea to consider. Stop taxing on income and tax on consumption.

PamBG said...

I can't prove it with statistics, but I did a lot of work with Sweden's national pension fund at one point in the late 1990s and I know the country and it's society well enough to comment, I think.

First of all, the population is about 9.5 million people. Which is just a bit more than that of New York City.

I wonder what the income of the richest Swede is? My bet is that there are very few Swedes making $1 million / year never mind the kind of income that people like Bill Gates or even a senior Wall Street Director are making.

It will take a lot of convincing for me to believe that it's unjust to tax someone who makes tens of millions a year at a 40% tax rate. Not the least because I paid a near 50% tax rate when I lived in Belgium in the late 1980s. It will also take a lot of convincing for me to believe that taxing someone who makes $20 million / year at 40% is going to take money out of the economy that would otherwise create jobs and goods and employ people.

I'll tell you something else about Sweden. They think we're barbarians. You don't see Swedes wanting to immigrate to the US. It's a much more genuinely egalitarian and humble society. They treat their poor well and they are friendly and treat foreigners well. We have a lot to learn from them. The only downside that I can see is that I don't like it when the sun sets at 1:30 in the afternoon in the middle of winter.

Allan R. Bevere said...


I hear what you are saying but I think the matter of SS, while important confuses the issue. I simply wanted to raise the issue of tax burden and the wealthy. One of the things I like to do on this blog is raise contrarian points of view from the conventional wisdom. Even if those contrarian views are not correct, we need to think outside the box of the talking points that everyone echoes.

Your mention of the VAT is interesting, but that is something everyone has to pay regardless of income, unless, of course, you are referring specifically to luxury items. But having a good friend who owns a business that produces parts for luxury boats, he can tell you that currently the wealthy are not buying luxury items. So a VAT on such things would not yield a whole lot of income for the government. At least for the time being.

Allan R. Bevere said...


Thanks for your insight.

I cannot speak for what the richest Swedes are making either, so it is probably wise for me to leave that alone.

You say that you are not convinced that it is unjust to tax someone who who makes tens of millions 40%. I agree, but just where do we decide the level is unjust? 60%? 80%?

Just to be clear-- In my view there is no reason why we cannot return to the tax rates of the 1990s, but at the same time, there does come a point when it does become unjust to tax too much, even on the wealthy, just as it is unjust to tax too little. Where is that boundary? I have no idea.

As far as the Swedes go, I am sure we can learn from them, but as for their view that Americans are barbarians... well... I will not comment lest I reveal my barbaric side.

Allan R. Bevere said...


One more point I forgot. You mention paying 50% tax in the UK. Fifty percent of income earners pay no income tax in this country-- and I am not referring to the wealthy and their tax loopholes. I speak of those on the bottom 50% of earners who pay nothing, including people who make a lower middle class to middle class income.

Why should they be exempt from paying something? They benefit from taxes. Why should they be exempt? I support exempting the poorest of the poor, but too many in the USA are not paying a dime. That is unacceptable.

PamBG said...

It was in Belgium that I paid 50% which you probably could have faulted for being a grossly inefficient use of tax money. What is an unjust tax level I don't know. But I also believe there are actually a lot of unjust ways that we use capital to make money that we never even stop to question.

I would like everyone to be able to participate as useful citizens in our society. Even people making tens of millions a year. ;-) (Seriously, I do believe it's impossible to make these amounts without doing things that are morally questionable.) I have said before that I think everyone should pay taxes, even if it's a minuscule amount.

Allan R. Bevere said...

What is an unjust tax level I don't know. But I also believe there are actually a lot of unjust ways that we use capital to make money that we never even stop to question.

I agree with that. As far as making tens of millions without doing something that is morally questionable... I am not sure, although I have no doubt plenty of people make such sums immorally. Indeed, all of us are up to our armpits in participating in "barter and exchange" on the back of someone.

PamBG said...

As far as making tens of millions without doing something that is morally questionable... I am not sure.

This is - in my usual fashion - a bit of a tangent, but here is the sort of thing I think we as Americans don't think about.

The company my husband works for. We moved from the UK to the US because we needed to do so, not because the company wanted to transfer him. He went from the same job in the UK to the same job in the Us and I assure you that he is a valued employee. In that move, he took a 60% cut in pay - yes, I mean he made less than half in the US that he made in the UK.

Why? Because the UK thinks that, if you're going to work 40 hours or more, you should have a shot at at least making a living wage. Whereas, in the US we *don't* value that. We think that as much as possible of a company's profits should be returned to the shareholders or the owner of the company. We don't question the balance between return on labor and return on capital. We do believe that it's perfectly OK to work 40 hours a week and not make enough to pay for your housing and food and healthcare and then we in the middle class call these people lazy and shiftless.

If, as a society, we really did value people's labor, there is no reason why the balance couldn't be somewhat shifted to give workers a living wage. But our country really does believe that God loves those who have the money (capital) to begin with. And we think that "consumer choice" is our birthright and if consumer prices[1] were a bit higher then we wouldn't be able to buy so much "stuff".

[1] I do realize we're in a recession and higher prices wouldn't help, but I think that, as a society, we do buy way too much "stuff". When you see respectable working class people in Kenya lighting their homes with oil lamps made from soup cans, you get the picture a bit.

Allan R. Bevere said...

We think that as much as possible of a company's profits should be returned to the shareholders or the owner of the company.

True, and in particular the shareholder thing is a BIG problem in my view.

as a society, we do buy way too much "stuff".

Indeed, as I keep saying, a big reason why the church is not able to do more to care for the poor, assist others with securing adequate health insurance, etc. is that we are just as materialistic as everyone else. The church's ability to minister is directly related to its own consumption.

Bruce said...

Great discussion folks. David Johns just posted an article that talks about wealth distribution. It is relevant to this discussion. Allan thanks for posting this so that we can all attempt to make sense of such a complex issue. Pam thanks for expanding my thinking. This is a good discussion and the spirit of the discussion is good. Allan I hope you do not feel attacked or defensive. Your efforts to bring about discussion are appreciated. Thank you.

Allan R. Bevere said...


I am not sure why I should feel attacked.

By the way, have you noticed that the main issue of the article I posted has not been addressed? ...That it is fallacious to assume that the wealthiest in the US bear less of the tax burden than in other developed countries. It may certainly be argued that they should bear more, but it is wrong simply to assume that the US is at the bottom of the list when it comes to what we tax from the rich in comparison with others.

I am simply pointing out that we cannot simply keep repeating the mindless mantra of what we always read in or hear from the media.

Perhaps it is not only an issue of taxation... how about spending as well?

Bruce said...

The problem with comparing the USA with other nations is that we are so much bigger, and our tax code is so blasted convoluted, complex and difficult to penetrate. Almost any comment can be argued against by some aspect of our tax code. I try to weed out the extremes on the right and left. This is often more about rhetoric than the actual issue. You are right about taxing and spending. We are caught in a certain context that uses certain code words and assumptions that attempt to discredit one another. What would it be like to start over on the tax code and the spending priorities of the nation? I wonder where we would end up. I like to think that the great minds of our nation could come up with something both simpler on the tax side and more focused and efficiant on the spending side. Most people that I know would not object to paying taxes. They object to waste and fraud in government.

Allan R. Bevere said...

The problem with comparing the USA with other nations is that we are so much bigger...

You are right, but those who want to argue that our tax code is not progressive when compared to Europe need to cease and desist on the comparison.

PamBG said...

Lots of good points, none of which I disagree with substantially. I'll try to find that David Johns article.

The US tax code *is* absolutely and utterly crazy, I completely agree.

Personally speaking, the bee I have in my bonnet isn't about government forcing people to do things. I don't really think the government can legislate attitudes about who "deserves" to have their needs met and who doesn't. It's just that I think there is so much that we take for granted that favors both the rich and the powerful and that we never consider or stop to think about.

I actually think that the *processes" of capitalism - as opposed to the ideals of capitalism - are the best that I know about. But we can use these processes to implement more balanced social values than simply survival of the fittest. Americans often have a misplaced and naive faith in "the power of supply and demand". In many sectors, either supply or demand or both are inelastic which means that the market isn't really "free" and the market mechanism *won't* come up with either the most ethical solution or the most utilitarian one.