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In his article, “Correcting the Top 10 Tax Myths,” Manhattan Institute’s Brian Riedl writes that a commonly held tax myth is that European countries tax the rich more than the United States does. In reality, the tax system in the United States is more progressive than most of Europe’s. American taxes are more progressive primarily because European nations impose higher income, payroll and consumption taxes on the middle class, while the United States has lower taxes on the middle class and grants tax subsidies to the poor.
The wealthiest 20% of Americans pay most of the federal income taxes. The top 20% paid $2 trillion in income taxes, and the next richest 20% paid $228 billion. The bottom 60% of earners received $92 billion in transfers from the federal government through programs such as the earned income tax credit.
Also, while recent reductions in the U.S. corporate tax rates have made them similar to those in other countries, the U.S. corporate tax rate of 22.3% is still higher than the Organization for Economic Cooperation and Development average and the corporate rates for all Scandinavian countries.
Before about 2000, Scandinavian countries did have very progressive taxes. However, over the last few decades, Scandinavian tax codes have become less progressive. Marginal tax rates on wages and capital have been reduced, and taxes on consumption have been increased. Over the last quarter century, Scandinavian countries reformed their tax systems to improve the competitiveness of their economies, increase people’s willingness to work and invest, and increase the efficiency of tax administration and enforcement. However, to fund their social welfare programs, Scandinavian tax revenue is typically over 40% of GDP, raised through high flat taxes.
In the United States, rising government deficits are caused primarily by increasing government spending, not tax cuts for the rich. Most recent tax cuts have been for the poor and middle class. Even though many people incorrectly claimed that most 2017 tax cuts went to the wealthy and corporations, 70% went to middle-income and low-income earners. Repealing all post-1980 tax cuts would substantially raise tax revenue, especially from middle-income and low-income earners.
Riedl argues that both parties rely on outdated, simplistic and false assumptions about taxes and the economy. Bad information typically leads to bad policies. If the United States wants to cut its deficit and pay for more social programs, then, like in Scandinavia, taxes on the working and middle classes will have to increase.•
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Bohanon and Horowitz are professors of economics at Ball State University. Send comments to ibjedit@ibj.com.
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