Does the USA Really Soak the Rich?

By Mike Konczal |

There’s a new argument about taxes: the United States is already far too progressive with taxation, it says, and if we want to build a better, eglitarian future we can’t do it through a “soak the rich” agenda. It’s the argument of this recent New York Times editorial by Edward D. Kleinbard, and a longer piece by political scientists Cathie Jo Martin and Alexander Hertel-Fernandez at Vox. I’m going to focus on the Vox piece because it is clearer on what they are arguing.

There, the researchers note that the countries “that have made the biggest strides in reducing economic inequality do not fund their governments through soak-the-rich, steeply progressive taxes.” They put up this graphic, based on OECD data, to make this point:

You can quickly see that the concept of “progressivity” is doing all the work here, and I believe the way they are going to use that word will be problematic. What does it mean for Sweden to be one of the least progressive tax state, and the United States the most?

Let’s graph out two ways of soaking the rich. Here’s Rich Uncle Pennybags in America, and Rik Farbror Påse av Mynt in Sweden, as well as their respective tax bureaus:

When average people usually talk about soaking the rich, they are talking about the marginal tax rates the highest income earners pay. But as we can see, in Sweden the rich pay a much higher marginal tax rate. As Matt Bruenig at Demos notes, Sweden definitely taxes its rich much more (he also notes that what they do with those taxes is different than what Vox argues).

At this point many people would argue that our taxes are more progressive because the middle-class in the United States is taxed less than the middle-class in Sweden. But that is not what Jo Martin and Hertel-Fernandez are arguing.

They are instead looking at the right-side of the above graphic. They are measuring how much of tax revenue comes from the top decile (or, alternatively, the concentration coefficient of tax revenue), and calling that the progressivity of taxation (“how much more (or less) of the tax burden falls on the wealthiest households”). The fact that the United States gets so much more of its tax revenue from the rich when compared to Sweden means we have a much more progressive tax policy, one of the most progressive in the world. Congratulations?

The problem is, of course, that we get so much of our tax revenue from the rich because we have one of the highest rates of inequality across peer nations. How unequal a country is will be just as much of a driver of the progressivity of taxation as the actual tax polices. In order to understand how absurd this is, even flat taxes on a very unequal income distribution will mean that taxes are “progressive” as more income will come from the top of the income distribution, just because that’s where all the money is. Yet how would that be progressive taxation?

We can confirm this. Let’s take the OECD data that is likely where their metric of tax progressivity comes from, and plot it against the market distribution. This is the share of taxes that come from the top decile, versus how much market income the top decile takes home:

As you can see, they are related. (The same goes if you use gini coefficients.)

Beyond the obvious one, there’s a much deeper and more important relationship here. As Saez, Piketty and Stantcheva find, the fall in top tax rates over the past 30 years are a major driver of the explosion of income inequality during that same exact period. Among other ways, lower marginal tax rates give high-end mangagement a greater incentive to bargain for higher wages, and for corporate structures to pay them out. This is an important element for the creation of our recent inequality, and it shouldn’t get lost among odd definitions of the word “progressive,” a word that always seems to create confusion.

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Mike Konczal is a Fellow with the Roosevelt Institute, where he works on financial reform, unemployment, inequality, and a progressive vision of the economy. His blog, Rortybomb, was named one of the 25 Best Financial Blogs by Time magazine. Follow him on Twitter @rortybomb.