Teaching Comparative Government and Politics

Wednesday, February 22, 2012

Progressive taxes and income redistribution

Simple minded folk like me have always blithely assumed that progressive taxation made for a more egalitarian distribution of income. I guess I am learning the dangers of simple mindedness.

Lucy Barnes, who is a postdoctoral fellow at Nuffield College, Oxford, offers some data to demonstrate the dangers of "common sense."

The Facts about Tax Progressivity

So, what are the facts about tax progressivity? The most comprehensive scholarly work on this question to date comes from sociologists, Monica Prasad and YingYing Deng, who use data on individual incomes to calculate total tax burdens at different levels of the income distribution. [There is a link to a PDF version of the paper in the Monkey Cage blog report.] Their main takeaway finding is illustrated in the two figures below, which show the Kakwani index of taxation (a measure of the progressivity of the system that parses out the impact of income concentration on the concentration of the tax burden) for a number of advanced democracies.

These data are from the most recent year available (around 2000 in most cases). The… figure shows those taxes that are paid directly by individuals: income, wealth, property and employee social security contributions…

[There's a second chart in the blog adding the effects of consumption (sales and VATs) taxes to the progressively.]

This claim, that the American tax system is progressive compared to those of its advanced economy peer countries, is hard for many (in both the US and in Europe) to accept. The conventional wisdom is that the United States intervenes comparatively little in redistributing income from rich to poor. It is not that these stylized facts are untrue: the figure below shows the reduction in inequality accomplished by government intervention (again using data from the Luxembourg income study)—both taxes and transfers.

Here the United States takes up its more accustomed place at the bottom of the pack (and it is data like these that have been used in the recent debate to refute the claim that US taxes are progressive). How is it possible that American taxes be progressive, while achieving so little redistribution?…