If you are going to argue that people who make mistakes should be ostracized . . .

. . . it’s best not to make a serious mistake in your attack.  Here’s Matt Yglesias:

The answer is that the column labeled “Share of taxes of richest decile” is in fact the share of income taxes paid by the richest decile. The federal income tax in the United States does, in fact, have a progressive rate structure. Federal payroll taxes, state and local sales taxes, most excise taxes, and property taxes all have a regressive rate structure. So, yes, if you look exclusively at the most progressive element of the American tax code, it’s highly progressive. If you compound that exercise by mislabeling your chart, then you can mislead people. You might think it’s a little strange that Greg Mankiw, an economics professor, would mislead people by uncritically endorsing such a misleading chart but Mankiw believes that progressive taxation is immoral and should be opposed even if it enhances human welfare. Perhaps this same moral theory leads him to believe that misleading people about the subject is an act of justice. If so, then I’m not sure it’s really in the interests of Harvard (or the many universities that assign his textbook) to entrust him with the instruction of teenage economics students.

Now I’m not going to argue that the chart Mankiw links to is exactly correct, but it looks like it’s in the right ballpark.  And I could tell that Yglesias’ assertion about income taxes was wrong without even looking up the numbers.  The top 10% in America pay way over 45% of income taxes, at least as tax incidence is normally estimated.  (BTW, the assumption that the incidence of income taxes falls on the people who write out checks to the IRS seems crazy to me, but my fellow economists of the left and right don’t agree.)

It is common knowledge among progressive public finance experts like Peter Lindert that the European tax regimes are able to collect more revenue than ours (as a share of GDP, not in total) by having a more regressive tax system.  Mankiw’s link may not be exactly right, but the stylized facts are in the right ballpark.  Given that Yglesias is a fan of the European welfare state, I’m surprised he hasn’t read Lindert’s research.

Actually, what most surprised me was the very low share of income earned by the top 10% in Switzerland.  That can’t possibly be right, can it?

Yglesias’ strongest argument might be that tax plus transfers in Europe might be more progressive than taxes alone. 

BTW, I agree with Yglesias that a progressive (consumption) tax system is desirable, and don’t really buy into Mankiw’s “just deserts” approach.  So this post has nothing to do with my ideology.  (Of course if I had been born as Greg Mankiw I might feel differently about the just deserts approach.)

To summarize, it’s still safe to use Mankiw’s text, but Cowen/Tabarrok is also excellent.   (Can’t afford to piss off any influential bloggers.)

Update:  Scott Winship sent me a post with some quite interesting graphs on income inequality.  (BTW, I don’t think income inequality is the best way to measure economic inequality–I prefer consumption inequality.  But income is what most people use.)


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40 Responses to “If you are going to argue that people who make mistakes should be ostracized . . .”

  1. Gravatar of Bob Murphy Bob Murphy
    21. March 2011 at 17:40

    Scott, I read Yglesias’s post, and your first paragraph, twice now, and I have no idea what you are talking about. Yglesias isn’t denying that federal income taxes are progressive; that’s his whole point, that they are the *only* taxes in America that are progressive. He’s not saying the numbers in Mankiw’s chart are wrong, he is saying they are misleadingly labeled as “taxes” when really they are “income taxes.”

  2. Gravatar of q2 q2
    21. March 2011 at 17:55

    Yglesias was wrong that it didn’t include payroll taxes, and if the chart had included sales tax, Europe would be even more regressive given their high VAT rate. And even if the chart doesn’t tell the whole story, Sumner clearly shows that the whole story really is that the U.S. has a much more progressive tax structure than Europe.

    The whole, whole story would be that U.S. redistribution is the part that’s not progressive at all.

  3. Gravatar of Integral Integral
    21. March 2011 at 18:17

    Professor Sumner,

    You are correct: the top decile in the US paid 55.4% of all Federal taxes and 72.8% of Federal income taxes in 2006. Indeed the top decile consistently paid between 50% and 55% of all Federal taxes during the 2000-2005 period, and around 70% of Federal income taxes in the same period.

    I have no comment on the European data, but the American data is quite flawed.

    Source: “Historical Effective Tax Rates, 1979-2005″, CBO, December 2007. and “Historical Effective Tax Rates, 1979-2006″, CBO, April 2009.

  4. Gravatar of Bababooey Bababooey
    21. March 2011 at 18:19

    Bob-

    Yglesias says that Federal payroll taxes, state and local sales taxes, most excise taxes, and property taxes all have a regressive rate structure. The only way that Mankiw, the Tax Foundation and the OECD are misleading is if those regressive taxes would make the US look less progressive, right? Why else would Yglesias argue that those 3 sources are misleading when they all point out that the US is more progressive than other countries?

    But he is wrong.

    1. The OECD did include payroll taxes in its chart;
    2. OECD VAT & GST exceed state and local sales taxes by any measure you want to use;
    3. Excise taxes include sales taxes, but let’s assume he means estate taxes and tariffs- do you want to bet whether the US or the OECD average is higher?
    4. Property taxes are regressive like Yacht taxes are regressive, they apply to a business’s non-inventory property and to real property, not to rental property.

    So I think L’il Mat made a serious mistake. Unless he’s arguing that Mankiw, the Tax Foundation and the OECD underrate the US’s progressivity, then he’s right.

  5. Gravatar of bertusmaximus bertusmaximus
    21. March 2011 at 18:28

    original source:

    http://www.taxfoundation.org/blog/show/27134.html

  6. Gravatar of Martin Martin
    21. March 2011 at 18:44

    I thought that the progressivity of the tax system was determined by the average tax rate as a function of income. Not by which group paid what share of the tax bill. That’s a different question.

    Example A and B, A earns 900, B earns 100. Tax burden is a linear function of income: tax rate = 0,0125 * income.

    900 * 0.0125 = 11,25; 900 * 0,1125 = 101,25
    100 * 0,0125 = 1,25; 100 * 0,0125 = 1,25

    Total tax bill = 102,50
    Share A = 101,25/102,50 = 99%
    Ratio of shares = 99% /90% = 1,1

    A earns 700, B earns 300.
    700 * 0,0125 = 8,75; 700 * 0,0875 = 61,25
    300 * 0,0125 = 3,75; 300 * 0,0375 = 11,25

    Total tax bill = 72,5
    Share A = 61,25 / 72,5 = 84%
    Ratio of shares = 84 / 70 = 1,2

  7. Gravatar of Lance Lance
    21. March 2011 at 18:53

    The largest regressive taxation which exists in the United States tends to be ‘sin’ taxes–alcohol, tobacco–yet they are policy instruments most heavily trumpeted by progressives who seek to influence behavior and raise tax revenue with minimal political resistance.

  8. Gravatar of Scott Sumner Scott Sumner
    21. March 2011 at 19:02

    Bob, But they aren’t just income taxes, that’s my point. If they were just income taxes then the figure would not be 45%. So Matt is wrong.

    q2, Thanks.

    Integral, Those sound right. Maybe the 45% also included S&L taxes.

    Bababooey, It’s unusual when I get this much support from commenters. Maybe I’m right for a change.

    Thanks Bertusmaximus.

    Martin, Yes, but this study just used a simply proxy, which is less accurate but still useful.

    Lance, Good point, someone just blogged on that over at Econlog, Henderson I think.

  9. Gravatar of William William
    21. March 2011 at 20:51

    Scott,

    Thank you so much for this post. I have been fuming about this for the past several hours, but didn’t have a prominent blog with which to make my anger known. Your title/first sentence is perfect.

  10. Gravatar of Jon Jon
    21. March 2011 at 21:10

    Bob states:

    Yglesias isn’t denying that federal income taxes are progressive; that’s his whole point, that they are the *only* taxes in America that are progressive.

    I must object. I don’t think people thing these things through very much. For instance sales tax is levied on restaurants but not on groceries or clothes. People I know who are rich dine out 3-5 days a week. Toss in some wine, steak, etc. You’re looking at a big bill. Poor people? Not so much. Second, overall, I think people with a high income consume more. Consequently they are going to pay more under an sales tax than someone poor. Sales taxes are not regressive.

    Okay lets pick a different tax… hmm property tax. Well who pays a property tax, that isn’t really clear. The rich definitely pay and pay big. Okay, what about someone poor and renting. Does the tax pass through to the renter? Well some of it does, some of it probably doesn’t. Right away this is putting the tax on the progressive side. Then to top it off, the poor rent a tiny place in the bad part of town. Property tax per-square foot is low. So, a property tax is quite possibly progressive.

    Payroll tax? Once you treat in terms of net benefits paid, its pretty clearly progressive.

    License taxes and fees? pretty regressive. Still, these are a drop in the bucket. Indeed, just about every regressive tax ends up being a capitation tax because those are the few cases where utilization is decoupled from income (saturates at one unit).

  11. Gravatar of Alexander Hudson Alexander Hudson
    21. March 2011 at 23:13

    I think it has been argued effectively here that Mankiw’s point (that the U.S. is more progressive) is correct, at least based on the data provided in the link.

    But I think Yglesias’s objection was less about the assertion that other countries are less progressive than the U.S. (which was what the inquiring commenter on his blog was talking about) and more about the implicit assertion that the U.S. tax system, as a whole, is progressive in an absolute sense (i.e. the richest paying a greater share of taxes than their share of income).

    The chart in question shows that the top decile pays 45.1 percent of income taxes (including payroll taxes) but only receives 33.5 percent of income. Hence, if you just read the chart (which says “share of taxes” rather than “share of income/payroll taxes”) you’d believe that the richest decile pays quite a bit more of the tax burden than its share of income. If you add in ALL taxes, however, the tax burden is roughly the same amongst all income groups. So the chart itself is quite misleading. (To be fair, the blog post above the chart is crystal clear, and Mankiw’s point still holds.)

    Anyway, it wasn’t Yglesias’s finest blog post, but there was a legitimate gripe in there. The resulting ire just shouldn’t have been directed at Mankiw.

  12. Gravatar of Alexander Hudson Alexander Hudson
    21. March 2011 at 23:21

    Also, the data in that Tax Foundation blog post is really weird. The CBO data referenced by Integral above suggests as much. The CBO data show that the top decile paid 55.4 percent of all federal taxes (income, payroll, corporate, and excise) in 2006. The OECD data show 45.1 percent. You might think that this implies that the OECD data must be including S&L taxes, but there’s another discrepancy that suggests this might not be the case: CBO data show that the top decile received 41.6 percent of pre-tax income in 2006, while the OECD data show them getting only 33.5 percent. And anyway, the Tax Foundation blog post clearly says that the data are for “all income taxes (both personal income and payroll taxes combined).” So maybe state income taxes are included (this is unclear). But certainly not all S&L taxes.

  13. Gravatar of Bababooey Bababooey
    21. March 2011 at 23:28

    Alexander-

    If Yglesias’s point is that the OECD, Mankiw and the Tax Foundation are unconscionably misleading because they are discussing relative progressivity and Yglesias demands that they instead discuss what Yglesias thinks they should discuss, they he should make the case himself instead of tossing around personal insults.

    Except he cant because sales tax info is impossible to break out by income cohorts. Yglesias’s rage should be directed at who ever decided that sales taxes should be collected at source instead of reported on income tax returns. More responsibly, he should probably apologize to Mankiw and move on.

  14. Gravatar of AdjectiveCap AdjectiveCap
    22. March 2011 at 00:38

    Not sure how reliable the source is, but it has useful information presented conveniently:
    http://www.usgovernmentrevenue.com/

    If you calculate the state+local revenue from sales/property taxes as a percentage of total federal+state+local revenue you get a figure around 9.7% or so, depending on the year you’re looking at.

    That’s obviously going to push the US ratio down, but I highly highly doubt it’s going to push it down too much- certainly not BELOW the other OECD countries.

    Is the data for non-US OECD countries just income+payroll as well or is it including the VATs and whatnot? If it is including them for the non-US OECD countries then that’s obviously a bit of dishonesty from the tax foundation, but probably pointless dishonesty. If they are not, and it’s merely an income+payroll comparison then the “true” disparity is probably even more stark since Europe makes very heavy use of VATs, as already mentioned.

    Germany for example gets about 33% of its tax revenues from VAT/property taxes, well above the US equivalent of about 9.7% estimated earlier.

  15. Gravatar of Jim Glass Jim Glass
    22. March 2011 at 01:30

    Just for the record, to judge how progressive a nation’s financial system is one must look not only at who pays how much but who receives how much.

    The Tax Foundation looked at this a few years ago and came up with numbers the gist of which is, by income decile…

    (these columns can’t possibly line up right, but you get the idea)

    quintile__tax paid__$ received__net__received/tax paid

    lowest______$1,684 ___$24,860 __+$23,176 _ 14.8x
    2nd low_____ 6,644 ___ 19,889 ___+13,245 __ 3.0x
    middl ______ 13,028 ___ 16,781 ____ -3,753 __ 1.3x
    2nd high____ 22,718 ___ 15,502 ____ -7,216 __ 0.7x
    highest_____ 57,512 ___ 18,573 ___ -38,939 __ 0.3x

    Full report: http://www.taxfoundation.org/files/sr151.pdf

    BTW, it’s not surprising that the rest of the OECD’s tax systems would be more regressive than the US’s given how heavily they rely on the VAT.

    There are liberal blogs today embracing this European model for the US on the logic: “Regressive taxes are the cost of progressive policy”.

    And when one suggests to them that if you have to be regressive to be progressive perhaps you’ve gone to far, or perhaps even it’s not about being progressive at all (to the extent deeds are better than words at revealing true preferences), they somehow just don’t grasp the notion.

  16. Gravatar of Jack Jack
    22. March 2011 at 01:51

    Re: Switzerland, my understanding is that the Swiss ”poor” and middle class are fairly well-off, so the top decile’s share of income would be smaller.

  17. Gravatar of Doc Merlin Doc Merlin
    22. March 2011 at 02:29

    @Jim Glass
    You aren’t cynical enough. The reason they are so regressive is because the state is trying to maximize its spending ability (and thus needs more revenue). Because mobility for the rich between states in the EU is so much higher than mobility for the rich across the US border (and higher than for the poor), they naturally need to have more regressive tax schemes to generate more revenue.

  18. Gravatar of Timothy Timothy
    22. March 2011 at 02:39

    Could Switzerland’s low income share earned by the top 10% be explained by banking secrecy laws, or by other regulations which allow high earners to understate their taxable income?

    What surprised me was Belgium’s ratio of taxes to income of only 0.94.

  19. Gravatar of John Thacker John Thacker
    22. March 2011 at 03:35

    @Jon:

    “For instance sales tax is levied on restaurants but not on groceries or clothes. People I know who are rich dine out 3-5 days a week. Toss in some wine, steak, etc. You’re looking at a big bill. Poor people? Not so much. Second, overall, I think people with a high income consume more. Consequently they are going to pay more under an sales tax than someone poor. Sales taxes are not regressive.”

    Actually, most states do levy sales tax on clothes, and quite a few tax groceries, albeit many at a lower rate. However, more importantly, you’ve missed entirely the definition of progressivity People with a high income consume more overall, but they consume less as a proportion of income. (Rather intuitively, rich people can afford to save more of their income.) Rich people pay more under a sales tax, but they pay less as a proportion of their income. This is an entirely noncontroversial point.

    As repeatedly noted, including sales taxes only makes the US look more progressive, since the USA (even including state sales taxes) has far lower sales taxes than the VAT and GSTs common in the rest of the OECD.

  20. Gravatar of bill woolsey bill woolsey
    22. March 2011 at 05:07

    Thacker:

    I believe that progressive, proportional, and regressive are chacteristics of rates relative to the base that is taxed. It isn’t about tax payments relative to income (or some other measure of ability to pay.)

    Obviously, all of this talk about alternative taxes being regressive or whatever assume that the base is something like gross income.

    I just think this is wrong headed.

  21. Gravatar of JimP JimP
    22. March 2011 at 06:21

    Money matters – as we found out after the 1906 San Francisco quake.

    http://www.ft.com/cms/s/0/afb469d2-53f2-11e0-8bd7-00144feab49a.html#axzz1HK3mOLAH

  22. Gravatar of Left Outside Left Outside
    22. March 2011 at 06:24

    Wonderful blog here which I recommend to you from a brit marxist libertarian ex-japan-based investment banker.

    http://stumblingandmumbling.typepad.com/stumbling_and_mumbling/2009/04/shrink-the-state-a-leftist-aim.html

    Writes well on the state, big states cannot be progressive states, there just aren’t enough rich people.

  23. Gravatar of Scott Sumner Scott Sumner
    22. March 2011 at 06:40

    Thanks William.

    Jon, I agree with your view on the progressivity of sales taxes, but for somewhat different reasons. They are regressive as a share of income, but income is the wrong measure of economic inequality–consumption is the right measure. As you say, food is often excluded, hence sales taxes tend to be progressive in terms of consumption.

    Alexander, I don’t strongly disagree, but two points:

    1. See my response to Jon.

    2. I’m not sure it would be proportional even with S&L taxes thrown in. Remember you’d also have to add the corporate income tax, which is higher in the US than other countries. And Federal taxes are much bigger in total than S&L taxes. I think you’d still find some progressivity in the top 10%, indeed I’m pretty sure.

    Adjectivecap, That sounds right. Thanks.

    Jim Glass, Good points.

    Jack, I thought of that, but am still a bit confused. I usually have pretty decent intuition about data plausibility, and although it’s true that the top 10% number can differ from the overall Gini, it usually doesn’t differ all that much. I recall the Nordics having considerably lower Gini’s than Switzerland, and yet they also have relative well off poor people. There’s something fishy there.

    BTW, I am a huge fan of Switzerland, and prefer their tax system to the Nordic countries even if they are slightly less egalitarian. As you said, their worst off are still pretty good by international standards. And Switzerland has a higher average income.

    Timothy, I also wondered about bank secrecy, but isn’t that mostly about foreigners? Or do the Swiss have no tax on domestically-earned bank interest?

    Bill Woolsey, I agree.

  24. Gravatar of Floccina Floccina
    22. March 2011 at 06:45

    One problem with democrats is that they like to call FICA a tax and yet when I say that I think that SS is a welfare program they argue that it is a retire plan and that the payout is owed to the contributors.

  25. Gravatar of Scott Sumner Scott Sumner
    22. March 2011 at 06:48

    JimP, Thanks, very interesting.

    Left Outside, That’s a very good blog. I’ll try to remember to follow it, but please send me other good posts in the future.

    Floccina, Good point. Progressivity is arguably best measured by looking at both taxes and benefits.

  26. Gravatar of example example
    22. March 2011 at 07:26

    I’m not really sure what the mistake was supposed to be. Yglesias didn’t say the tax system wasn’t progressive, or that the rich didn’t pay a bigger share of taxes, but rather that the share they paid was much larger mostly because they made a much higher portion of the income.

    This chart makes it more clear:

    http://yglesias.thinkprogress.org/2011/03/a-better-chart-on-taxes-and-inequality/

  27. Gravatar of Ernie Ernie
    22. March 2011 at 08:33

    I’m surprised that tax expenditures have gone uncommented upon in this debate. The U.S.’s reliance on credits such as the EITC and the Child Tax Credit to achieve social spending goals is singular among industrial countries (we spend much more on the EITC than we do on “real” welfare through TANF). These tax expenditures have the effect of skewing the distribution of the tax burden towards upper income filers. Were we to replace credits like the EITC with equivalent, on-budget spending programs, then U.S. social spending would be exactly the same but the tax code would appear to be less regressive.

  28. Gravatar of W. Peden W. Peden
    22. March 2011 at 09:25

    Here’s and old Stumbling and Mumbling post I bookmarked-

    http://stumblingandmumbling.typepad.com/stumbling_and_mumbling/2010/05/6bn-no-big-deal.html

  29. Gravatar of Bob Murphy Bob Murphy
    22. March 2011 at 11:56

    Just to clarify, everyone, I was *not* saying (in the first comment way at the start) that Yglesias’ overall point was correct. Rather, I was saying that Scott’s critique made no sense.

    After Scott’s clarification here in the comments, I now understand what he meant. But this is what he originally wrote:

    “And I could tell that Yglesias’ assertion about income taxes was wrong without even looking up the numbers.”

    Since the only thing Yglesias ever said about income taxes was that they were progressive, I had no idea what Scott was talking about.

  30. Gravatar of Jason Jason
    22. March 2011 at 12:05

    Scott, you said “The top 10% in America pay way over 45% of income taxes, at least as tax incidence is normally estimated.”

    I agree, but the chart also says that the top decile brings in 33.5% of income. According to Saez, this number should be more like 45% to 50% for the min-2000s. (I would also like to point out that 33.5% for the top decile is not consistent with the OECD estimation in the original source table of the Gini coefficient. A Gini coefficient of 0.45 means about 45% going to the top decile for a Pareto-like tailed distribution.)

    I assume the incorrect properties of the distribution mean that the total of all the deciles add to only ~70% of the total market income.

    If you correct for this normalization, given the top decile earns 45-50% (per Saez) of the total income instead of 33.5%, they would pay 60-70% of all personal income taxes which is more consistent with other estimates:

    http://www.ntu.org/tax-basics/who-pays-income-taxes.html

    So Yglesias is probably correct.

    Summary: If the top decile takes in 33.5% of total income, then proportionally they pay 45% of all income taxes. This is only consistent with the reported Gini coefficient if total market income includes income not attributed to a decile. If the top decile takes in 50% of total income, they pay 70% of all personal income taxes. This is consistent with the reported Gini coefficient if the sum of all deciles is the total income. And Yglesias’s assertion is probably correct that this is primarily looking at income taxes.

    (My guess is that e.g. corporate profits/taxes are considered part of market income/income taxes but not attributed to a decile. Or possibly whatever else adds to the total employee compensation and total corporate profits that add to 64 + 13.8 = 77.8 to bring it up to 100% from this data:

    http://www.cbpp.org/cms/?fa=view&id=634

    )

  31. Gravatar of Why is Our Income Tax So Progressive? | Lobster Stuffed With Tacos Why is Our Income Tax So Progressive? | Lobster Stuffed With Tacos
    22. March 2011 at 13:41

    [...] interest the interchange between the Tax Foundation’s Scott Hodge, Greg Mankiw, Matt Yglesias, Scott Sumner, Karl Smith and Reihan Salam over Hodge’s post using OECD data to argue that the United [...]

  32. Gravatar of Jason Jason
    22. March 2011 at 14:05

    I was a little off; a Gini coefficient of 0.45 has a top decile taking in closer to 0.4 of the total income.

    Gini Income fraction estimate (Pareto distribution)

    0.20 0.216
    0.25 0.252
    0.30 0.290
    0.35 0.329
    0.40 0.369
    0.45 0.411
    0.50 0.454
    0.55 0.498
    0.60 0.544
    0.65 0.590
    0.70 0.637

    Before 0.2 and after 0.7 the overall shape of the distribution becomes a lot more important than just looking at the tail. It should approach 1 at gini = 1 and 0.1 at gini = 0.

  33. Gravatar of Morgan Warstler Morgan Warstler
    22. March 2011 at 14:08

    I wasn’t kidding.

    Matty made a mistake because Mankiw screws him up. He has a bone to pick from way back, and so he didn’t read carefully enough.

    Matty is young. It is easy to forget because he’s talented… if you aren’t an idealist in your 20′s you have no heart, if you haven’t gone establishment by your 30′s you have no brain.

    —–

    Far more interesting is a discussion on progressive consumption taxes…. we shouldn’t even allow ourselves to think about income. It’s like rating hot women based on their size of their dick.

  34. Gravatar of Peter Whiteford Peter Whiteford
    22. March 2011 at 14:47

    I will post what I put on Matt Yglesias’ blog, slightly expanded to deal with some of the misconceptions that have come up:

    I am the person who wrote the chapter in the OECD report that is the basis of these figures. It is part of a report on the distribution of income to households, so it doesn’t include taxes that are not recorded in income surveys as being directly paid by households, such as sales taxes or employer social security contributions. As far as possible, the taxes are consistent across countries, so neither VAT nor employer taxes are included in any of the other countries. The table does compare like with like.

    The table also calculates the distribution of taxes for the household as whole after adjusting for the number of people in the household, so it will differ from data calculated on income tax returns which are not adjusted for household size, as some of the figures referred to by Jason appear not to. Putting household taxes together and adjusting for the number of people in the household is standard in analyses of income distribution surveys, but it gives different results from analysis of administrative tax statistics.

    As others have pointed out this measure includes all direct taxes on individuals so it includes income taxes (federal and state) and employee social security contributions, but not employer payroll taxes. It also doesn’t include sales taxes, but these are much heavier in most other OECD countries, and not as progressive as direct taxes, so if you added indirect taxes in through some sort of modelling it is almost certain that the USA would still have the most progressive overall tax system. To take an example – most Nordic countries have VAT rates of between 20 and 25%, although food may be taxed at 12-14%. So if you included indirect taxes, the USA would almost certainly not change its ranking.

    However, as the OECD report points out, progressivity is not the same as redistribution. Progressivity measures how the distribution of the tax burden is shared. It is true that high income groups in Europe will generally pay a higher hsrae of their total income in taxes, but in itself this is not a measure of progressivity. This is a measure of how high taxes are. The point is that as well as high income groups paying higher taxes in Europe, low income people pay much higher taxes, as well. Progressivity measures the difference between the taxes paid by high and low income groups. In fact the Chapter includes better measure of progressivity than the share paid by the top 10%. It includes the concentration coefficient for taxes, which is calculated like the Gini coefficient, except that households are ranked by their dispoable income rather than their taxes – this is necessary if you want to know what the impact of taxes is on disposable incomes. People can access this better measure at http://dx.doi.org/10.1787/422013187855 . It and the share of the top 10% are actually in one table in the report. Using the better measure and adjusting for inequality of market incomes it is actually Ireland that has the most progressive tax distribution in the OECD, but the USA is fairly close behind at number 2.

    As people pointed out above, this result is not new. It has been pointed out previously by Peter Lindert, for example.

    I think to some extent people are getting progressivity mixed up with redistribution. As pointed out above, progressivity is a measure of the share of total taxes paid by different income groups. Redistribution measures how much the tax system reduces inequality. Redistribution is influenced both by the progressivity of taxes and the level of taxes collected.

    In fact, the US system of direct taxes reduces inequality more than any other country as well. But overall, the USA reduces inequality a lot less than most other countries, because the other thing that you need to take into account is what taxes get spent on.

    The US system of social security and cash benefits reduces inequality by less than any other OECD country except Korea. The US social security system is marginally less progressive than the OECD average, but the level of spending is very low – only Mexico and Korea spend less in the OECD.

    So while the US tax system is progressive and reduces inequality, the US welfare state is much less effective at reducing inequality. And because the US has a very unequal distribution of income from capital and a much wider wage distribution than many other OECD countries, it ends up as a relatively unequal country after taxes and benefits.

    If you look at Nordic countries, they all have much less progressive tax systems than the USA, but they collect a lot more in taxes (including in VAT). They then spend this much higher tax revenue on social security and services, and it is this side of the equation that is most important in reducing inequality.

    AS a non-American, I wouldn’t say that the USA either needs to increase or reduce the progressivity of the tax system. But I think it is important to understand why it is that most other rich countries have lower inequality than the USA. This is not because they have more progressive tax systems – they have less progressive tax systems, but ones that collect more tax overall and then spend the additional tax revenue on progressive social programmes.

    In addition, the least unequal countries like Denmark, Sweden and Norway have had high employment rates (like the USA used to have before the GFC) and they also have much more compressed wage distributions than the USA.

  35. Gravatar of Scott Sumner Scott Sumner
    22. March 2011 at 19:10

    example and Jason, Yglesias is definitely wrong, check out Whiteford’s comment below. Also my newer post.

    Ernie, Those are good points.

    Bob, Yes, I went too fast with the explanation.

    W. Peden, I agree on the UK.

    Morgan, I agree about consumption taxes.

    Peter Whiteford, Thanks for all that info, I basically agree. Just a few small points.

    It’s a bit misleading to say the Europeans collect more tax revenue than we do. Some do, but others don’t. They have higher rates. But our GDP per capita is much higher (PPP) than Europe, hence total revenues are much closer.

    I would also emphasize that income is a very misleading statistic for all sorts of reasons, starting with the fact that it adds capital and wage income together, even though capital income has already been taxed once as wage income. The best way to look at economic inequality is by looking at consumption inequality.

    Another problem is that the economic and legal incidence of taxes is very different, even for the income tax. In Europe the government often pays for medical school, hence doctors earn much less than over here. The high income of American doctors is partly a return on capital, and part of the burden of high MTRs placed on US doctors falls on their customers, who pay more for medical care. That’s just one of many problems.

  36. Gravatar of Joseph Benaiah Cox Joseph Benaiah Cox
    23. March 2011 at 08:08

    I think Yglesias is wrong only in that he said that payroll taxes are excluded. However, the Tax Foundation explicitly says that only income taxes (they include payroll taxes as income taxes) are in the chart, but then labels the chart “share of taxes.”

    The chart on how progressive American taxation is ignore that 1) tax incidence says nothing about overall rates; American has low income tax rates and 2) America has a negative income tax for low income people and exempts many government benefits from taxation. I know that many European countries tax benefits, so this superficially makes the tax code seem less progressive, but in reality the net effect is equivalent to the American systemt. The proportion of revenues that come from the richest decile seems to have a low numerator (with rates topping out at 35% and lots of exclusions to further reduce incidence) but an even lower denominator (thanks to having spending programs in the tax code, rather than administered externally).

  37. Gravatar of ssumner ssumner
    23. March 2011 at 14:05

    Joseph, Even if Yglesias is only wrong about payroll taxes (and I’m not sure that’s true), that is a huge mistake to make when you’ve just said people shouldn’t use Mankiw’s textbook because he made a mistake in a blog post, and yet he didn’t make any mistake. I just found the post kind of funny, I actually like Ygleias a lot–he’s one of my 5 favorite bloggers.

    The US relies more heavily on progressive income taxes than other countries, our Federal government relies almost entirely on personal and corporate income taxes, and payroll taxes. S&L government have some sales taxes, but much lower than European VATs. Obviously one can argue about any data set, indeed the entire concept of “income” is almost meaningless in an economic sense, hence any “income data” will be worthless. But that’s no reason to criticize Mankiw, he’s playing the same game everyone else plays–treating income as if it measures something meaningful.

  38. Gravatar of Erik Erik
    1. April 2011 at 23:04

    The Nordic countries have employer payroll tax (which is excluded in this table) of about 40% of the salary (viewed as regular income taxes).

  39. Gravatar of ssumner ssumner
    2. April 2011 at 05:17

    Erik, I don’t believe the payroll tax is excluded. What evidence do you have that it is? Yglesias made that claim, but others showed he was wrong.

  40. Gravatar of Jonathan Chait is not only mean but also wrong | BUSINESS GUIDE BLOG Jonathan Chait is not only mean but also wrong | BUSINESS GUIDE BLOG
    11. February 2012 at 06:26

    [...] this indicate (and most more) or The Money Illusion’s educational economist Scott Sumner (here). For instance, a important Sumner suggests reading a work of economist Peter H. Lindert (Growing [...]

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