America is a low-tax country, with one of the least progressive tax systems in the world. In order to permanently close the federal deficit, all we need to do is raise marginal tax rates on the rich. These are fairly common talking points for many politicians. There's only one problem: None of them are true.
Myth #1: Americans pay low taxes.
From 2004 to 2008, total taxes paid per person in the United States were just under $11,900 per year. Compare this to several similar countries over the same time period: In Australia, this figure is $10,700 in USD at purchasing power parity; in Canada, $12,100; France, $13,700; Germany, $12,000; Japan, $8,800; Spain, $10,600; Switzerland, $11,500 and the United Kingdom, $12,300 (according to figures from the Organization for Economic Cooperation and Development). Americans aren't paying much less in taxes than their international peers do.
Yes, total taxes are a smaller percent of gross domestic product in the United States than in many of these countries. But this is because the United States has a higher per-capita income than these other countries, not because Americans pay fewer total taxes. Most western European countries have lower per-capita incomes primarily because their governments have pursued economic policies that discourage work effort in favor of leisure. If western European countries enacted different policies, their citizens would probably earn just as much income as Americans.
Myth #2: America's tax code isn't progressive.
The top 1 percent of U.S. income earners pay a greater share of federal income taxes than the bottom 90 percent combined, and the poorest 48 percent of Americans pay no federal income tax. While the poorest fifth of Americans pay an average of 4.3 percent of their incomes in federal taxes, the richest 1 percent pay an average of 31.2 percent of their incomes in federal taxes. Although one can debate whether the overall tax burden is just, the simple fact is that the United States does have a strongly progressive tax system.
In fact, the United States actually has the most progressive income tax system in the Organization for Economic Co-operation and Development. The richest 10 percent of Americans earn 33.5 percent of the national income but pay 45.1 percent of the income and payroll taxes, at a ratio of 1.35. Switzerland is at the other extreme: The richest 10 percent earn 23.5 percent of the national income but pay only 20.9 percent of income taxes, leading to a ratio of 0.89. All other OECD countries have ratios lower than 1.33, meaning that the United States is the only OECD country in which the richest decile's share of income taxes is one-third larger than the richest decile's share of national income.
For the sake of completeness, I must add two qualifications: First, I have not mentioned sales tax. But to do so would only strengthen the results. Sales taxes (as implemented in Western Europe) are regressive, and Western European countries rely more heavily on sales taxes than the United States does. Second, the United States has one of the least progressive welfare and entitlement systems in the OECD. Since both taxation and government spending effect income inequality, the U.S. federal government does less to reduce income inequality than many other OECD governments.
Myth #3: Higher marginal tax rates on the rich alone will solve our budget problems.
This is patently untrue: Even a 70 percent top marginal tax rate wouldn't raise enough revenue to balance the budget. Furthermore, even if you believe that the U.S. federal government needs to raise more tax revenue, raising marginal income tax rates is not the best way to do so. The U.S. tax system is extraordinarily complicated and causes significant costs for the overall economy. We need to eliminate deductions and lower marginal rates, not leave the deductions in place and raise rates. Many tax breaks significantly reduce federal tax revenue and help the rich more than the poor. For instance, households that earn over $100,000 per year receive 64 percent of the benefits of the mortgage interest deduction and 81 percent of the benefits of the deduction for state and local taxes. Thus, getting rid of many deductions would hurt the rich more than the poor.
In short, these three common tax myths do not hold up to scrutiny. Given the magnitude of the federal government's long-run budget problem, we need to dispense with these myths and begin to have a serious conversation about taxes.
