In the Forbes column we quoted in the previous post ("Undertaxed America"), Bruce Bartlett referred to OECD data in making his case. Clive Crook referred to OECD data as well in a post on taxes in his Atlantic blog earlier this week ("America's widening fiscal gap"):
Mr Obama intends to squeeze the rich, but the scope for this may be more limited than US liberals would wish. Few Americans seem aware that the US income tax code, as a recent Organisation for Economic Co-operation and Development study showed, is already one of the most progressive.* Even before the rise in top marginal rates promised by Mr Obama, the US income tax collects 45 per cent of its revenues from the highest-income decile. Compare that with Britain at 39 per cent, Canada at 36 per cent, France at 28 per cent, Sweden at 27 per cent and an OECD average of 32 per cent.
This difference is only partly explained by the less-equal US income distribution. The fact that the US has no broadly based national sales tax - value added taxes make Europe's overall tax codes less progressive still - only underlines the point. The US tax system raises comparatively little revenue; what little it raises already comes disproportionately, by international standards, from the rich.
I have previously argued that the US will need a VAT [value added tax]. Even before Mr Obama unveiled his ambitions for healthcare reform, wage subsidies to help the working poor, better education and the rest, the US middle class was seriously undertaxed. The government's promises, on present plans, will be unaffordable. If they are honoured regardless, the only question is which comes first: broadly based tax increases or fiscal collapse.
I have wondered if there might be a simpler way to tax Americans' consumption than to implement a value added tax. Since income taxes in the U.S. are highly progressive, and IRAs and 401(k)s don't offer deductions for payroll taxes, there is little incentive for Americans in lower income quintiles to save instead of consume. For example, according to CBO data, effective income tax rates for Americans in the bottom two income quintiles were negative in 2005 (i.e., these Americans received more in transfer payments than they paid in income taxes). So why not just increase the payroll tax by some amount and then allow workers to deduct up to that entire additional amount if they make an equivalent contribution to an IRA or 401(k)? Those who contribute less than that additional payroll tax amount to their retirement accounts will be paying a de facto consumption tax.
The image above accompanied the Financial Times column from which Clive Crook quoted himself in his Atlantic post.