In recent testimony before the Senate Budget Committee, international studies were quoted showing the wealthy in America pay more of the nation’s tax burden than in any other industrialized country, giving the U.S. “the most progressive income tax system” in the world.
Earlier this month, Scott Hodge, president of the non-partisan Tax Foundation, testified before the committee, showing that the top 1 percent of taxpayers in the U.S. now pays a greater share of the income tax burden than the bottom 90 percent combined.
“As of 2008, the top 1 percent of taxpayers paid 38 percent of all income taxes, while the bottom 90 percent of taxpayers paid just 30 percent of the income tax burden,” Hodge explained. “By any measure, this is the sign of a very progressive tax system.”
Hodge was quoting studies by the Paris-based Organization for Economic Cooperation and Development, or OECD, which analyzes a wide array of economic factors around the world.
Hodge pointed out that because “tax expenditures” – meaning credits and deductions that reduce or refund the amount tax-filers owe – are rising, fewer and fewer Americans actually pay taxes, leaving the wealthy to shoulder an increasing percentage of the national tax burden.
“There is a common belief that because so many tax expenditures benefit upper-income taxpayers, the ‘rich’ are not paying their fair share of taxes,” Hodge said. “Nothing could be further from the truth.”
“Today, a record number of Americans – 52 million, or 36 percent of all filers – have no direct connection with the basic cost of government because they pay no income taxes,” Hodge told the senators. “If we add this group to the people who have some income but don’t file a tax return, the ranks of American households outside the income tax system rise to 48 percent.”
He continued, “Indeed, because of the expansion of tax benefits aimed at low- and middle-income households, the OECD finds that the U.S. has the most progressive income tax system of any industrialized country. What that means is that the top 10 percent of U.S. taxpayers pay a larger share of the income tax burden than do the wealthiest decile in any other industrialized country, including traditionally ‘high-tax’ countries such as France, Italy and Sweden.”
The chart below, compiled from IRS data, details the U.S. trend in tax burden from 1987-2008.
In a blog post following his testimony, Hodge related that one of the senators posed and intriguing question: If the richest 10 percent of taxpayers in the U.S. earn the relative most – compared to the rest of the nation’s wage earners – of any OECD country, shouldn’t it make sense that they also bear the largest tax burden of any country?
But Hodge pointed out that even by the senator’s criteria, factoring in how much the wealthy in the U.S. make, rich folks in America still pay the highest proportion of taxes of any industrialized nation.
Using 2005 OECD figures on 24 different nations, Hodge compared the share of market income of the wealthiest 10 percent to the share of tax burden of the wealthiest 10 percent, creating a ratio that could be compared between the different countries.
For example, if the wealthiest decile of a nation made 30 percent of the nation’s income and paid 30 percent of the nation’s taxes, the ratio would be an even 1.0.
“The ratio for U.S. households is 1.35,” Hodge stated, “far greater than the ratio of taxes to income in any other country. Even in the three countries with a comparable distribution of income, the ratio of taxes to income was less: 1.18 in Italy, 0.84 in Poland, and 1.20 in the U.K.”
Hodge’s chart of taxes-to-income ratios can be seen below:
Hodge also answered the objection that even if the rich in the U.S. are paying the highest proportionate rate, “Big Business” is getting off easy, right?
“Not only does the U.S. have the most progressive income tax system among OECD nations,” Hodge told the Senate committee, “it also has the second-highest corporate income tax rate in the OECD.”
Tax code undermining the economy?
Hodge’s testimony also included scathing criticism over how the federal government is distributing its tax expenditures and subsidies.
“Over the past two decades,” Hodge testified, “lawmakers have increasingly asked the tax code to direct all manner of social and economic objectives, such as encouraging people to: buy hybrid vehicles, turn corn into gasoline, save more for retirement, purchase health insurance, buy a home, replace the home’s windows, adopt children, put them in daycare, take care of Grandma, buy bonds, spend more on research, purchase school supplies, go to college, invest in historic buildings and the list goes on.”
He continued, “Today, the biggest financial crises facing working families and the economy are health care, housing and state and local government finances. Ironically, these are the areas in which government is already the most involved.
“For example,” Hodge said, “the tax preference for employer-provided health insurance creates a classic third-party payer problem in which patient-consumers are disconnected from the cost of service. The cost of health care is soaring because we have an unlimited demand for health care since someone else is paying the bills. The market forces that deliver quality goods at low prices for everything from toasters to automobiles have been disrupted in the health-care system because it is tax preferred.
“The recent health-care reform legislation will make this problem worse, not better,” he concluded. “The cure for what ails these industries is to be weaned off the tax code, not given more subsidies.”
Not surprisingly, Hodge’s proposed solution is major reform of the tax code:
“There are any number of plans that would greatly simplify the tax code, including the flat tax, Rep. Paul Ryan’s ‘Roadmap,’ the FairTax and the Bradford X-tax. A good illustration of how far tax rates can be lowered by eliminating some or all of the tax expenditures in the code is the ‘Zero Plan’ drafted by the chairmen of President Obama’s National Commission on Fiscal Responsibility and Reform, Erskine Bowles and Alan Simpson.”
Hodge concluded his testimony with the following assertion: “Washington needs to call a truce to using the tax code for social or economic goals. The consequence of trying to micromanage the economy as well as individual citizens’ behavior through the tax code is a narrow tax base and unnecessarily high tax rates. These high rates are endangering America’s global competitiveness and undermining the nation’s long-term economic growth.
“Fundamental tax reform can restore the nation’s competitiveness and put us on a growth path for the future,” he said. “Not only will this improve living standards in America, but it will improve the nation’s fiscal health. That is a win-win for everyone.”