In short, whether it intends to or not, Congress is leaning towards making the long-term deficit even bigger. It is preparing to underwrite a large and permanent expansion of the government's spending obligations while failing to provide for a corresponding expansion of the tax base. A crucial question is therefore whether, and for how long, Mr Obama will continue to be bound by his pledge to raise income taxes "by not one cent" for almost all Americans.You can read the whole thing here.
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. 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. Welcome home, Mr President.
« G20: The bottom line | Main | A criminally stupid war on drugs » America's widening fiscal gap07 Apr 2009 03:26 am
My latest column for the FT looks at the ever-widening long-term budget gap and what will be needed to close it.
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Has it ever occurred to anyone (and, admittedly I haven't researched this to say whether or not it's true) that, perhaps the reason the wealthiest Americans now pay such a higher percentage of taxes is because the US easily has the highest income disparity of the developed nations?
It could potentially mean that while the wealthy pay a higher overall percentage of the income tax, relative to their overall wealth; they still pay a lower amount.
This would jibe with the fact that the earners in the highest tax bracket, have the lowest rate of taxation of any time in the past 80 years (and this particular point in absolutely true).
I'm not saying we should start fleecing the rich (Indeed, all Americans need to face the fact that they can either have their government services, or higher taxes, but not both), but it does undercut the continued whining from wealthy America that they're being taken for a ride.
Excellent column, as usual. A wake up call for the American left. Unfortunately, most of my left of center friends in New York, when I've pointed out to them that income taxes on the loosely defined "rich" will never be enough to pay for Obama's spending, respond uniformly by covering their ears and repeating loudly "but Bush made the deficits worse, but Bush made the deficits worse!"
The real problem for Obama is political - when he eventually faces reality and raises middle class taxes to pay for all of these commitments, he will be exposed as the unreformed snake-oil salesman that he is. He was elected on the back of promises of free government goodies for the middle class. But in government, as in life, you can't get something for nothing.
Oh please! This is a very misleading use of statistics. You can't measure the progressiveness of the tax code by looking at the revenues raised from the top income decile because by doing so you ignore the income distribution. The reason the U.S. collects more taxes from its wealthy citizens than Britain, France, Canada and Sweden is not because its tax code is more progressive but because its income distribution is more unequal. The rich account for a significantly higher proportion of U.S. national income than in those nations.
How is taxing the middle class politically feasible when there is already so little economic mobility in America?
The rich and multinational corporations throughout the Baby Boomer generation have done a fantastic job at engineering the slow and steady collapse of the middle class - and now you're calling for our government to take the final stab. Sounds like a beautiful plan.
Like most people writing on this, you miss a very important distinction between the US and the countries you name: our federal system. Once the entirety of the tax burden on individuals is taken into account (federal, state income and sales, local), the US tax system gets significantly less progressive. In fact, progressiveness may disappear entirely, depending on the study.
If the U.S. middle class is "seriously undertaxed," what does that say about upper income Americans?
One glaring element in this claim that the US, relatively speaking, overtaxes its rich is the fact that we have very liberal exemption and deduction allowances for both personal and corporate tax filers.
Let's compare the allowable deductions as well, 'kay?
Clive, interesting points. A question: to what degree might these comparative data be skewed by the level of state and local versus federal taxation in the US as it compares to the other countries you mention?
While I do agree that a consumption tax is both desirable and necessary, most populous states already have significant sales taxes (NY:7-8.75%; CA: 8.25-10.25%; IL: 6.25-11.5%), which tend to be more regressive than the federal income tax you mention. Revenue from these taxes is used to fund a number of programs (including unemployment and welfare benefits and medical care) generally paid at the national level by European countries.
In addition, if the focus is on the income tax levels and revenue generated alone, does this distort the effect of Social Security and other payroll-based levies, which once again are more regressive than the income tax levels would seem to indicate?