The U.S. is routinely described as one of the lowest taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. jurisdictions in the industrialized world, but a Tax Foundation comparison, authored by Chris Atkins, of top individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. rates calls this conventional wisdom into question. Currently, 9 OECD countries (including 4 members of the European Union) have lower top marginal rates for individuals than the United States (see table below), and more than half of all OECD nations have lowered their rates since 2000.
Lawmakers in the House and Senate approved budget resolutions this year that allow for the 2001 tax cuts to expire, and some are considering imposing surtaxes on the top individual tax rate as part of an AMT reform package. Chris Atkins’ research shows that the combination of the two proposals would push the top marginal tax rateThe marginal tax rate is the amount of additional tax paid for every additional dollar earned as income. The average tax rate is the total tax paid divided by total income earned. A 10 percent marginal tax rate means that 10 cents of every next dollar earned would be taken as tax. in the U.S. up to 49.49%, giving us the 9th highest top marginal rate in the OECD (ahead of Canada, Germany, Switzerland, and the United Kingdom, among others).
The U.S. already has the second-highest combined corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. rate in the OECD. Only Japan’s is higher. Since many U.S. businesses are not large, publicly-held corporations but small or medium-sized businesses that pay their taxes through the individual income tax system (often at the top marginal rate), a high individual income tax rate will stunt our economic growth by increasing the cost of employing labor in the U.S., impeding entrepreneurship and innovation, and harming the international competitiveness of many small and medium-sized U.S. businesses.
Top Marginal Combined Individual Income Tax Rates in the OECD 2006
|
Country |
Top Combined Marginal Individual Income Tax Rate in 2006 |
Rank |
|
Denmark |
59.74% |
1 |
|
Sweden |
56.60% |
2 |
|
France |
55.85% |
3 |
|
Belgium |
53.50% |
4 |
|
Netherlands |
52.00% |
5 |
|
Finland |
50.90% |
6 |
|
Austria |
50.00% |
7 |
|
Japan |
50.00% |
7 |
|
Australia |
48.50% |
9 |
|
Canada |
46.41% |
10 |
|
Germany |
45.37% |
11 |
|
Spain |
45.00% |
12 |
|
Italy |
44.10% |
13 |
|
Switzerland |
42.06% |
14 |
|
Portugal |
42.00% |
15 |
|
Ireland |
42.00% |
16 |
|
Poland |
40.00% |
17 |
|
Greece |
40.00% |
18 |
|
United Kingdom |
40.00% |
19 |
|
Norway |
40.00% |
20 |
|
United Statesa |
39.76% |
21 |
|
New Zealand |
39.00% |
22 |
|
Luxembourg |
38.95% |
23 |
|
Korea |
38.50% |
24 |
|
Iceland |
36.72% |
25 |
|
Hungary |
36.00% |
26 |
|
Turkey |
35.60% |
27 |
|
Czech Republic |
32.00% |
28 |
|
Mexico |
29.00% |
29 |
|
Slovak Republic |
19.00% |
30 |
|
Average |
42.95% |
|
a) Since a combined federal and state rate is presented, the U.S. rate is adjusted to account for the deductibility of state and local taxes. The U.S. is the only OECD country that allows the state and local tax deductionA tax deduction is a provision that reduces taxable income. A standard deduction is a single deduction at a fixed amount. Itemized deductions are popular among higher-income taxpayers who often have significant deductible expenses, such as state and local taxes paid, mortgage interest, and charitable contributions. . In 2006, we assume that less than 20 percent of the state and local tax deduction was clawed back by Pease.
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