The Tax Code Isn’t Good at Fighting Inequality

October 9, 2014

A recent article on Vox, How Sweden Fights Inequality—Without Soaking the Rich, notes that countries with the most success in fighting inequality do not have highly progressive tax systems, such as the United States’ tax code. Instead, these countries, such as Sweden and Denmark, rely on much flatter taxes and use spending programs to address inequality.

The authors say there is a reason why not using the tax code makes the most sense:

“The lesson for the United States is that relying on the wealthiest citizens and corporations to fund the public sector will not create the revenue necessary for large-scale initiatives to reduce inequality. Emphasizing redistribution as the central principle for tax policy is needlessly divisive, leads to smaller government revenues overall, and thus misses the positive benefits that having more revenues can offer if invested wisely in promoting success for all.”

We have seen this divisiveness in recent years as calls for the wealthy to pay their fair share and requirements of maintaining the progressivity of the tax code have inhibited efforts on tax reform.

Beyond the reasons to move away from high taxes on individuals and corporations as stated in the article, research shows that highly progressive tax systems come with additional costs: they damage economic growth.

In fact, the OECD finds moving away from corporate taxes and progressive income taxes is good for growth. Developed countries around the world have paid attention to this finding and continue to shift away from highly distortive tax policy, such as progressive income taxes and the corporate tax, and toward flat individual or consumption taxes.

Again, countries such as Sweden and Denmark provide a good example. Both countries have cut their corporate tax rates significantly in the last 30 years while relying, instead, on relatively flat tax codes that tax large amounts of the population. Sweden, for example, taxes individual taxpayers at a rate of 56 percent on income over $84,365, which is 1.5 times the average income.

This is a far cry from the tax system In the United States. Our highly progressive tax system leaves high income individuals with a disproportional amount of the tax burden, with the top tax rate of 46.3 percent (national and subnational) beginning at 8.5 times the average income level.

As a result, in the U.S. individuals with incomes over $200,000 earn 32.3 percent of the nation’s income, but pay 46.7 percent of total federal taxes and 70 percent of federal income taxes.

Additionally, we levy the third highest corporate tax rate in the entire world—behind only Chad and the United Arab Emirates—and tax investment two, and sometimes three, times in the form of capital gains and dividend taxes and the estate tax.

These types of taxes are inefficient, as many European countries might tell us. They raise limited revenue and impose a significant level of economic harm.

Instead, the U.S. should move away from highly progressive taxes on income and investment and toward flatter consumption taxes. If policymakers are set on addressing inequality, this would limit the economic damage done by the current tax code and allow them to rely on spending programs for redistribution instead.

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