A defining characteristic of an 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. system is its degree of progressivity. The United States has a rather progressive income 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. . This means that the average tax rateThe average tax rate is the total tax paid divided by taxable income. While marginal tax rates show the amount of tax paid on the next dollar earned, average tax rates show the overall share of income paid in taxes. paid by an individual increases as their income increases. Contrast this with a flat income tax, which all taxpayers have the same average tax rate regardless of income or a regressive income tax, which taxpayers pay declining average tax rates as their income increases.
Most countries maintain progressivity in their individual income tax through 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. structures. These structures tax each subsequent bracket of taxable incomeTaxable income is the amount of income subject to tax, after deductions and exemptions. For both individuals and corporations, taxable income differs from—and is less than—gross income. at progressively higher rates. The United States’ income tax rates range from a low of 10 percent to a high of 39.6 percent. For example, a taxpayer with $40,000 of taxable income would be taxed on the first $9,075 at 10 percent, the next $27,000 at 15 percent, and the remaining $4,000 at 25 percent.
|
2014 Taxable Income Brackets and Rates |
|
|
Rate |
Single Filers |
|
10% |
$0 to $9,075 |
|
15% |
$9,076 to $36,900 |
|
25% |
$36,901 to $89,350 |
|
28% |
$89,351 to $186,350 |
|
33% |
$186,351 to $405,100 |
|
35% |
$405,101 to 406,750 |
|
39.60% |
$406,751+ |
States also have income taxes with varying degrees of progressivity and rates. On average, the top rate for a taxpayer in the United States tops out at about 46 percent.
The result is that as an individual’s income increases, so too does their average tax rate.
But how progressive is the U.S.’s tax code? One way to measure and compare the progressivity of income tax codes across countries is to express the level of income at which each country’s top tax bracket applies as a multiple of that country’s average income.
For example the United States’ top marginal income tax (state and federal combined) rate of 46 percent applies to a bracket of income over $406,751, or approximately 8.5 times the average income in the United States of $48,000. Very few people earn enough to face this top rate, creating a very narrow tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. . The higher the multiple, the more progressive and narrower the income tax base.
According to this measure, the United States has one of the more progressive income taxes in the OECD (8th of 34 OECD countries). Portugal has the most progressive income tax, with a top rate that applies at 16.2 times the average income, followed by France (15.1 times) and Chile (12.8 times).
Hungary has a flat taxAn income tax is referred to as a “flat tax” when all taxable income is subject to the same tax rate, regardless of income level or assets. , which means that the top rate (their only rate) applies at 0 times the average income, or on the first dollar. Estonia and Czech Republic have nearly flat income tax codes (top rates that apply at 0.2 and 0.4 times the average income in each country).
|
Progressivity and Top Marginal Rates of OECD Ordinary Income Taxes, 2013 |
|||
|
Country |
Rank |
Multiple of Average Income at which the Top Income Tax Rate Applies |
Top Individual Income Tax Rate (National and Subnational) |
|
Portugal |
1 |
16.2 |
50.3% |
|
France |
2 |
15.1 |
54.1% |
|
Chile |
3 |
12.8 |
39.5% |
|
Spain |
4 |
11.7 |
52.0% |
|
Canada |
5 |
10.6 |
49.5% |
|
Italy |
6 |
10.1 |
47.3% |
|
Korea |
7 |
8.7 |
38.1% |
|
United States |
8 |
8.5 |
46.3% |
|
Israel |
9 |
6.2 |
50.0% |
|
Germany |
10 |
5.8 |
47.5% |
|
Greece |
11 |
5.5 |
46.0% |
|
Slovenia |
12 |
5.4 |
39.0% |
|
Japan |
13 |
4.6 |
50.6% |
|
United Kingdom |
14 |
4.2 |
45.0% |
|
Mexico |
15 |
4 |
35.0% |
|
Slovak Republic |
15 |
4 |
21.7% |
|
Switzerland |
17 |
3.4 |
36.1% |
|
Turkey |
18 |
3.3 |
35.8% |
|
Luxembourg |
19 |
3.1 |
43.6% |
|
Finland |
20 |
2.5 |
48.9% |
|
Poland |
21 |
2.4 |
20.9% |
|
Australia |
22 |
2.3 |
46.5% |
|
Austria |
23 |
2 |
43.7% |
|
Norway |
24 |
1.6 |
40.0% |
|
Iceland |
25 |
1.5 |
44.4% |
|
Sweden |
25 |
1.5 |
56.7% |
|
New Zealand |
27 |
1.3 |
33.0% |
|
Denmark |
28 |
1.2 |
56.2% |
|
Netherlands |
28 |
1.2 |
49.9% |
|
Belgium |
30 |
1 |
45.3% |
|
Ireland |
30 |
1 |
48.0% |
|
Czech Republic |
32 |
0.4 |
20.1% |
|
Estonia |
33 |
0.2 |
20.6% |
|
Hungary |
34 |
0 |
16.0% |
|
Source: OECD |
One of the more interesting income tax codes is Sweden. Sweden is usually thought of as having a very progressive income tax that emphasizes redistribution. However, according to this measure, Sweden’s top rate is not narrowly targeted on a small group of high income earners. Rather, Sweden applies its high income tax rate to a large number of taxpayers. The top rate applies at 1.5 times the average income.
What would Sweden’s income tax system look like in the United States? The United States would have a top rate of about 56 percent (10 percentage points higher than it is currently). However, this top rate would apply at $84,365—a much lower level than our current top rate that applies at $406,751. This would be a significant base broadeningBase broadening is the expansion of the amount of economic activity subject to tax, usually by eliminating exemptions, exclusions, deductions, credits, and other preferences. Narrow tax bases are non-neutral, favoring one product or industry over another, and can undermine revenue stability. for the income tax and a significant tax increase for many individuals.
|
Swedish Taxable Income Brackets and Rates (U.S. Dollars) |
||
|
Federal Rate |
Municipal Rate Average |
Income Brackets |
|
0% |
31% |
$0 to $58,912 |
|
20% |
31% |
$58,913 to $84,364 |
|
25% |
31% |
$84,365+ |
This is something to keep in mind when comparing tax revenue as a percent of GDP across countries: yes Sweden raises a lot more revenue than the United States (44.3 percent of GDP vs. 24.2 percent of GDP in 2012), but it does this with a significantly broader income tax base, not a significantly more progressive one.
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