What Does a Less Progressive Income Tax Look Like?

September 23, 2014

A defining characteristic of an individual income tax system is its degree of progressivity. The United States has a rather progressive income tax. This means that the average tax rate 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 rate structures. These structures tax each subsequent bracket of taxable 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 base. 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 tax, 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 broadening 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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