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If U.S. taxes are so progressive, why the inequality gap?

By Aimee Picchi/CBS News 1:02 PM May 13, 2014

In the debate over America’s increasing income inequality, some of the rhetoric has focused on the country’s tax system, with calls for heftier burdens placed on the country’s wealthiest. Heck, even millionaires say they and their cohorts should face higher taxes.

That’s prompted some critics to point to a 2008 report from the Organisation for Economic Co-operation and Development, which stated that the U.S. has the most progressive tax system among developed countries. Therefore, some conservative groups such as the American Enterprise Institute have argued, America is already addressing inequality and should be held up as a “redistributive paradise.”

Not so fast, argues the Center on Budget and Policy Priorities in a report issued Monday. Some of the analyses are “cherry picking” and distorting the OECD’s findings, the report’s authors argue, noting that the conclusions aren’t as rosy as some would like to think. Instead, the American system of taxes and cash transfers — such as Social Security payments — are doing less to reduce inequality than almost any other OECD country, despite the country’s progressive tax.

So how does that work? After all, if a country’s tax system taxes wealthy people at higher levels than the poor, shouldn’t that help to narrow income inequality?

There are two big issues with the U.S. system that are actually putting it behind other developed countries, the Center for Budget and Policy Priorities reports.

“The answer is that tax progressivity by itself gives an incomplete picture of how much taxes and cash transfers reduce inequality,” authors Chye-Ching Huang and Nathaniel Frentz wrote.

First of all, the overall amount raised by taxes directly impacts how a country can address inequality: The less money raised through taxes, the fewer resources a country has to redirect those funds to lower-income families, for example. And taxes in the U.S., despite its progressive policies, represent a smaller share of household income (about 26 percent) than in the average OECD country (at about 29 percent, excluding the U.S.)

Secondly, the U.S. spends less on cash transfers — at about 9 percent of household cash disposable income — than almost any other country in the OECD, and about half as much as the OECD country average of 22 percent.

“As a result, while U.S. income and employee payroll taxes were the most progressive in the OECD, they were only the fourth most effective in reducing income inequality,” the report notes.

Regardless of interpretation, the fact remains that inequality is growing in the U.S., as well as other developed countries. The top 1 percent of Americans now take home 20 percent of all pre-tax income in the country, or double their share in 1980, the OECD reported earlier this month.

And despite higher taxes as a percentage of GDP in countries such as Denmark and Germany, inequality is also rising in those countries, albeit at a slower rate than in in the U.S.

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