US Tax Rates - Maudlin

What about tax rates? Who has the highest tax rates in the world?

The US is close to the top.

The top marginal income tax rate at the federal level is 39.6%.

Now, a lot of economists stop there, and say US taxes are 39.6%, Sweden’s are 59.7%, so the US is a low-tax jurisdiction.

But you have to take into account state income taxes, too. California is the highest, at 13.3%. Some municipalities and counties also have income taxes. When you take into account New York state and city income taxes, it’s also about 13.3%.

So 39.6 + 13.3 = 52.9%.

Catching up to Sweden!

We’re not done yet. We now pay a 3.8% surtax on investment income, which was intended to fund Obamacare. That makes it 56.7%.

Only four countries in the world are higher³. Sweden, Finland, Canada, and Belgium⁴.

We’re not done yet!

We also pay payroll taxes of 6.2% for the employee and 6.2% for the employer on the first $118,500 of income, plus Medicare taxes of 2.9%, 1.45% for the employee and 1.45% for the employer. Economically speaking, the employee pays both. So add 2.9% to the total, and then you get to 59.6%.

We’re not done yet!

In some localities (like New York), there is something called an “unincorporated business tax,” or UBT, so if you have an LLC or sole proprietorship, you pay another 4% on your net business income.

63.6%.

Not done yet!

We haven’t yet discussed property taxes. In high-tax jurisdictions like New York, New Jersey, Connecticut, or Illinois, you can easily have a tax burden of $20,000 annually on a middle-class home. I have heard that property tax bills of $50,000 to $70,000 are pretty common. Nobody takes this into account in the global comparisons.

Even where I’m from, in the impoverished eastern part of Connecticut, it’s not uncommon to see $4,000 property tax bills on houses that are worth about $130,000.

Now we’re done.

So is the US a high-tax jurisdiction or a low-tax jurisdiction? Or a better question might be: How can we pay so little compared to other countries if our tax rates are so high?

Glad you asked.

The Most Progressive Tax Code in the World

I think if I were an economics PhD student, the topic I would pick for my thesis would be to measure the progressivity of income taxes around the world. Like, how much people in low brackets pay compared to people in high brackets. This is an important question.

A lot of people spout off about taxes without really knowing what they are talking about. So let’s pull up the latest tax table from the IRS:

Source: Tax Foundation

So you might recall the Mitt Romney biff from the last election when he said that half the country pays no income taxes, and people thought this was a very tone-deaf thing to say. If you look at the table above, you can see that everyone pays at least some tax. So what gives?

Two points:

1. Generally, people in the lower brackets get a lot of deductions and credits (like the EITC) that completely eliminate their tax liability, or even create a negative one. That’s right—not only do a lot of these folks pay no income taxes, they actually receive money from the government.⁵

2. People still pay payroll tax, to fund Social Security and Medicare.

Our tax code is very progressive—the effective tax rate for millions of people is zero or negative, while the effective tax rate for rich filers is in the thirties (or much higher when you add in state income taxes and other items that we discussed before).

What about Sweden?

Here are Sweden’s tax brackets, in USD (from Wikipedia):

0%      $0 to $2,690
31%    $2,690 to $62,140
51%    $62,140 to $88,180
56%    $88,180+

So as you can see in Sweden, everyone pays a decent amount of tax. The rates are high, but the tax code is not all that progressive.

And this is how the OECD reports Sweden has a much higher tax burden than the US: the tax code is flatter, and everyone pays. Lower class, middle class, upper class—everyone.

Progressive tax codes are the worst things in the world.

Why?

With a progressive tax code, you can divide people into groups and turn them against each other. The rich aren’t paying their fair share. The poor aren’t either. There is a lot of hate and discontent.