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If taxing the rich increased equality, the U.S. would be more egalitarian than Europe

December 19, 2011

Equality is overrated. There's a lot of equality in North Korea because (almost) everyone is very poor, and even for the top 1% things aren't so hot. In the U.S. the poorest 20% are better off than all but the very wealthiest in Brazil or India, to say nothing of North Korea; it can't be much comfort for people in poor countries that they are more equal in their misery.

Yet reducing inequality remains a big deal in tax policy. Many pundits think that we need ever-heigher taxes on the rich to reduce wealth disparity. Economist Timothy Taylor says that doesn't seem to work (via Arnold Kling):

It's useful to look at redistribution policies both from the tax side and the benefits side. The striking theme that emerges is that in most countries, benefits for those with low incomes are much more important in reducing inequality than are progressive tax rates.

On the tax side, the U.S. tax code is already highly progressive compared with these other countries.

This finding is surprising to a lot of Americans, who have a sort of instinctive feeling that Europeans must be taxing the rich far more heavily. But remember that European countries rely much more on value-added taxes (a sort of national sales tax collected from producers) and on high energy taxes. They also often have very high payroll taxes to finance retirement programs. These kinds of taxes place a heavier burden on those with lower incomes.

The welfare states of Europe are funded by taxes on everyone, not just "the rich." But our politicians keep promising free stuff that somebody else will pay for.

Related: The rich guy still isn't buying the drinks

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Not really sure what you are saying here. The push to raise taxes is probably more driven by a very large deficit rather than an attempt to somewhat level the playing field. From the standpoint of our historical tax brackets and the progressive nature of such brackets, it seems that such current income tax bracket rates are lower and there are fewer brackets. I think people like Warren Buffet look at our national income statement and think we need more revenue. So where should it come from? The answer is more based on history and ways to increase the taxes coming into our government than any equality argument.

Steven, I think you are incorrect in denying that it is based on an inequality argument. "The rich" can't possibly pay for current levels of spending, no matter how high the rates. Beating up on high earners doesn't solve the problem, and it likely makes it worse.

The politicians go after "the rich" as a diversion from their own failures to control spending. They won't tell voters that they will get a bill for all the free stuff politicians want to give them. Attacking the rich doesn't solve the problem, it evades it.

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