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Will Soaking The Rich Go Too Far?

Clive Crook--one of my favorite conservative writers--has a new column in which he warns against raising taxes on the rich to finance new government spending, particularly health care. The reason? The U.S. tax code is already very progressive by international standards. Making the tax code even more progressive will, Crook says, push it even more to that extreme.

Mr. Obama intends to squeeze the rich, but the scope for this may be more limited than US liberals would wish. Few Americans seem aware that the US income tax code, as a recent Organisation for Economic Co-operation and Development study showed, is already one of the most progressive. Even before the rise in top marginal rates promised by Mr Obama, the US income tax collects 45 per cent of its revenues from the highest-income decile. Compare that with Britain at 39 per cent, Canada at 36 per cent, France at 28 per cent, Sweden at 27 per cent and an OECD average of 32 percent.

My understanding is that Cook basically right, in this sense: Relative to Europe, we draw income taxes more disproprotionately from wealthy people. 

But European contries also collect far more taxes overall, as Crook acknolwedges. And they use those tax revenues to finance far more generous welfare states. Particularly in Scandinavia, but also in Western Europe, taxes finance all sorts of public programs--not just universal health care, but also child care, worker retraining, and the like. These programs also have a strongly progressive effect, as this report from the OECD (the same report that Crook cites) makes clear:

Redistribution of income by government plays a relatively minor role in the United States. Only in Korea is the effect smaller. This is partly because the level of spending on social benefits such as unemployment benefits and family benefits is low--equivalent to just 9% of household incomes, while the OECD average is 22%. The effectiveness of taxes and transfers in reducing inequality has fallen still further in the past 10 years.

In other words, European taxes are more regressive than ours. But, overall, the effect of their government programs--including both taxes and spending--seem to be more progressive. (I say "seem" because I don't have all the relevant statistics in front or me or an economist at hand to guide me through them. But I'm pretty sure that's right.)

To be clear, Crook isn't arguing we can't have more government spending, although he worries about financing that spending with deficits. In fact, he's suggested before that the government may need to take on more responsiblities, particularly for health care. But he prefers to finance such expansions through more evenly distributed tax increases, like a value added tax. (V.A.T.) 

That's certainly a reasonable argument in principle. The more government programs serve not just the poor but the middle class, as well, the more the middle class should take some responsibility for financing them (although precisely how much is a matter on which Crook and I might disagree).

Update: Chuck Marr, at the Center on Budget and Policy Priorities, offers a more definitive take on how progressive our tax code already is--and isn't. 

--Jonathan Cohn