A new study from the Fraser Institute ranks the progressivity of tax systems in Organization for Economic Co-operation and Development (OECD) economies. It found that the US has the most progressive tax system of the 33 countries studied.
Measuring progressivity systematically is challenging because tax codes are complex and easily conflated with broader redistribution and transfer policies. The Fraser Institute study strikes a balance by creating an index comprised of multiple tax metrics that indicate progressivity, attainability, and comparability across different countries.
The index uses five metrics to determine and compare tax structure progressivity across
45 jurisdictions covering 33 OECD countries. This study excluded Chile, Costa Rica, Colombia, Turkey, and Mexico because data was lacking.
The metrics used in this study include..
1 – Marginal Personal Income Tax Range
This is the difference in percentage points between the top and bottom marginal personal income tax (PIT) rates.
2 – Distance to the top tax bracket
This is the income level, relative to the national average, at which the highest marginal income tax rate applies.
3 – Low-income tax protection
This shows the size of the basic personal exemption relative to the national average income. In the US, this measures the combined relative size of the federal and state standard deductions.
4 – Income tax share of tax revenue
This is the ratio of personal income tax revenue to total federal tax revenue. Income taxes tend to be the most progressive tax type; therefore, a higher share indicates greater progressivity.
5 – Consumption Tax Share Of Income
This is the ratio of consumption tax revenue to total federal tax revenue. Consumption taxes are generally considered regressive, as a consumption tax of the same amount is a smaller portion of a high-earner’s income than a low-earner’s income, so a higher share indicates less progressivity.
To account for variations in progressivity within countries where subnational authorities have significant taxation power, the index samples regions that reflect the range of local tax policies. In the United States, California and Texas represent the highest and lowest top state PIT rates, respectively, with Texas having no state-level PIT.
Some of the study’s conclusions include..
1 – California is ranked as the most progressive of the 45 OECD jurisdictions
2 – Texas ranks fourth, behind Newfoundland, Labrador, Canada, and Korea
3 – California ranks highest in the marginal PIT rate range, while Texas ranks 28th. Both states rank highly in the measure of distance to the top tax bracket being 8th and 12th, respectively.
4 – California ranks 39th in low-income tax protection, in part because the higher average wage reduces the relative size of the standard deduction, while Texas ranks 24th.
The tax revenue variables drive the US’s high overall ranking. In the income tax share of tax revenue category, the US ranks second to Denmark. Moreover, in the consumption tax share of tax revenue category, the US is the most progressive, with the lowest revenue share in the OECD.
The results are consistent with other studies indicating the US has the most or nearly the most progressive tax code in the developed world, depending on the measure.
But let’s remember that this only compares income tax systems and rates inside the OECD Countries and individual jurisdictions. What happens when you include all of the taxes we pay such as Sales, Property, and Other Excise Taxes?
According to Wallethub, Illinois has the highest combined tax rates of all Americans. We even beat California.
Effective state and local tax rates totaled almost 17% for a median Illinois household last year, compared with the national average of just over 11.02%. This was even higher than #2 New York, at 14.95%.
The median amount of state and local taxes for an Illinois household was $12,538 last year, fourth-highest in the country. That’s the median or the middle value, rather than all income classes combined.
The national median was around $8,949. Illinois’ burden is driven by property, sales and excise taxes that exceed national averages and those in neighboring states.
Property taxes are especially high, with an effective rate of 1.92% of a typical home’s value. This is more than double the national median of 0.89%.
Sales taxes are also elevated in Illinois, with a nearly 9% combined state and local rate on average.
Let me leave you with this…
Doesn’t that make you feel special? We pay more taxes than anyone in the Free World.
I feel like popping open some Champagne. In reality, just writing that sentence made me want a Martini, a Martwoni, and a Marthreeni.
So why do we do it? Why do we pay these ridiculous taxes?
I don’t know about you, but I do it for access to the greatest market I know.
My accounting practice is substantial. I own the largest single partner practice on Chicago’s North Side.
Unlike most accounting practices, I’m not restricted to one jurisdiction. Given my national accounting license, I have the same rights and privileges in Illinois that I have throughout the entire US.
40% of my clients are outside of Illinois and the Chicagoland Area. By and large, those clients are not as strong as my Chicagoland Businesses.
So what are we paying for? Why do we pay these ridiculous taxes?
For me, a large top line translates into a larger bottom line. This also means that our tax planning work is even more important than it is for most Americans.
If you’re paying too much in taxes, or are having difficulties with your accounting and tax work, what are you waiting for? Contact us today.
We’re all going to get through this. Let’s get through it together…
Chris Amundson
President
Accounting Solutions Ltd.
773-267-7500
888-310-0300
www.AccountingSolutionsLtd.com
www.SalarySolutions.net
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