The argument that the U.S. tax code favors the rich is unfounded, according to this analysis, which compares the federal tax rate faced by the rich to the rate faced by the average blue-collar worker. The tax ratio in the United States has exceeded the OECD average for over a decade, demonstrating that the U.S. redistributes income far more than the typical developed country.

Senior Fellow Kevin A. Hassett

Most everyone seems to believe that the United States has pursued a tax policy that is radically different from that of other countries because it favors the wealthy.  Indeed, this assertion has been a key argument of Senator Obama over the past year: "For decades, America has been victim to an anti-tax sentiment that has led to tax cuts that favor wealth, not work."

Does the United States favor the rich in comparison to other countries?  The attached chart addresses the question.  It plots for the years 1981 through 2007 the ratio of the tax rate faced by the rich to the tax rate faced by a typical blue collar worker.  If a country's tax code is highly progressive, then this ratio will be quite high, as the rich will have tax rates that are much higher than those faced by the poor.  In a flat tax economy, the ratio would simply be one, since everyone would face the same tax rate.

In the United States, we have a top statutory income tax rate of 35 percent.  The Social Security tax no longer applies to the rich, as it goes to zero for incomes above $102,000, but the Medicare tax of 1.45 percent on employers and employees is also imposed, making the top rate on labor income in the United States about 38 percent.  In 2007, a person who earned half of the average income (as measured in GDP per capita) earned about $23,000 and faced a federal income tax rate of 15 percent. This person also, however, faced Social Security taxes and Medicare taxes.  Accounting for these, the income received by the lower-wage worker faced a combined tax rate of about 30, and the ratio of this to the top rate was about 1.3.

When one performs such a calculation for a typical European country, one finds a lot more flatness in the tax code.  This occurs for a simple reason: while income taxes tend to be quite progressive, payroll and sales (or value-added) taxes are paid by just about everyone, and large governments around the world have to rely on all of these tools to raise the revenue they need to spend more than 40 percent of GDP. 

Thus, the chart reveals a surprising fact:  We redistribute far more than does the typical developed country. 

The chart also shows that this was not always true.  The United States redistributed more than its major trading partners when Ronald Reagan took office and the top marginal tax rate was 70 percent.  Reagan then drastically reduced that top rate, but the progress was reversed first by George H.W. Bush and then again by President Clinton. Ever since the early 1990s, we have been one of the more redistributive countries in the OECD.

The notion that U.S. tax policy is out of whack with the practices of our main trading partners is absolutely correct, but Mr. Obama has the direction wrong.  We redistribute more than they do, even with rates where they are.

Kevin A. Hassett is a senior fellow and the director of economic policy studies at AEI.