Tax Progressivity, Here and in Germany

I wish that Joseph Sternberg had included more perspective in his Wall Street Journal op-ed on progressivity in taxes in Germany:

The Germans specialize in devising pithy nicknames for tax problems. The “middle-class belly” describes the way in which Berlin’s income-tax code applies steep marginal rates at lower incomes before leveling off—it looks like a protruding stomach on a graph. And now comes the “whale in the bathtub.” It’s the most serious problem of all, and an illustrative one for the rest of Europe.

Europeans believe their tax codes are highly progressive, giving lower earners a break while levying significant proportions of the income of higher earners and corporations to fund generous social benefits. But that progressivity holds true only for direct taxes on personal and corporate income.

The graph above, reproduced from the op-ed shows total percentage of tax by income decile in Germany and, as you can see, for the poorest income decile taxes are around 35% (mostly VAT) while for the highest income decile taxes are around 45% (mostly income taxes). That’s a a difference of around 10 percentage points or, in other words, Germany’s tax system when taken overall is slightly progressive.

The perspective I wish had been added is a comparison with the U. S. tax system so I decided to supply it. These figures are five years old so they’re slightly dated and derive from a Washington Post column by Ezra Klein. Consider this graph:

Several things are apparent from that graph. The first is that our tax system is relatively flat. The tax rate on people in the lowest decile is around 17% while that of the highest decile is around 31%—a difference of just 14 percentage points. It also bears mentioning that the only time that total taxes have represented such a high percentage of income in our history is at the height of World War II.

Germany could makes its tax system more progressive by reducing or eliminating its VAT. That’s something it should do anyway. The only really practical way to make our system more progressive is by taking a step that is uninteresting to Republicans and which Democrats have already rejected: cutting or eliminating FICA.

One more point. Some will suggest that the substantial difference between the total taxes that Germans levy on themselves with the total taxes that Americans will accept means that there’s a lot of space for tax increases in the United States. Among the many differences between Germany and the United States is that Germans actually get value for their higher taxes. In the United States taxes are largely used to boost the income of the highest quintile of income earners. Most Americans who aren’t in that highest quintile (and some who do) don’t see that as value received.

7 comments… add one
  • Jimbino Link

    Germany’s near-compulsory health insurance needs to be considered a tax, too. And don’t forget its compulsory church tax.

  • Andy Link

    The Ezra Klein chart appears to leave out a lot. I could not find the original data, but it’s quite different from the CBO analysis of the same topic (PDF File) which uses 2013 data. See especially the charts that begin on page 31.

    I also wonder where the state and local data comes from, especially considering the large differences is state and local tax schemes and rates.

  • The data in Ezra’s graph and in the CBO report are reported so differently they’re hard to relate. The easiest is Figure 4 in the CBO report which is actually pretty close to the WaPo graph with 3.5% federal taxation for the lowest quintile and 26% average for the highest quintile. Not too greatly different.

  • Andy Link

    Here are the actual chart numbers side-by-side:
    Quintile / CBO / Ezra / Difference
    Lowest / 3.3 / 5 / (2.3)
    Second / 8.4 / 9.5 / (1.1)
    Middle / 12.8 / 13.9 / (1.1)
    80-90 / ~21 / 18.5 / ~2.5
    90-95 / ~24 / 19.7 / ~4.3
    95-99 / 26.3 / 20.6 / 5.7
    Top 1% / 34 / 21.1 / 12.9

    On Ezra’s graph the difference between the bottom quintile and the top 1% for federal taxes is 16.1%. On the CBO chart the difference is 30.7%, almost double.

    But now that I read more into it I think the major differences come down to the 2013 tax changes, which I forgot about. Most of the Bush Tax Cuts were made permanent, but several of them were rolled back including the payroll tax and a few changes that affect the top quintile. Since Ezra’s table is from 2011 those tax changes probably explain the bulk of the difference for the upper quintiles but it doesn’t explain why rates would drop for the lower quintiles, especially considering the payroll tax was reduced 2% in for the 2011 tax year and then increased 2% for the 2013 tax year.

    Anyway, it would be interesting to see more current data for comparison.

  • The basic points still remain: Germany’s tax system isn’t as progressive as they think it is but it’s still somewhat progressive, ours isn’t as progressive as we think it is; it’s almost flat.

  • Andy Link

    BTW, here’s an interesting report comparing progressivity for individual states:

    Who Pays Report

  • Thanks, Andy. I would have predicted that Illinois was among the most regressive. It’s almost a done deal with a constitutionally-mandated flat income tax like Illinois’s. Fun fact: the state legislature has just made the state more regressive by raising the state’s income tax rate.

    A flat tax and heavy reliance on property taxes and sales tax are a formula for a regressive tax system. The only decent thing to do is to keep the income tax rate low. Of course, our state legislators don’t understand that.

    IMO there is are arguments to be made for a proportional tax system or for a progressive tax system. There is no argument whatever for a regressive tax system.

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