In their post at RealClearMarkets, Sita Slavov and Alan Viard provide a valuable insight. The U. S. tax system is the result of a grand compromise between our two major political parties:
Our smaller, more progressive tax system has emerged as a compromise between the two parties. Republicans would probably prefer a smaller and less progressive fiscal system. That approach would promote economic growth by imposing smaller penalties on earning income, saving, and investing, but it would also reduce redistribution and harm those with lower incomes. Democrats would probably prefer a larger and more progressive tax system with larger benefit payments. That approach would reduce income inequality, but it would also impede economic growth. Neither of these extreme combinations is likely to be politically feasible.
In addition there’s something that cannot be emphasized too much. If you think that the purpose of our tax system is to raise the money necessary to fund the federal government, to restrain the growth of government, to redistribute from the rich to the poor thereby reducing income inequality, or some chimera of those three, our system is a failure. The deficit, the amount that we’re borrowing or creating to fund the government, continues to rise without bound. The federal government continues to grow. Income inequality is the highest it’s been in a century.
Most actual federal revenue is produced either by income taxes (58% including individual and corporate taxes) or payroll taxes (33%). By comparison in Germany about 40% of federal revenue is from individual and corporate income taxes while 32% is from consumption taxes.
