May 22 2014
Policy Focus: Four Myths About American Taxes
Rachel DiCarlo Currie
To paraphrase the late Israeli diplomat Abba Eban: When it comes to tax reform, U.S. lawmakers never miss an opportunity to miss an opportunity. Every time it appears that momentum is building for a sweeping overhaul of the kind we had in 1986, something derails the process. The latest casualty was the tax-reform plan introduced by House Ways and Means Committee chairman Dave Camp (R., Mich.), which was almost instantly declared “dead on arrival.”
Why is tax reform so hard? There are many reasons, of course, but one big reason is the persistence of several myths about American taxes. For example, many people seem to believe that the United States (1) is a low-income-tax country, (2) has a relatively modest effective tax rate on corporate investment, (3) could raise a massive amount of new revenue by hiking the top federal rate on individual income, and (4) has a less progressive tax structure than most nations in Western Europe.
Each of those assertions is either deceptive or just plain wrong.
As this paper will demonstrate, America depends on income-tax revenue far more than most other developed countries; its marginal effective tax rate on corporate investment is among the very highest in the world; its federal tax on individual income has yielded a remarkably consistent amount of revenue over the past four decades, despite huge variations in the top rates; and its overall tax structure is actually more progressive than those of the major European welfare states.