Peter Whiteford is one of my favourite commenters. He rarely joins a thread without adding useful data or some telling insight. On Monday he showed up on Matt Yglesias’ blog to explain the difference between progressivity and redistribution in the tax system.
The debate was over a table Scott Hodge posted on the Tax Policy Blog. According to Hodge "the U.S. has the most progressive income tax system among industrialized nations." Yglesias argued that this was misleading. Here’s part of Whiteford’s reply:
… progressivity is not the same as redistribution. Progressivity measures how the distribution of the tax burden is shared, while redistribution measures how much the tax system reduces inequality. Redistribution is influenced both by the progressivity of taxes and the level of taxes collected.
In fact, the US system of direct taxes actually reduces inequality more than any other country as well. But overall, the USA reduces inequality a lot less than most other countries, because the other thing that you need to take into account is what taxes get spent on.
Now the US system of social security and cash benefits reduces inequality by less than any other OECD country except Korea. The US social security system is marginally less progressive then the OECD average, but the level of spending is very low – only Mexico and Korea spend less in the OECD.
So while the US tax system is progressive and reduces inequality, the US welfare state is much less effective at reducing inequality. And because the US has a very unequal distribution of income from capital and a much wider wage distribution than many other OECD countries, it ends up as a relatively unequal country after taxes and benefits.
Of course Whiteford is well placed to explain the data. As he wrote in his comment: "I am the person who wrote the chapter in the OECD report that is the basis of these figures."