Tax systems across the rich world have become markedly more progressive over recent decades, more than offsetting the rise in pre-tax income inequality that occurred mainly in the 1980s. America redistributes about twice as much today as in the 1960s. Germany, Japan, Britain and Canada also redistribute considerably more than they used to. By one estimate, seven in ten countries have more progressive tax-and-benefit systems than in 1990. Those that have become less progressive tend to be dysfunctional (Belarus, Eritrea, Haiti) or were exceptionally redistributive to begin with (Norway, Sweden).
In the nominally progressive mid-20th century, high statutory rates masked widespread avoidance. During the 1950s America's top income-tax rate was at least 91%, yet the effective federal income-tax rate on the top 1% was around 20%, falling as low as 13.8% in the 1960s. Britain's top rate reached 83% on income and 98% on dividends. In Sweden in the 1970s the marginal rate in effect exceeded 100% for some people.
Today, avoiding tax is harder. The effective tax rate on Britain's top 1% is now nearly 40%, up from 34% in the 2000s. In Canada the top 1% face an effective income-tax rate of 39%. In Spain the effective rate on the 1% has risen from 30% to 34% over 20 years. America's average federal income-tax rate on the top 1% is 27.6%, close to the historical high of 28.9% in 2000.
A study by Thomas Coleman and David Weisbach, both of the University of Chicago, found that America's tax system "has become more progressive and more redistributive over the last several decades". Research by Thomas Piketty of the Paris School of Economics and colleagues found that redistribution "is significant in France and the US and increased throughout the entire 20th century". Gerald Auten of the Treasury Department and David Splinter of the Joint Committee on Taxation conclude that someone in the top 0.01% pays about 50% tax overall and that the very richest face higher effective rates today than did their counterparts in the 1960s or 1970s.
The concentration of the tax burden has left governments highly dependent on top earners for revenue. Britain's 1% account for nearly 27% of the income-tax take, up from 22% in 2000. In Australia the 1% account for 17-20%, up from 16% in the early 2010s. In South Korea the top 1% account for 40%, up slightly in recent years. In America the 1% paid 40% of income tax in 2022, up from 33% in 2001.
Across the rich world social transfers now account for about 22% of GDP, up from 18% in the mid-1990s. In the EU the median state pension is worth 60% of the earnings of a 50-something, up from 55% in 2010. More than half of working-age people in Britain now receive more in state spending (including health care) than they pay in tax, up from about a third in the 1990s. An American in the bottom income quintile receives means-tested benefits worth 100% of their earned income, up from 50% in the late 1970s.
Research by Arun Advani of Warwick University suggests that in 2018 the very richest British people (earning many millions a year) paid around 25% when income is broadly measured, compared with about 35% for the merely very wealthy. Akcan Balkir of the University of California, Berkeley, and colleagues find similarly low effective rates for the 400 or so richest households in America. However, David Splinter argues that when wealth is distributed across family members, the effective rate for the richest 400 taxpayers is closer to 40%. The "buy, borrow, die" strategy—borrowing against assets to fund consumption and thus avoiding taxable income—remains a minority pursuit, according to Edward Fox of the University of Michigan and Zachary Liscow of Yale.
Contrary to popular belief, the reduction or abolition of inheritance taxes has made little difference to overall inequality. In 1990 OECD members raised 100 times more in income taxes than in estate, inheritance and gift taxes combined. If America had kept its 1960 estate-tax rate (77% on inheritances over $10m), the overall tax burden on the 1% today would be 46.0% rather than 45.3%.
Thomas Piketty, Emmanuel Saez of the University of California, Berkeley, and Stefanie Stantcheva of Harvard conclude that the optimal tax rate on the rich could be over 80%.
See also: wealth taxes.
Dinosaurs aren't extinct. They've just learned to hide in the trees.