Are Top U.S. Earners Over Taxed?

Are wealthy Americans paying more than their fare share of income taxes? That's a much harder question to answer than Washington might have you think. Republican lawmakers touted a statistic by the Join Committee on Taxation last week that found 51% of households owed no federal income tax in 2009, a number they're using to push back against President Obama's pitch to pay down deficits by increasing taxes for high-income earners.
The Wall Street Journal also threw together a graphic to illustrate why the wealthiest 20% of Americans have been paying more than their share of the country's income in taxes, especially compared to Europe.

Credit: Wall Street Journal

The stats paint a pretty dreamy picture for the un-rich in America, but they're shoddy math for more than a few reasons. First off, the chart uses income tax rates that don't include the many tax breaks that go to mostly higher income earners.

Numbers crunched by the Tax Policy Center show that when you add up the various tax incentives (like mortgage interest deductions, child credits, and deductions for charitable giving) doled out by the U.S. government, top earners end up with the lion's share of benefits. Howard Gleckman at Forbes parses this out:
Those tax breaks are worth an average of $275,000 to those in the top 1 percent (who make at least $668,000) and $1.5 million to those in the top 0.1 percent (who make more than $3 million). These preferences allow those folks at the very top to boost their after-tax incomes by more than 20 percent—more than twice the benefit of those at the bottom.
To put it another way, the highest-income 20 percent enjoy almost two-thirds of the benefits of tax expenditures. More than one-quarter goes to the top 1 percent alone. The bottom 40 percent?  They get about 10 percent. For some, it may be enough to zero out their tax bill, but compared to those at the top, it isn't much of an increase in income.
Factor in the many other peculiarities not reflected in official income tax rates (such as state, local, and consumption taxes), and the difference between Europe and the U.S. turns out to be very little. A July 2010 OECD Observer article calculated that the “all-in” tax rate for top earners in the U.S. is 43.2% of wages, whereas it's 56% in Sweden and 59.4% in Belgium. The “all-in” average for OECD countries is 45.9%, slightly higher than the U.S.

The WSJ graphic also compares tax burdens for the “richest 10%” in Europe and the U.S. to show that Americans are paying a bigger share of the country's income in taxes than Europeans. But just who's included in that top 10%?  In Hungary, Ireland, and Luxembourg, the average worker pays the top marginal tax rate, according to the OECD, whereas U.S. taxpayers don't hit the top rate until they've earned nearly ten times the average U.S. wage level.  In other words, a much bigger group of income earners is paying top tax rates in Europe than in the U.S. So Americans may not be that progressive after all.