A Fraser Institute study ranks the United States as having the most progressive tax system among the OECD economies measured. The finding challenges the view that the US tax code is unusually light on high earners, but the result depends on how progressivity is measured and what the index includes or excludes.
The study compares tax progressivity across 45 jurisdictions in 33 OECD countries. Chile, Colombia, Costa Rica, Mexico, and Türkiye were excluded because of insufficient data.
The index focuses on tax structure rather than broader redistribution through welfare spending or transfer payments. It uses five measures:
- the difference between the top and bottom marginal personal income tax rates
- the income level, relative to the national average, where the top tax bracket begins
- the size of the basic personal exemption or standard deduction relative to average income
- the share of total federal tax revenue raised from personal income taxes
- the share of total federal tax revenue raised from consumption taxes
Income taxes are treated as more progressive, while consumption taxes are generally treated as less progressive because they usually take a larger share of income from lower earners than from higher earners.
Why the United States ranks highly
The US ranks highly mainly because of its tax mix.
The United States relies heavily on personal income taxes and has no national consumption tax. Many other OECD countries rely more heavily on value-added taxes or other broad consumption taxes.
In the income tax share of tax revenue category, the US ranks second after Denmark. In the consumption tax share category, the US ranks as the most progressive because it has the lowest consumption tax revenue share in the OECD.
The index also accounts for subnational taxes where local governments have significant tax power. For the United States, California and Texas are used to reflect the range of state income tax policy:
- California represents the high end of state personal income tax rates.
- Texas represents the low end because it has no state-level personal income tax.
California ranks as the most progressive of the 45 OECD jurisdictions measured. Texas ranks fourth, behind Newfoundland and Labrador in Canada and Korea.
California ranks highest on the range between top and bottom marginal personal income tax rates. Texas ranks 28th on that measure.
Both states rank highly on how quickly the top tax bracket applies relative to average income: California ranks 8th and Texas ranks 12th.
On low-income tax protection, California ranks 39th and Texas ranks 24th. In California’s case, the higher average wage reduces the relative size of the standard deduction.
What the index captures
The index separates tax policy from government spending policy. This matters because two countries can produce similar after-tax-and-transfer outcomes through very different systems.
One country may rely on a highly progressive tax code. Another may rely on a less progressive tax code but more generous spending or transfer programs. By isolating the tax side, the Fraser Institute index focuses on how governments raise revenue, not how they later redistribute it.
The index also looks beyond income taxes alone. By including both income taxes and consumption taxes, it gives a broader picture of the overall tax structure.
This is important for comparing the US with other OECD countries because the US does not have a national VAT, while many other developed economies rely heavily on VAT-style systems.
Limits of the index
The index has several important limits.
It uses statutory tax rates and standard deductions or personal exemptions, but it does not directly account for tax credits. This is significant for the United States because refundable credits aimed at lower-income households are an important part of the progressivity of the US tax code.
Tax credits also create a measurement problem. Because credits reduce income tax collections, they can lower the share of revenue raised from income taxes. In the index, that could make a tax system appear less progressive even when the credits themselves are progressive.
The index also does not fully account for differences in income inequality or market structure between countries. It relies on summary measures such as mean income and bottom tax rates, which do not show the full distribution of tax burdens across income groups.
A more complete comparison would include tax burdens by income quintile, but reliable cross-country data is difficult because countries measure and report income and taxes differently.
US-specific comparison issues
The US also has a large pass-through business sector, where more business income is reported on individual tax returns.
This can make top incomes appear more concentrated and increase the measured share of income tax revenue. As a result, comparisons based on income tax revenue shares may partly reflect differences in income reporting rather than pure differences in tax progressivity.
The article notes that when more detailed US data is available, such as recent Congressional Budget Office data, the US still appears highly progressive when comparing income shares with tax shares.
Policy implications
The study’s result does not mean every aspect of the US tax system is more progressive than every other country by every possible measure. It means that under this index — which emphasizes tax structure, income tax reliance, low consumption tax reliance, and statutory tax design — the United States ranks as the most progressive among the OECD jurisdictions measured.
The key caveat is that progressivity is difficult to compare internationally. Tax rates, tax bases, credits, income reporting, business structures, and consumption tax reliance all affect the result.
The practical takeaway is that debates over increasing US tax progressivity should account for the international context. The article argues that policymakers should also consider potential downsides of higher marginal tax rates, including slower economic growth, increased avoidance, and limited additional revenue.
Source article: taxfoundation.org
