Taxes and transfers in the U.S. put its income distribution in line with its large developed peers.
America is the world’s most prosperous large country, but critics often attempt to tarnish that title by claiming income is distributed less equally in the U.S. than in other developed countries.
The OECD measures inequality by determining a country’s “Gini coefficient,” or the proportion of all income that would have to be redistributed to achieve perfect equality.
How Unequal?Gini Coefficient, adjusted disposable incomeSource: OECD, authors
But there are variations in how each nation reports income. The U.S. deviates significantly from the norm by excluding several large government transfers to low-income households.
This means current OECD comparisons omit about $1.6 trillion in annual redistributions to low-income Americans—close to 80% of their total redistribution receipts. This significantly skews the U.S. Gini coefficient.
Gini scores for other countries in the OECD ranking also might shift with better data: The OECD doesn’t publish transfers by income level for other countries. But the change in income distribution for other countries would likely be less drastic.
The U.S. also has the most progressive income taxes of its peer group. The top 10% of U.S. households earn about 33.5% of all income, but they pay 45.1% of income taxes, including Social Security and Medicare taxes.
If the top earners pay smaller shares of income taxes in other countries, everybody else pays more.
Even these numbers understate how progressive the total tax burden is in America.
When all transfer payments and taxes are counted, the U.S. redistributes a larger share of its disposable income than any country other than France.
Mr. Gramm, a former chairman of the Senate Banking Committee, is a visiting scholar at the American Enterprise Institute. Mr. Early served twice as assistant commissioner at the Bureau of Labor Statistics and is president of Vital Few LLC.