Nordic Countries Do Actually Soak The Rich

Jonathan Chait had a piece yesterday echoing one of those zombie myths that float around in liberal circles for some reason:

The most generous tax-and-transfer systems in the world — such as in Denmark, a country Sanders has cited as a model — do not tax the rich all that much more heavily than the United States does.

This is simply untrue. The Nordic countries do tax the rich much more heavily than the US does. They tax everyone much more heavily than the US does.

The easiest way to see this is to look at labor tax wedges across the wage distribution. "Tax wedge" refers to the total amount of taxes paid for a unit of labor divided by the total cost of that unit of labor. More simply, the "tax wedge" is the tax rate a worker "pays" when you also count employer-side social insurance taxes (and payroll taxes not for social insurance), such as Medicare Tax, Social Security Tax, and Unemployment Insurance Tax. Expressed as a formula: Tax Wedge = (Federal and Local Income Taxes + Employee-Side Social Insurance Taxes + Employer-Side Social Insurance Taxes) / (Gross Pay + Employer-Side Social Insurance Taxes).

Here are the marginal labor tax wedges for the US and the Nordic countries spanning from 50% of each country's average wage to 250% of each country's average wage:

I only go from 50% of the average wage to 250% of the average wage because that's all the OECD provides this kind of data for. But nonetheless, you can see just how high the Nordic taxes go. And they don't go any lower from there.

The US marginal tax wedge trails throughout the distribution and even falls after the OASDI flat taxes disappear at 233% of the average wage. Based on the statutory federal income tax rates, we know that the US line will eventually bump up around 10 extra points at its highest mark (somewhere off the graph on the right). This means the highest US tax wedge settles around 47%. Sweden's comparable number is 67%.

In addition to marginal labor tax wedges, it's also useful to look at average labor tax wedges.

As you'd expect, the average tax wedges in the Nordics run much higher than in the US. If we extended the chart off to the right, the gap between average tax wedges would grow even greater. People often remark that the Nordic countries tax their middle classes at higher rates, but what they fail to point out is that these higher middle-class marginal rates doubly soak the rich. High-wage workers ride through those middle-class tax brackets too and so when you look at the average taxes paid by the rich in the Nordic countries, it's even more exceptional than only looking at the marginal tax wedges might make you think.

The Nordics do soak the rich and there really is no excuse for pundits who pride themselves on wonkiness to keep pretending otherwise.

Wage Compression

One last thing worth noting is that the Nordic countries have much more compressed wage differentials than the US has. This is the result of the way their organized labor market works.

The upshot of this is that, unlike the US, there isn't a sizeable reservoir of taxable income being grabbed down at tops of the wage distribution. This means that they necessarily have to "tax the middle class" more because that's where the money is. This is less true in the US. To eventually get to Nordic tax levels, you certainly have to bring in the VATs and bring in higher tax wedges in the middle-income zones. But in the short-term, you could up the US tax level quite a bit by only tapping the excess taxing capacity at the top of the wage distribution.