Income taxation across countries

The paper provides the most comprehensive cross-country empirical characterisation of effective income tax functions to date, estimating the two-parameter log-linear tax function — pioneered by Feldstein (1969) and applied in structural macroeconomics by Heathcote, Storesletten, and Violante (2017) — for over thirty countries across approximately four decades using harmonized household microdata from the Luxembourg Income Study (LIS). The log-linear function fits income tax systems worldwide with median R² of 0.984 (mean 0.976), extending a finding previously known mainly for the United States to essentially all LIS countries. Five main facts emerge. First, income tax progressivity (τ) and average tax level (λ) are positively correlated across countries: Northern European countries with the highest average tax rates — Belgium, Netherlands, Germany, Finland — also have the highest progressivity; countries such as Brazil, Colombia, Peru, and the Republic of Korea exhibit effectively flat income taxes (τ near zero or negative) despite progressive statutory codes, because actual enforcement and effective coverage are limited. Second, progressivity increases with economic development: richer countries systematically operate more progressive income tax systems, consistent with greater institutional capacity to enforce income taxation. Third, progressivity differs significantly by family structure: married couples with children face the highest progressivity across countries, single households without children the lowest, reflecting child tax credits, joint filing rules, and other family-based provisions. Fourth, the United States ranks toward the lower end of progressivity among high-income countries, with τ ≈ 0.046 in 2010; Belgium, Finland, Germany, Iceland, Ireland, the Netherlands, and Spain are more than twice as progressive as the US. Fifth, transfers account for most redistribution: the combined tax-and-transfer system’s progressivity substantially exceeds that of income taxes alone, indicating that analyses focusing solely on income tax progressivity understate total redistributive effort.

Nicolò Russo | Macro Paper Warehouse

Income taxation across countries