A European Welfare State Requires a European Tax Regime

By Kevin D. Williamson

Thursday, October 28, 2021

 

Is it time for a 50 percent tax increase on the American middle class? What say you, Senator Warren?

 

You’ll know that American progressives are serious about adopting European-style social-welfare policies when they start talking about adopting European levels of taxation on the middle classes instead of pretending that Jeff Bezos and cigarette smokers can pay for the Danish welfare maximalism they fantasize about.

 

Until then, it’s pretty much all piffle.

 

The current tax posture of our progressive friends is partly irresponsible, partly ignorant, and partly dishonest. If you compare Alexandria Ocasio-Cortez (whose ignorance and arrogance are mutually reinforcing) with Elizabeth Warren (deeply informed, deeply mendacious), what you’ll see is that the more Democrats know, the less honest they are able to be in this matter — a clear and frank account of the situation would be very bad politics for progressives.

 

Unlike many U.S. conservatives such as my colleague David Harsanyi (author, most recently, of Eurotrash: Why America Must Reject the Failed Ideas of a Dying Continent), I am relatively well-disposed toward what we think of as the European model of government and civic life. “European” is too broad a term — what American admirers mainly mean by “European” is rich Western Europe and squared-away Northern Europe, such prosperous and contented countries as Germany, France, Denmark, Norway, Switzerland, etc. I don’t think that we could as a practical matter graft the best of European policy onto American life, partly because of the force of culture (Switzerland is full of Swiss people, while the United States is full of guys who get charged with aggravated assault with a deadly weapon for tossing an alligator through the drive-thru window at Wendy’s), and partly because governing a small, rich country such as Denmark is very different from governing a large, rich country such as ours.

 

That being said, it isn’t entirely obvious to me that Germany or the Netherlands is a dystopian hellscape, and comparing Stuttgart with Detroit or Zurich with San Francisco suggests to me that there is something to be learned from Europe. Marseille is a high-crime city by both French and wider European standards, with a murder rate that is . . . about one-third that of Omaha, Neb., and about 4 percent of St. Louis’s. Switzerland’s GDP per capita is a third higher than that of the United States. The Spanish and the Italians live longer than do Americans. Etc.

 

Very high-income people in much of Europe pay higher taxes than they would in the United States — sort of. Compared to the United States, countries such as Sweden and Switzerland have relatively high income taxes across-the-board. But these places are nonetheless very attractive to very wealthy and high-income people, including cosmopolitan billionaires who have a great deal of choice in where they reside and pay taxes. Sweden has an unusually large number of billionaires relative to the size of its population, owing in no small part to its very entrepreneurial and open economy. But while it has high income taxes, it has no taxes at all on inheritance or residential property, and it has a relatively low corporate-tax rate. Switzerland has no taxes on capital gains. (Switzerland does have a small wealth tax, with the rate set and the tax collected at the cantonal level, which produces about 3.5 percent of all tax revenue. The Swiss manage to collect this without a surveillance apparatus of the sort Joe Biden dreams of — culture, again.) So, the income-tax rate doesn’t tell the whole story.

 

In fact the income-tax rate doesn’t even tell the whole story about income taxes, because there can be dramatic differences between a taxpayer’s marginal rate (the rate he pays on that portion of his income that falls into the highest bracket) and his effective overall rate. Think of a very simple tax system in which income under the $100,000 mark is taxed at 0.00 percent and income over the $100,000 mark is taxed at 90 percent. If you earn $100,001, then your marginal rate is 90 percent, but your effective overall tax rate is basically nothing, far less than 1 percent. Like those sky-high statutory tax rates in Eisenhower-era America (when federal tax revenue as a share of GDP was a little less than it is today), the high top rates in Norway and Denmark don’t entirely capture the tax reality.

 

The Organization for Economic Cooperation and Development (OECD) makes comparisons between countries based on what it calls a “wedge.” This takes into account income taxes and payroll taxes, including those notionally paid by the employer, as well as preferential tax policies, to get a fuller account of real taxes on labor income, making meaningful county-to-country comparisons possible. This is a pretty useful tool. As the OECD runs the numbers, the tax on the average single worker with no children in the United States was 28.3 percent last year, significantly below the OECD average of 34.6 percent. Canada, Australia, and the United Kingdom came in slightly below the OECD average.

 

On the other hand, the European countries that our progressives propose to emulate — Germany, Austria, Sweden, France — come in quite a bit higher, at the 45 percent to 50 percent level. The average Belgian worker labors under a rate just north of 50 percent, as the OECD figures it. Even taking into account “benefits to families with children through cash transfers and preferential tax provisions,” a married single-income couple with two children in Sweden will pay an average tax on labor income that is about twice what their American counterparts would pay.

 

As Adam Michel of the Heritage Foundation runs the numbers, a middle-income single worker in Europe pays a tax rate that is on average about half-again as much as his American counterpart, 43.8 percent for the European vs. 28.5 percent for the American. That is a 51 percent increase in the tax rate.

 

There isn’t anything necessarily wrong with any of this. There are many different ways to organize and fund the social-welfare programs maintained by every advanced nation. Denmark makes its system work, and Singapore makes its radically different system work. But in any case you have to make the math work out, and our class-war progressives can’t do that with their “1 percent” policies. The top 1 percent of U.S. households collectively earn about $2.5 trillion a year. The federal government spent $6.6 trillion in 2020. Even if the top 1 percent paid every penny of their income in taxes (and assuming, arguendo, that they did not change their behavior in response), the great majority of tax revenue would have to come from the rest of the population.

 

So the 1 percent solution is no solution at all. What about “the rich” more broadly? As it stands, the top half of income-earners pay virtually all of the federal income tax, while the bottom half pay almost nothing. The top 1 percent pay about 40 percent of all federal income tax, which is about twice their share of all income. Lower-income households do pay other taxes, including federal payroll taxes and state and local taxes, sales taxes, excise taxes on alcohol and cigarettes, etc. — and few of them will tell you that their tax burdens are not high enough. But there really isn’t any plausible way to pay for what progressives propose without getting into the pockets of households well under Joe Biden’s preferred $400,000-a-year mark.

 

Europeans fund their welfare states through relatively high income taxes, including relatively high income taxes on middle-class and low-income workers, along with a variety of other instruments, notably the value-added tax (a kind of national sales tax), which also tend to fall relatively heavily on the middle classes. For the most part, they do not fund their social programs the way our reality-denying progressives propose to: taxes on large inheritances, taxes on the incomes of the top 1 percent, confiscatory taxes on investment income, etc.

 

There are good reasons for this: There isn’t nearly enough money in inheritances or CEO bonuses to make much difference in the budget of a country with a modern economy; the very wealthy make mind-blowing sums as individuals, but still make up only a relatively modest share of a wealthy nation’s economy; taxing investment income in many cases means taxing retirement income, as it would in the United States, which puts more pressure on the very social programs that taxes are meant to fund. And there are larger issues, too: Taxpayers respond to financial incentives, which is why high-earning Americans often find ways to take their income as capital gains rather than as salaries or bonuses, forms of income that are taxed at higher rates; the “corporate inversions” that were all over the news a few years ago (through which some large firms legally relocated their headquarters abroad for tax purposes) were driven mostly by relatively high U.S. corporate-tax rates and the threat of even higher rates.

 

And while it is easy to roll one’s eyes at the doings of a Jeff Bezos or an Elon Musk, a very small number of enormously successful firms — including the famous FAANG quintet comprising Facebook, Apple, Amazon, Netflix, and Google — have accounted for a wildly disproportionate share of both stock-market returns and overall economic growth in recent years. Because it is impossible to know in advance which firms will be super-performers, the most intelligent way to proceed is to try to maintain a broad national portfolio of established firms and startups, which requires a policy environment that is generally friendly toward capital, investment, and profits. That is why the “socialist” Swedes (who are actually anything but socialist) do not in reality lean too hard on the kinds of taxes that American class-war progressives prefer.

 

There is much to like and admire about European practices. And perhaps even David Harsanyi would admit that people who wish that Cleveland were a little more like Vienna are not obviously insane. But if you want a European welfare state, you have to pay for it with something like a European tax regime. We could have a useful and interesting debate about that — maybe even make it the central issue in an election! — if there were anybody in the Democratic camp willing to make the honest case.

 

Don’t worry — I’ll wait.