The real ‘tax gap’ is the one between progressive spending dreams and economic reality

By James Pethokoukis

If the $3.5 trillion Democratic reconciliation bill becomes law in anything close to current form — including paid parental and sick leave, universal preschool, some free college, and an annual check to households with younger children — it would be a big step toward turning the United States into a European-style comprehensive welfare state. Many progressive Democrats speak highly of the Scandinavian social democracies, in particular. As Bernie Sanders has put it: “I think we should look to countries like Denmark, like Sweden and Norway and learn what they have accomplished for their working people.”

But those loving glances toward Team Nordic often produce fuzzy vision. They typically miss something really important: how those countries pay for those massive welfare states. As Wall Street Journal columnist Greg Ip notes:

Yet if other countries’ welfare states are a template for American progressives, their taxes aren’t. In Germany, the typical worker pays 49% of her labor compensation in income and payroll taxes (including the employer’s contribution); in France, the proportion is 47%, in Sweden, 43%. In the U.S., it is just 30%. The U.S. alone, among major advanced economies, doesn’t impose a value added tax on consumers of goods and services.

On that last point: Denmark, Sweden and Norway all have VAT rates of 25 percent, according to the Tax Foundation, with each collecting close to 10 percent of GDP through the levy. Yet Democrats have made a big deal about not raising taxes on households earning less than $400,000 a year. (There are some exceptions as Ip notes: “Smokers, for example, will pay a higher cigarette tax, and middle-class stockholders will indirectly bear some of the higher corporate tax rate.”)

One could argue that there’s still plenty of room to fund more social spending through higher corporate taxes and higher top income-tax rates before talking about an economy-wide VAT. That, especially given higher income inequality in the US. But clearly creating Nordic America is going to require lots of additional revenue, whether through a VAT, carbon taxes, or a combination of both. Again the Tax Foundation: “In 2019, Denmark’s tax-to-GDP ratio was at 46.3 percent, Norway’s at 39.9 percent, and Sweden’s at 42.8 percent. This compares to a ratio of 24.5 percent in the United States.” And these WSJ charts highlight the current gap in social spending and spending commitments between the US and Europe:

It’s hard to avoid the reality — unless you’re a progressive politician, perhaps — of a fundamental mismatch between the left’s spending dreams and the economics of taxation. One caveat, which I point out in a recent The Week column:

Unless of course, Democrats adopt novel theories of macroeconomic policy that suggest significantly less need to pay for government spending. But there’s little evidence that anyone outside deeply left progressive politics or EconTwitter takes such ideas seriously. Certainly there’s no evidence that Federal Reserve Chairman Jerome Powell does, and he’s likely to be renominated for another term as boss of the central bank. If the far left really wants a transformational presidency — whether Biden’s or someone else’s — the lives of all Americans would need to fundamentally change.

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