Only Trump can make America European
Remember the “Nixon to China” meme? The basic idea is that under our system of governance, major shifts in policy require buy-in from the faction that is traditionally hostile to the idea. There are too many checks and balances to ram through a momentous change without support from the opposition party.
If you compare the American fiscal regime with the fiscal policies of most European countries, you’ll notice many similarities, but also a few key differences:
1. Both feature big government, but government in Europe is usually at least 10% of GDP larger than in the US. (Except Switzerland.)
2. Both raise a lot of revenue through progressive income and corporate income taxes. The top income tax rates are not all that different. Both have extensive payroll taxes.
3. European countries have VAT systems with tax rates of roughly 20% (and much high gasoline taxes than the US.) These higher taxes on consumption are (perhaps unfairly) considered regressive, and largely explain why European countries raise substantially larger amounts of revenue than does the US government.
The progressive left will never be able to achieve their dream of a Euro-style welfare state by taxing the rich. If you read the smarter progressives, they all know this. They understand that the US would have to add a large tax on consumption in order to get government spending up to 45% of GDP. Until now, that idea has been a complete non-starter, because of intense opposition from the GOP.
But now, Trump is proposing a big new tax on consumption, indeed a tax that is even more regressive than a VAT. He’s advocating a 10% tariff on all imports (and 60% on China.) Yes, that falls far short of a 20% VAT on goods and services. But it’s the foot in the door. The next step is when the Dems reclaim power and complain that tariffs hurt the poor because the consumption basket of the rich is skewed toward services. “Why should services be exempt?” They switch us from a 10% tariff to a 10% VAT. Then, when more money is needed, it becomes a 12% VAT. Rinse and repeat . . . we are on the way to becoming a Euro-style welfare state.
Trump is doing the Dems a huge favor, making the idea of massive regressive consumption tax seem less toxic. It’s the fiscal equivalent of Nixon going to China.
PS. Yes, tariffs only apply to imported goods. Next time you’re at Walmart, check the labels to see how many goods are made in the USA. And yes, I realize that Trump may not actually implement the 10% tariff. Consider this post a “what if”, not a prediction.
PPS. Some will say that consumers don’t pay the tariff, the money is paid by producers. In a technical sense, that’s also true of VATs and gasoline excise taxes. Does anyone think that producers aren’t passing those taxes along to consumers?
PPPS. Today’s Weekend at Bernie’s moment, Biden wants to cap rent increases at . . . er . . . $55!!
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17. July 2024 at 16:07
A 10% VAT tax certainly sounds better than a 35% income tax.
I’d rather be taxed on what I spend, then taxed on my labor. It would limit the size of the Federal government substantially.
What we need is a fixed digital currency, and/or a digital currency that allows for increasing the supply but only in cases of an emergency, which would require 75% of the states to agree. For example, XRP’s blockchain permits additional printing (that could be controlled via smart contract) or we could implement a blockchain that doesn’t allow any printing under any circumstances (potentially dangerous for emergencies) like BTC. 90% of the states agreeing might be better, that way we ensure it’s a real emergency as opposed to neocon, neolib war mongers deciding to fund their pet project 8000 kilometers away.
VAT also rewards people who save, and that saving can lead to investment and innovation, and understanding important economic concepts like a “budget”.
But Trillions in credit card debt, the current bloated system would have to collapse to get back to sanity.
17. July 2024 at 18:42
Seriously, what is it with you and China?
Is it because you have a Chinese wife?
Do they pay you?
Where does this infatuation come from?
60% is too low. We shouldn’t be trading at all with people who imprison and harvest organs from the Falun Gong. And Tariffs will just force more domestic production which is great. The globalist elite profit margins will be smaller, people’s real income’s will increase, nothing else will change. It’s a win/win.
17. July 2024 at 19:20
Scott, if I remember right, in absolute terms the US has a higher per capita tax take (and government expenditure) than most (or app?) of Europe.
Specifically, the US spends more dollars per person on social welfare than France does. That’s mostly a fraction of the US having a much higher GDP per capita than France, so even a lower percentage works out to a higher total.
But perhaps percentages are more important than absolute totals.
Sara, the VAT would be in addition to income taxes, not instead.
Edward, the economic case for free trade is pretty solid. If you want to help Chinese people, and especially badly.treatwd Chinese.minorities, the cheapest and most.effective way is to open up migration to them. Make asylum easier, or even offer green cards.
Loosening barriers to migration is free, and good for the economy.
Strangulating ypur own economy with tariffs is costly, and doesn’t help the foreigners one bit.
(See also how ‘well’ what is effectively punitive tariffs on Cuba have worked out..)
17. July 2024 at 19:23
Sara, what does private debt, Looe credit card debt, have to do with the amount of money the government is allowed to print?
Credit card debts are based on private agreements between private participants of the economy.
17. July 2024 at 21:18
Matthias, I recall that Greg Mankiw did a post making that claim. I think that is roughly correct, as per capital GDP is about 25% to 30% lower in Europe, which is roughly the amount by which their G/GDP ratio is higher.
17. July 2024 at 22:17
@Edward, Oddly in my experience Wisconsinites are the most Chinaphile people in America as a state group , never really understood it. I’ve always just figured it was a byproduct of hating blacks hence having to prove they aren’t racist by liking someone. It’s equally helpful when your state has like seven Chinese in the entity of the state so it’s easy to “like” as they aren’t in your backyard. Abd if you move away you can finally get that Chinese wife too and the neighbors won’t look at you.
18. July 2024 at 03:33
I don’t think you are correct about tariffs leading to a VAT because most Americans don’t have the sophisticated understanding of tariffs required to substitute one for the other.
The think that tariffs screw foreigners and end up giving more jobs to Americans. They know the VAT just screws them.
18. July 2024 at 03:42
@Mattias, IMO percentages are definitely more important than absolute totals. Especially when we’re talking about what resulting % of the economy ends up being guided by markets and growth institutions versus what % is guided by a government focused on equity and distribution.
18. July 2024 at 08:23
Peter, Now that Ricardo is banned, it’s good to see someone quickly come along to replace his “complete moron” slot.
Scott, If you look back to earlier periods of American history, tariffs were a big issue. And the public did understand that domestic consumers pay the tariffs.
18. July 2024 at 09:04
What did Ricardo do?
18. July 2024 at 09:26
Sumner, I’m pretty sure none of these tax reforms will happen. Regardless, VATs were proposed by the Rand Paul and Ted Cruz campaigns in 2015.
18. July 2024 at 10:42
I am not sure VAT is the main reason that government expenditures are higher in Europe. I would say it’s mostly either higher tax wedge and/or higher capital gains tax. Tax wedge here in France is am eyewatering 47% for an average worker. Taxes on foodstuff and restaurant meal is 10%, which is not so burdensome.
Anyway, I thought general federal sales tax is constitutionally not allowed in the US.
18. July 2024 at 11:13
I thought that either 5% or $55 was stupid. Housing is mostly a local issue so not sure there is much federal laws can do. It does bring up a question. If absent housing inflation is essentially back to normal now do we really have an inflation problem per se? Seems like what we have is a housing problem.
Steve
18. July 2024 at 11:25
‘The next step is when the Dems reclaim power’
The way things are going, I feel like this should say ‘if the Dems reclaim power.’
‘the money is paid by producers. In a technical sense, that’s also true of VATs’
Do you mean this as in the producer is the one who literally transfers the money to the state?
I’m amazed how many supposedly ‘capitalists’ are supporting Trump. How can they not see how much damage he will do to businesses and the economy? (To be fair, I’m surprised anyone supports him.)
In my ideal world, all taxes would be consumption taxes, so I’m a big proponent of VAT. We’ll see what the Republicans actually pass when/if they take control next January.
@ Eharding: Ricardo went off the rails in a profanity-filled derogatory post that was vulgar and disjointed to the extreme. I haven’t seen a post that wild in years – anywhere.
18. July 2024 at 18:06
Hi Scott,
I completely agree that major shifts in policy are best done by the faction that is traditionally hostile to the idea – only they can get their supporters on board. Fits in perfectly with Dan Kahan’s cultural cognition model, people will believe anything when it is coming from their tribe, and nothing when it comes from some other tribe.
But of course Trump will not make the US more like Europe. He will make it more like Argentina.
18. July 2024 at 21:09
Tsergo Ri, Well it’s certainly not higher capital gains taxes!
As far as the Constitution, it also says that Congress (not the president) enacts tariffs. Does anyone take the Constitution seriously anymore?
Tacticus, I also like the VAT, if it’s an alternative to income taxes.
mbka, Yes, Trump will make us more like Argentina, but he will hand the Dems a big new revenue source on a silver platter.
19. July 2024 at 06:08
Dr. Sumner said: “Some will say that consumers don’t pay the tariff, the money is paid by producers. In a technical sense, that’s also true of VATs and gasoline excise taxes. Does anyone think that producers aren’t passing those taxes along to consumers?”
I’m saddened that Dr. Sumner doesn’t think his readers already believe that any tariff is paid partly by consumers and partly by producers and how it gets divided between the two depends on the relative price elasticities of supply and demand. Saddened more buy the fact that our so called political leaders can ignore basic economic facts as long as they can’t be reduced to a sound-bite.
19. July 2024 at 07:01
Jerry, Yes, it’s sad, but if you look at some commenters you’ll understand why I have to make these points.
19. July 2024 at 07:04
ssumner – you are a sore loser
19. July 2024 at 07:34
Steve, Yes, I don’t like to lose. And how would your describe Trump’s reaction to losing the 2020 election? Just curious.
19. July 2024 at 09:46
ssumner – the election in 2020 was a farce, a scam, and stolen from the true victor. You know it and most of the country knows it. At least those with a normal prefrontal cortex. So take your ball and go home, you don’t play nice in the sandbox and are not wanted on the playground.
19. July 2024 at 10:02
Gee Steve, you seem like a sore loser.
19. July 2024 at 10:56
Indeed. There was no way Trump deserved to win re-election, and over 40 states swung against him.
28. July 2024 at 20:45
US already has a consumption tax of close to 10%. It’s just that the revenue is collected by the states (and in some cases, by cities too) instead of the federal government. So a 10% tariff and existing sales taxed might bring US taxes on consumption close to European levels of around 20% already.