I already shared my thoughts about the value-added tax when discussing fiscal policy with an economist at the Confederation of Swedish Enterprise.
Here’s some of what I said about tax progressivity and the welfare state.
The bottom line is that the American tax system targets the rich. But that’s not the case in Sweden.
If you don’t believe me, let’s see what some left-of-center sources say.
Here’s a chart from a study for the World Inequality Lab by three economists at the Paris School of Economics.
As you can see, the United States is an outlier. The rich pay a much bigger share of the tax burden in America compared to other nations.
Interestingly, it’s not because America imposes higher taxes on the rich. It’s because Europeans impose higher taxes on lower-income and middle-class households.
Want more confirmation from another left-of-center source?
Here are some excerpts from a column in the New York Times by Monica Prasad, a sociology professor at Northwestern.
We can learn from Sweden, but the lesson is not what many people think. Rich Swedes do get taxed at high rates, but so does everyone else: The average American worker’s total tax burden is 31.7 percent of earnings, compared with 42.9 percent for the average Swede. The Swedes actually tax corporations less… Estate tax? In the United States the average effective rate is 16.5 percent. In Sweden, it’s zero. Swedish national sales taxes, which fall disproportionately on the middle classes, are much higher than sales taxes in the United States. …Some scholars have drawn on this history to argue that the United States needs to give up its fixation with progressive taxation and adopt a national sales tax as every other advanced industrial country has done. …It’s hard to make a case for a big new tax in America on the middle classes and the poor…progressive taxation still has a role to play in the United States — but we do need to learn the larger lesson…the secret of the European welfare states.
Her view of the the “larger lesson” and “secret” is not the same as mine.
She wants an efficient welfare state and – to her credit – she acknowledges that means big tax burdens for lower-income and middle-class households.
I look at comparative living standards and say “are you $&(#)@* crazy!”
I’ll close by emphasizing a point I made at the end of the above video. Our friends on the left like to argue that big government is popular and they’ll cite polling data to make that case.
But people have much different answers to polling questions when they are asked if they are willing to pay higher taxes to finance bigger government.
And since there are not enough rich people to finance big government, the only way to have Swedish-sized government is to have Swedish-level taxes on ordinary people.
P.S. For those who want to focus solely on the taxation of rich households. Europeans tend to impose higher personal income tax rates but to also have less double taxation of income that is saved and invested.
Sweden mixes libertarian birth control and prohibitionist drug policies.
The lower tax rate on income increases the return on active/invested wealth …. and that is a big part of the design. Passive/safe wealth should be effectively taxed more (but at the same rate).
EPD,
I’d love to have a VAT replace the corporate income tax. I’m a supply-sider, so I think taxing consumption is better than taxing income. But saying Trump likes VAT doesn’t sell it to me. I think he’s better than Hillary and Joe, but that’s no ringing endorsement!
Also because I’m a supply-sider, I think your 2% wealth tax is too high. I’m a big fan of growth via productivity and innovation, which requires investment. This is already a difficult thing to achieve, so I like having fewer obstacles. Assuming an 8% return on wealth and 3% inflation yields a 5% real return. Taking 2% from that is too much, equating to approx 43% tax rate on the increase in wealth. Even higher if any tax is levied on investment income.
As a technical matter, I like your idea of low tax rates on the three things, but there are other aspects to consider. I don’t like it from the perspective of human behavior or politics. History has shown that politicians will often raise initially low tax rates. Politicians with more tax levers to pull will often pull them (“Europe has 21% VAT, ours shouldn’t be only 8%”).
I agree Dan is the best. For years I have been commenting about the three tax bases: net wealth, income, and value added. A 2%, 4%, 8% tax of each (respectively) would produce enough revenue for the country and provide a fair flat tax.
Did you know Donald Trump wrote a book recommending a wealth tax? Dan is beginning to see the merits of a VAT. What id the low rate VAT replaced the corporate income tax?
Keep an open mind.
Eugene,
Many Americans use “the rich” as a shortcut phrase to mean the high-income, the wealthy, or even both. I don’t think this is Dan being dishonest or deceptive.
Now, for the substance of your comment. The reality is the US taxes income and not wealth balances. The US tax system is already highly progressive, as reflected in Dan’s graph, and many other metrics. To make the frequent claim “the rich don’t pay their fair share” look even remotely close to being true, you need to narrow the focus to a tiny sliver of the population. So tiny we wouldn’t collect many tax dollars even if we did tax them more. It’s not like there are tons of really high net-worth households with really low incomes. Furthermore, direct wealth taxes are difficult to manage, don’t collect much tax revenue, represent double-taxation, and are harmful to long-run prosperity.
The fact is, income from work is the dominant source of income for 99.99 percent of all households. Even for the 0.01 percent, much of their investment income derives from past work.
“The rich pay a much bigger share of the tax burden in America” is comparing apples to oranges. “Rich” is wealth while tax burden in U.S. is income. Be honest and not deceptive. There are three tax bases and the rich/wealthy have it better than the high income (where tax expenditures don’t count the income).