European countries have really high taxes

If Democrats don't want to go there, they need to stop overpromising

I think most people know that European countries have much more generous welfare states than the United States and that they accomplish this by having much higher taxes.

It’s not just higher taxes on billionaires. Of the 25 richest people on the Bloomberg Billionaires list, only three are European versus 17 Americans. That doesn’t mean that we, who are blessed with many super-rich corporate founders and their heirs, couldn’t try to fund a welfare state by taxing the unrealized capital gains of Elon Musk, Steve Ballmer, and the Walton kids. But if your question is “In Germany, they have X, Y, and Z; why can’t we be just like them?” then the answer has relatively little to do with billionaires. Indeed, the richest German, Klaus Michael-Kuhn, is worth “only” $38.5 billion or so. For better or worse,1 European economies are structured so as to make it harder to become super-rich — making super-rich people pay higher taxes isn’t central to the model.

To be clear, top marginal tax rates generally are higher in Europe, and I don’t want to obscure that, though they’re not necessarily higher than the combined state and federal rate in the highest tax states in the U.S. But the point is that taxes are higher on everyone as part of a broad social choice to constrain consumption of large categories of goods in order to facilitate affordable access to certain prioritized social goods.

On a trip to Copenhagen a few years ago with some progressive journalists, we were all constantly annoyed by the staggeringly high prices of everything from a cab ride to a bottle of Coke Lite to some very bad pad thai. As a visitor, you don’t get to take advantage of super-cheap college tuition or nearly-free health care, which makes the Danish social model a terrible bargain for you. But Danish people consume fewer consumer goods than Americans (they have smaller houses with less furniture, worse appliances, and fewer, cheaper cars) and in exchange, they get all that Nordic goodness.

And if you’re not going to try to explicitly sell Americans on large, broad-based tax increases, then you need to take that constraint seriously in your whole approach.

Taxes in Europe are very high

Taxation is a complicated and multifaceted subject, but this summary Milan Singh put together illustrates the key points: European taxes are higher across the board, with the partial exception of corporate income taxes where small countries (like Sweden) tend to favor low rates.

France and Sweden have much higher top tax rates than America, while Germany’s top rate is only moderately higher. In the highest tax states, America’s combined rates might be higher than in the lower-tax Germany states.

But all these countries have much higher consumption and payroll taxes than we do, driving much higher overall revenue.

To understand the significance of this, it’s helpful to invoke the briefly fashionable progressive idea that deficits don’t matter and the real constraint on fiscal policy is inflation. When that talking point was hottest, the United States was living through a prolonged period of very low inflation, so the people who said it mostly meant in practice “just don’t worry about spending too much.” These days, though, we see that inflation is a real thing that can happen. And even if you can make financing the preschool program by taxing Elon Musk’s unrealized capital gains work mathematically, it doesn’t work macroeconomically in an economy that’s already experiencing moderate inflation.

What you need to do is shift consumption society-wide away from “stuff that isn’t preschool” toward “preschool.” And in practice, the easiest way to do that is with broad consumption taxes. If America had more people working in child care, elder care, preschool, and clean energy infrastructure building, then we’d need fewer people working in some other sectors like serving food in restaurants or delivering packages to houses. The most straightforward way to do that is by broad taxation so people buy fewer goods and services, and then giving them these other social assistance services for free.

The annual consumption expenditures of a Musk or a Bill Gates are dramatically higher than those of an average person, so taxing consumption across the board and using it to finance social services is highly progressive in its distributional consequences. But it’s still true that delivering a universalistic welfare state requires gross sacrifice of private consumption from almost everyone, even if we are mostly better off on net. If you’re not willing to take that kind of step (and few, if any, American politicians are), then you’re not going to deliver a broad welfare state. And maybe that’s fine, but it’s bad to do politics from the premise that you are when you actually won’t.

The perils of overpromising

Back in 2007, key congressional Democrats reached a consensus that the party’s next big idea would be a proposal to offer subsidized, heavily regulated health insurance to everyone. To control actuarial costs and ensure universality, this insurance would also be mandatory. The model was a program that had been enacted in Massachusetts, which in turn, I believe, derived from a New America Foundation proposal from shortly after the turn of the millennium (you can find it in “The Radical Center” by Ted Halstead and Michael Lind).

This is what came to be known as “Obamacare,” but as a candidate, Obama opposed this vision.

He offered instead a plan focused on expanding Medicaid and CHIP and offering means-tested subsidies for individuals to buy insurance without a mandate. After winning the primary with this plan and then winning the general election with this plan, he was persuaded to change course and revert to the blueprint offered in the primary by Hillary Clinton and (more importantly) supported by leading congressional Democrats. A key idea was that Democrats didn’t just want to expand health insurance coverage and raise incomes for people in the bottom quartile of the distribution; they wanted to achieve the dream of universal healthcare. Obama’s plan didn’t do that, whereas the mandate plan did.

Except the mandate was unpopular, so as the idea worked its way through Congress, the mandate became weak … too weak to achieve universality. And when Obama’s HHS started implementing regulations, they also erred on the side of weakness. These were reasonable, politically prudent concerns. But they meant the ACA didn’t achieve universality, and since they weren’t achieving universality anyway, there was no need to have the mandate at all. The mandate was a controversial and politically risky effort so that “America is the only industrialized country to not guarantee health insurance to all its citizens” would no longer be true. Once you give up on that, it’s easier to just help people in a popular way.

And I think that you see the same overpromising poisoning the Build Back Better process. Democrats just do not have the revenue-raising capability to create universal preschool, universal paid parental leave, and a universal subsidized child care program that manages to cut costs while actually raising wages for providers. But instead of admitting that to themselves, they wrote a universal leave plan that’s not universal, a preschool plan that most states will reject, and a child care program that will raise costs for the unsubsidized. And that was before Manchin and Sinema started further squeezing the available revenue. Indeed, for a lot of people, the extent to which progressives were overpromising all along will be obscured by the fact that these things needed to be cut down to meet moderate approval. They just didn’t have it in them to propose the scale of tax increases that would create a cradle-to-grave welfare state.

What is to be done?

I think the beginning of wisdom is to just admit that there is no short-term path to get from where America is today to the kind of comprehensive welfare state that left-wing people admire.

Once you give up, you can get to work.

The first thing is setting priorities. Reasonable people can disagree, but to me, the sky-high child poverty rate in the United States stands out as a moral scandal in a way that none of the other shortcomings of our welfare state do. And there are politically viable ways to address this, either with a permanent Biden-style Child Tax Credit or with something more like Mitt Romney’s child allowance proposal. The key, though, is that to have enough money for this, you’d need to tell other advocates on adjacent issues “no.” Say “I don’t have a problem with your idea, but we can’t do everything, and we’re doing this first.”

Second, it’s also essential to work on these issues at the state level. The median voter in Oregon or Connecticut is substantially to the left of the median American voter, who in turn is to the left of the median Senate seat. That doesn’t mean people in Connecticut love tax increases and big government, but it’s an easier sell there. And if you can do universal preschool in Connecticut and Massachusetts and everyone loves it, then maybe it’ll sell in New Hampshire and Maine. The difficult thing is that everyone seems to agree you can’t finance state government in Connecticut exclusively through taxing billionaires (the concern is that they’ll move), but in a way, this is a useful discipline. State governments are under pressure to deliver public services in a cost-effective way so that people feel they’re getting value for their money. That’s hard, but if you can pull it off it’s very valuable.

Third, you can recognize the value of keyhole solutions. During the 2020 primary, several candidates (Beto O’Rourke and Pete Buttigieg come to mind as leading examples) had ideas to create a Medicare-linked public option that employers would then be allowed to buy into. This definitely generates unnecessary complications relative to Medicare for All financed by payroll tax increases, but it also achieves a large share of the benefits of Medicare for All without requiring you to sell voters on broad-based tax increases. The way that debate played out, those plans were simply categorized as squishy moderate plans compared to the Bernie/Warren M4A real stuff. But if you look at these things as programs for action rather than character tests, there would be a lot of merit to economic progressives taking up ideas along those lines.

Fourth, it’s worth exploring exotic sources of revenue. Because the federal government has a uniquely low cost of funds, it’s generally profitable to sell bonds and use the proceeds to buy stock — essentially creating money from nothing. For roughly the same reason, you can often do policy with subsidized loans that score as having zero fiscal cost. Note that these kind of gimmicks don’t get you around objective inflation constraints. But to the extent that the issue really is just sticker shock, then gimmicks are good.

Let America be America again

Last but by no means least, it’s worth saying that there’s more to life than pining for the fjords of the Nordic social model.

There’s a lot to admire about European welfare states, but these are also countries that are on average much poorer than the United States. And much of what’s admirable about European lifestyles isn’t attributable to the welfare state at all. It has to do with the fact that the streets are safer or non-policy things like old buildings being cool. Some of it specifically relates to population density, land use, and transportation engineering. In a fundamental way, life in the United States is never going to be “like” life in the Netherlands because we don’t have nearly as much old stuff and because even the lunatic author of “One Billion Americans” doesn’t think there’s a feasible way to increase our population density 14-fold.

America has its own virtues, though, like a much more open form of national identity and a population full of families who self-selected into trying to improve their lives by moving to a new country.

It’s really good to learn from foreign models, not just about the welfare state but also things like how to run trains. But the idea of transforming one country into another country doesn’t really work politically or hold up to that much scrutiny. Lots of countries nationalized their health care systems before costs started exploding when it was cheap to do so. We didn’t, and we can’t go back in time and undo that.

We can and should work away at creating a more generous welfare state, but we can also tackle tons of problems in people’s lives with better regulatory approaches to housing, occupational licensing, zero-carbon energy, school management, and a dozen other things. There’s no point in getting too hung up on making America into a giant Sweden rather than the best possible version of itself.

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I side with worse here, but that’s a whole separate argument.