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!!