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| How to Think About Taxing and Spending Like a Swede | How to Think About Taxing and Spending Like a Swede |
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| In the recent rush of proposals to tax the rich, Democrats have forgotten — or never really cared to learn — an important lesson: The countries that have been most successful at reducing poverty and inequality have not done it by taxing the wealthy and giving to the poor. | In the recent rush of proposals to tax the rich, Democrats have forgotten — or never really cared to learn — an important lesson: The countries that have been most successful at reducing poverty and inequality have not done it by taxing the wealthy and giving to the poor. |
| Take Sweden, a country often cited by progressives for its extensive social programs. Sweden has very low poverty and inequality, and economic mobility is significantly higher than it is in the United States; a poor Swede is much more likely to become middle class than a poor American is. | Take Sweden, a country often cited by progressives for its extensive social programs. Sweden has very low poverty and inequality, and economic mobility is significantly higher than it is in the United States; a poor Swede is much more likely to become middle class than a poor American is. |
| 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: 19.8 percent, compared with 34.2 percent in the United States in 2017, the last year for which we have comparative data — and yes, that’s after all the loopholes and deductions have been accounted for. The American rate will be lower after the 2017 tax bill, but it’s still unlikely to be as low as Sweden’s. | |
| 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. In France, another country held up as an exemplar by progressives, the economist Thomas Piketty and his collaborators found the overall tax structure was actually a bit regressive, meaning the wealthiest pay slightly lower rates of tax than the less wealthy. Throughout Europe, since World War II, the rule has been high taxes on labor and low taxes on capital. | 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. In France, another country held up as an exemplar by progressives, the economist Thomas Piketty and his collaborators found the overall tax structure was actually a bit regressive, meaning the wealthiest pay slightly lower rates of tax than the less wealthy. Throughout Europe, since World War II, the rule has been high taxes on labor and low taxes on capital. |
| On the spending side, Sweden does not target much of its spending specifically to the poor. Tax revenue is spent on universal programs, like health care, which benefit most those who live longest; free college tuition takes from those who do not go to college and gives to those who do. Many aspects of welfare state spending in Sweden — as in other European countries — are linked to income, so that the more you earn, the more you receive in benefits. This is enormously effective, because it gives an incentive to Swedes to work hard and earn more. | On the spending side, Sweden does not target much of its spending specifically to the poor. Tax revenue is spent on universal programs, like health care, which benefit most those who live longest; free college tuition takes from those who do not go to college and gives to those who do. Many aspects of welfare state spending in Sweden — as in other European countries — are linked to income, so that the more you earn, the more you receive in benefits. This is enormously effective, because it gives an incentive to Swedes to work hard and earn more. |
| Poverty and inequality do get reduced, though not by redistribution from rich to poor, but rather by redistribution within classes — as the American sociologist Arthur Stinchcombe once put it, from the healthy to the unhealthy, from the young to the old and from the lucky to the unlucky. | Poverty and inequality do get reduced, though not by redistribution from rich to poor, but rather by redistribution within classes — as the American sociologist Arthur Stinchcombe once put it, from the healthy to the unhealthy, from the young to the old and from the lucky to the unlucky. |
| These patterns go back to the early 20th century, when many European countries were trying to figure out how to compete with the rising American economic behemoth and decided that they had to nurture their capitalists to do so. | These patterns go back to the early 20th century, when many European countries were trying to figure out how to compete with the rising American economic behemoth and decided that they had to nurture their capitalists to do so. |
| European welfare states have many origin points and many causes, but they took their modern forms around the Second World War, when in countries like France and Germany there simply wasn’t much capital to tax, because the capital stock had been destroyed by war. Higher taxes on corporations and the wealthy in the United States also have their origins in the early 20th century, when politicians representing Midwestern and Southern farmers ganged up against Northeastern industrialists. | European welfare states have many origin points and many causes, but they took their modern forms around the Second World War, when in countries like France and Germany there simply wasn’t much capital to tax, because the capital stock had been destroyed by war. Higher taxes on corporations and the wealthy in the United States also have their origins in the early 20th century, when politicians representing Midwestern and Southern farmers ganged up against Northeastern industrialists. |
| 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. | 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. |
| But this is too literal an interpretation of the lessons of history. It’s hard to make a case for a big new tax in America on the middle classes and the poor after decades when most of the economic benefits have flowed to the wealthy. European countries adopted their tax policies at times when economic growth was desperately needed and capital needed to be built up. Much has changed since then, and European tax systems could at this point stand a bit of reform in a more progressive direction, as the Yellow Vest protesters in France have been trying to tell us. | But this is too literal an interpretation of the lessons of history. It’s hard to make a case for a big new tax in America on the middle classes and the poor after decades when most of the economic benefits have flowed to the wealthy. European countries adopted their tax policies at times when economic growth was desperately needed and capital needed to be built up. Much has changed since then, and European tax systems could at this point stand a bit of reform in a more progressive direction, as the Yellow Vest protesters in France have been trying to tell us. |
| The real lesson to take away from Europe is that progressive social programs are most popular, most effective and most durable when they are carried out in ways that do not damage business prosperity. European social reformers didn’t just reduce poverty and inequality. They created a new reality. When conservatives come into power in European countries, they find they cannot take away the progressive policies. | The real lesson to take away from Europe is that progressive social programs are most popular, most effective and most durable when they are carried out in ways that do not damage business prosperity. European social reformers didn’t just reduce poverty and inequality. They created a new reality. When conservatives come into power in European countries, they find they cannot take away the progressive policies. |
| European reformers managed this by embedding progressive policies in business-oriented arrangements. Low taxes on capital are just one example. We don’t need to enact exactly the same policies now — given how much wealthy Americans have benefited over the last several decades, progressive taxation still has a role to play in the United States — but we do need to learn the larger lesson that the secret of the European welfare states is that they are surprisingly business-friendly. | European reformers managed this by embedding progressive policies in business-oriented arrangements. Low taxes on capital are just one example. We don’t need to enact exactly the same policies now — given how much wealthy Americans have benefited over the last several decades, progressive taxation still has a role to play in the United States — but we do need to learn the larger lesson that the secret of the European welfare states is that they are surprisingly business-friendly. |
| What would a policy that takes these lessons to heart look like in the United States today? It would look a lot like a business-oriented version of the Green New Deal. The recent proposal by Alexandria Ocasio-Cortez and Edward Markey needs a great deal of work, but it is far from a pipe dream — indeed, it’s the only proposal we have that is trying to face difficult truths. | What would a policy that takes these lessons to heart look like in the United States today? It would look a lot like a business-oriented version of the Green New Deal. The recent proposal by Alexandria Ocasio-Cortez and Edward Markey needs a great deal of work, but it is far from a pipe dream — indeed, it’s the only proposal we have that is trying to face difficult truths. |
| For the plan to reduce carbon emissions, however, it has to get started now, and stay in place a long time, including through the next few conservative backlashes. The only way to do that — the only way to make it the new reality of the American economy, rather than a temporary attempt swept away by conservative populism — is to get business on board. This isn’t just because businesses will otherwise fight it, it’s because the American people will otherwise fight it. | For the plan to reduce carbon emissions, however, it has to get started now, and stay in place a long time, including through the next few conservative backlashes. The only way to do that — the only way to make it the new reality of the American economy, rather than a temporary attempt swept away by conservative populism — is to get business on board. This isn’t just because businesses will otherwise fight it, it’s because the American people will otherwise fight it. |
| To move from vision to reality, the Green New Deal coalition must include business groups, manufacturers, farmers and unions, and reformers need to genuinely listen to and respond to their concerns. They need to focus on solving problems such as the decline in productivity and work force participation, by using the revenue from a carbon tax to create jobs in energy efficiency and renewable energy, and by using higher taxes on capital gains to fund infrastructure, education, and research and development. | To move from vision to reality, the Green New Deal coalition must include business groups, manufacturers, farmers and unions, and reformers need to genuinely listen to and respond to their concerns. They need to focus on solving problems such as the decline in productivity and work force participation, by using the revenue from a carbon tax to create jobs in energy efficiency and renewable energy, and by using higher taxes on capital gains to fund infrastructure, education, and research and development. |
| Green reformers also need to explain the enormous business opportunity that this historic shift to a zero carbon economy presents. Get businesses to make investments in renewable energy and energy efficiency, and you make your policies not only more feasible, but also irreversible. | Green reformers also need to explain the enormous business opportunity that this historic shift to a zero carbon economy presents. Get businesses to make investments in renewable energy and energy efficiency, and you make your policies not only more feasible, but also irreversible. |
| None of this would create a European-style welfare state. But if done right, it would create something even more extraordinary: a new model of capitalism that European progressives themselves would, someday, try to imitate. | None of this would create a European-style welfare state. But if done right, it would create something even more extraordinary: a new model of capitalism that European progressives themselves would, someday, try to imitate. |
| Monica Prasad, a professor of sociology and a faculty fellow in the Institute for Policy Research at Northwestern University, is the author, most recently, of “Starving the Beast: Ronald Reagan and the Tax Cut Revolution.” | Monica Prasad, a professor of sociology and a faculty fellow in the Institute for Policy Research at Northwestern University, is the author, most recently, of “Starving the Beast: Ronald Reagan and the Tax Cut Revolution.” |
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