Call Americans Regressive – Just Don’t Call Them European

There’s really no need to parody American politics — politicians parody themselves so well.

Take Republican Eric Cantor, a congressman from Virginia who will probably be the majority leader in the House of Representatives in January, and who has rejected the idea of instituting a value-added tax in the United States because it sounds, well, too European.

“I don’t think any of us want us to go the direction of the social welfare states around the world,” Mr. Cantor said to The Wall Street Journal’s CEO Council on Nov. 16.

Does he think Europeans are really that miserable?

There is already a backlash in the United States against a new proposal for dealing with the deficit that was put together by a bipartisan group led by Pete Domenici, a former Republican senator, and Alice Rivlin, a Democratic budget expert. The plan suggests a significant value-added tax, which is similar to a sales tax, but is instead collected in stages as goods are produced and moved to the market.

People are right when they say sales taxes are regressive taxes – meaning that a larger percentage is taken from people with lower incomes than those with higher incomes. But while I haven’t had time to evaluate the whole thing, the sales tax isn’t a reason to discard the idea, from my point of view.

Why? Many European countries impose this sort of uniform tax on goods and services, and we know that many countries with strong social safety nets, such as Sweden and Finland, rely on consumption taxes for government revenue.

The Luxembourg Income Study’s data for 2009 does seem to show that countries with stronger welfare states have less progressive tax systems than those with weaker safety nets (such as the United States).

Progressive taxes take a larger percentage from people with higher incomes than those with lower incomes (as is the case with American income taxes).

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And there’s substantial literature suggesting that this is no accident: that in the United States, because we don’t have a national sales tax, politics ends up being about tax brackets, which in the end can’t do much to reduce income inequality.

But Europe has broad-based taxes, and politics ends up being about which people get helped — which matters much more, especially for the less fortunate.

There’s even an argument that our uniquely weak welfare state is not reflective of cultural and racial divisions within the United States, the happenstance that we don’t have national consumption taxes.

All of which leads me to conclude that if I can trade a somewhat regressive value-added tax for guarantees of decent retirement and universal health care, I will take it.

Backstory: US Weighs New Levy

Policy makers with a wistful eye on European-style value-added taxes have started to speak up in the United States, and with the gross federal debt ballooning to more than $13 trillion, people are listening.

In early November, the co-chairmen of President Barack Obama’s deficit commission — Democrat Erskine B. Bowles and former Senator Alan K. Simpson, a Republican — presented a budget plan that would curb the deficit by $4 trillion by 2020. Shortly thereafter, a task force from the Bipartisan Policy Center, led by former Senator Pete Domenici, a Republican, and Democrat Alice Rivlin, a former director of the Congressional Budget Office and also a member of the debt commission, proposed a similar plan that would trim $6 trillion from the deficit by 2020. A key feature of both plans is the introduction of levies on goods and services similar to value-added taxes.

Governments of most developed countries, especially in Europe, rely on value-added taxes to generate revenue — the United States is one of the few nations that does not. Put simply, a value-added tax is a charge that a national government levies on all commercial transactions. Unlike a sales tax, which is applied only to the final sale, the value-added tax is applied at every step of a product’s manufacture.

For the countries that use them, these taxes have proved to be significant sources of revenue. In practice, value-added taxes, which range from 5 percent in Japan to 25 percent in Sweden, are highly flexible tax instruments. Because the tax is essentially hidden within the price of a good, governments can easily raise them to accommodate fiscal changes.

© 2010 The New York Times Company

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Paul Krugman joined The New York Times in 1999 as a columnist on the Op-Ed page and continues as a professor of economics and international affairs at Princeton University. He was awarded the Nobel in economic science in 2008.

Mr Krugman is the author or editor of 20 books and more than 200 papers in professional journals and edited volumes, including “The Return of Depression Economics” (2008) and “The Conscience of a Liberal” (2007).
Copyright 2010 The New York Times.