A year ago, I had this to say:
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.
A few days ago, Noah Millman observed in the NYT that proponents of tariffs:
sometimes proclaim these as a great source of revenue, but in reality even very high tariff rates won’t do much to fill our fiscal hole because trade, while economically crucial, is still only a modest percentage of the American economy (imports of goods totaled approximately 12 percent of our G.D.P. in 2024). Furthermore, higher tariffs would reduce the volume of trade.
But tariffs are a tax on consumption, and higher taxes on consumption are almost certainly going to be part of any serious attempt to solve America’s looming fiscal crisis. Our federal tax revenues are already unusually skewed toward income taxes, which are themselves unusually progressive compared with those of other O.E.C.D. countries. The gap between American tax receipts and the O.E.C.D. average can be almost entirely accounted for by the fact that America doesn’t have a value-added tax.
Under normal circumstances, passing a VAT — a regressive tax on consumption — would be political suicide for either party. But in the context of a fiscal emergency, and with the cost partly offset by cuts to even more regressive tariffs, it just might be a plank that both parties could agree to walk together.
A recent post by Matt Yglesias shows that the rate of capital taxation in Europe isn’t much different from in the US; it is European consumption taxes that are much higher than in the US. Although tariffs are a tax on consumption, they are not a true “consumption tax“, as they also apply to investment goods. A value-added tax is a true consumption tax and is thus generally considered by economists to be more efficient than a tariff.
As time goes by, I am becoming more and more convinced that a high tariff policy will eventually lead to a big VAT, which is the sine qua non of a European-style welfare state. We are still a long way from that outcome, but the door has been cracked open and I believe that we can already see how this will play out in the long run.
