Michael Lind: What If All Sides are Wrong about Taxes?

Michael Lind’s new book, "Land of Promise: An Economic History of the United States", will be published in April and can be pre-ordered at Amazon.com.

...To the extent that the radicals of the right (a better term than conservatives) admit the need for taxation, they tend to favor replacing all other taxes, including income and Social Security and Medicare payroll taxes, with a federal flat tax on consumption. There is a case to be made for a national consumption tax like a value-added tax or VAT (more on this below) but as one among several taxes, not as a replacement for all other kinds of taxes.

There is not a single advanced industrial democracy in the world that relies for its revenues on a single, flat national consumption tax. Not one. The absence of foreign examples may not bother right-wing proponents of American “exceptionalism” or uniqueness. But the rest of us must wonder, if funding all government spending from a single flat consumption tax is such a brilliant idea, why hasn’t some nation somewhere, perhaps a small nation, already tried the experiment? Libertarians can point to Chile as an example of a country that has attempted another of their panaceas, the privatization of Social Security. But they cannot point to any country that has adopted anything resembling their flat tax proposal.

Alas for the American left, the popular progressive alternative also fails the same test of international comparison. To judge from center-left journalism, more progressive opinion leaders oppose than support a federal consumption tax like a VAT, on the grounds that it would be regressive (a genuine problem, although one that can be ameliorated in various ways). But the Nordic welfare state, which represents a kind of utopia for much of the American center-left, rests on three revenue streams—not only income and payroll taxes, like those of the U.S., but also VAT revenues. The U.S. is unique among industrial democracies in its over-reliance on income and payroll taxes and its lack of a national consumption tax.

Now if you want to have a Nordic-style public spending without a Nordic-style VAT, you must jack up progressive income taxes, payroll taxes, or both to extremely high levels. Much of the American left, it appears, would be comfortable with far higher progressive income taxes, funding much greater redistribution of income. Again, the question of international comparisons comes up: If this is a workable idea, why is that no other countries combine an ultra-progressive income tax with a much larger welfare state and no national consumption tax, not even the Nordic social democracies? Turnabout is fair play. If progressives gloat that no country in the world organizes its tax system along the lines favored by the flat-taxers of the right, conservatives can reply that not even the biggest and most generous European welfare states rely as much as American liberals would like on extremely progressive income taxes.

The political center, in the American tax debate, is represented by fiscally-conservative “deficit hawks” of both parties, who worry more about federal deficits and the national debt than the supply-siders of the right or the Keynesians of the left. Whether they are Republicans or Democrats, these earnest, rather solemn and puritanical folks tirelessly promote a bipartisan compromise: raise revenues while lowering overall tax rates, by eliminating tax expenditures (“loopholes”) not only for the rich but also for the middle class....