On the far-too-long list of big mistakes I have made over time, several come under the heading “too much of a good thing.” It started with that third piece of coconut cream pie I ate at age 5. That was the last time for coconut cream, but just the first of many such misjudgments.
Later in life, I proudly participated in two revisions of the federal tax code. First in 1986, and then in 2001, the income tax system was reformed in ways that, on balance, were positive for economic growth and, in particular the ’86 version, brought somewhat greater equity and simplicity by removing some loophole exclusions.
Those bills had something else in common. Each featured a significant reduction, in many cases to zero, in the income tax liability of low- and middle-income households. In 1986, and then again in 2001, with jobs that included advocating for those reforms, I took special delight in emphasizing that millions of Americans would be relieved of any income tax burden.
It seemed a good idea at the time. But decades later, it looks like too much of a good thing, and it’s bringing us to a difficult pass.
At some point, a much broader segment of society will now, unfairly, have to start paying for the irresponsibility of the previous generation of national leadership. This could have been avoided or limited by action over the years. But by now the refusal to reform entitlements means that saving the safety-net programs as they go broke will require major new taxes on millions who are paying little or none today.
Those socially conscious Europeans, whatever fiscal messes they have created for themselves, have had no qualms about taxing their whole populations. The primary vehicle is sales taxation, in the form of value-added taxes, which accumulate along a product’s value chain and are ultimately paid by the consumer. VATs extract roughly 9 percent to 10 percent of middle-class incomes across the euro zone and can result in middle-income citizens paying for nearly half of all VAT revenue. Every country in the 38-member Organization for Economic Co-operation and Development except the United States has one.
That’s a major reason the U.S., frequent misrepresentations to the contrary, has the most progressive tax system among the most developed countries. Here, the top 10 percent pay about 70 percent of U.S. income taxes, and more than half the total U.S. taxes even when payroll taxes are included. The dreaded 1 percent pick up more than a quarter of the entire federal tab.
The tax-to-income ratio is the highest anywhere, and the reason that glib calls to simply tax the rich more can’t come close to solving the country’s biggest domestic (and, increasingly, a national security) problem.
Enter the Trump tariffs. Boneheaded as economic policy, they represent a clumsy, unintentional first step into national sales taxation. Though it’s unclear exactly what portion of the tariff tax is falling on consumers, no one asserts that it’s small. With estimates of about $289 billion in tariff collections last year, the administration claims a positive effect on the deficit. Another cloudy computation will be needed to identify the net effect, after damage to economic growth is factored in.
Consider it a dry run. Even less transparent to the victim than a state sales tax or a VAT, taxation by tariff constitutes a step into consumption taxation, of people at all income levels.
Everyone will have to chip in to the fiscal emergency plan that the country’s procrastinating, irresponsible national leadership, of both parties, has made inevitable. Taxation of consumption, regrettable as it will be, at least has the virtue of weighing less heavily on work and investment, and therefore growth, than further taxation of income. It is likely to be part of the safety-net rescue.
Excusing 40 percent of Americans from income taxation has made for appealing social policy and jolly politics. But it has had the deleterious side effect of anesthetizing its beneficiaries against the true costs of Big Government.
When the promises of Social Security and Medicare can no longer be kept, or when the world’s bond buyers take their money elsewhere, millions of Americans will have to be reintroduced to the reality that the lunch is never free. Their sense of social betrayal at being misled all these years, about the trustworthiness of the trust funds, will be compounded by the burden of sharing the tab for their past leaders’ dereliction of duty.
Those who label the tariffs a regressive tax on those less well-off are exactly right. But when it comes to taxing consumption, odds are we’re just getting started.
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