On Democratic Socialism

What made America great?  Why did we attract people from all over the world? It was really the impact of those magic words enshrined in the Preamble to our Declaration of Independence—that among our inalienable rights was the “pursuit of happiness,” not some Brave New World providing happiness, but the right to simply pursue happiness.  We were the first people in the history of the world who were free to choose. We could go wherever we wanted in this land, do whatever we chose (as long as it was legal), make our own way and prosper or fail largely by the talent and perseverance we exhibited. There was no sovereign to tell us what we could and couldn’t do, where we could or couldn’t go, what we could or couldn’t earn.

The result was magical. In little over a century we rose from a rag-tag gaggle of immigrants to the greatest economic power the world had ever seen. As Alexis de Tocqueville observed in his 1830 tome, “Democracy in America,” it was like nothing he had ever seen anywhere in the world. “These new Americans,” he said, “were like Englishman left alone” …a nation of men and women in eager search of economic advancement. And advance they did.

Was it utopia? Not by a long shot. There was poverty in the shadow of wealth, there were rapacious opportunists, and corporate robber barons. That’s why, over a hundred years ago, we passed anti-trust laws and established agencies and institutions to reign in unbridled, laissez-faire capitalism. We established a social safety net and introduced and then recalibrated our tax laws to progressively assure that citizens paid more in taxes as their income increased.  We even passed laws to recapture for the public fisc much of the wealth individuals accumulated during a lifetime.

Was this new American system perfect? Far from it. But it was, and still is the most promising economic system the world has ever seen.

Let’s stop using Denmark, Norway and Finland as examples of Democratic Socialism that we should emulate here in the United States.  Frankly, they don’t like it. They are all strong market-driven capitalist nations. They provide robust social safety nets, which are mostly very popular and they impose substantially higher tax rates at much lower levels of income than we impose in the United States or that would be acceptable in our country. They really don’t soak the rich, so much as they soak everyone.

The tax rates that are tolerated in Scandinavia, at nearly all levels of income, would probably not be tolerated in America. In virtually all Scandinavian countries, the people get a good return on their taxes. The Scandinavian countries use their tax revenues to provide a huge safety net, which provides universal health care and high quality, very affordable education.

Our politicians know they couldn’t impose such high tax rates across the board.  That’s why they always focus on taxing the wealthiest Americans. The wealthy must pay their fair share, they tell us. What else can they say, given the large swath of the electorate who pay nothing at all when they file their tax returns.

Bernie Sanders and Alexandria Ocasio Cortez tell us they want to model the American economy after Denmark or Norway. What they don’t tell us is what the Danes and Norwegians pay in taxes to support their robust social programs. We’re not criticizing these countries or their social programs. Quite the contrary, like we said, they provide a lot of bang for the buck. But politicians who advocate the Scandinavian model for the United States should be candid about what Scandinavian citizens pay in taxes. They tell us we’ll provide the same benefits as the Scandinavian countries, but they pretend only the rich will pay. That simply isn’t the way it can work. No matter how much we tax the rich, we won’t be able to provide Scandinavian-type social benefits without imposing Scandinavian-type tax rates on pretty much all American tax payers. We could tax the rich 100% of their income and still not provide the social programs our home-grown Democratic Socialists propose.  They know perfectly well that the programs they advocate will require the government to reach down deep into American pockets at pretty much every income level.

Here are the simple facts as published by the Tax Foundation.  Scandinavian countries impose high taxes on income at almost every level. Tax rates in Scandinavian countries are very high relative to the United States. Denmark’s top marginal effective income tax rate is 60.4 percent. Sweden’s is 56.4 percent. Norway’s top marginal tax rate is 39 percent.

Income taxes raise a lot of revenue in Denmark, Sweden and Norway because they are really a rather flat tax. High but flat. Most people in Scandinavia are taxed at very high rates, not just high-income taxpayers. The top marginal tax rate of 60 percent in Denmark applies to all income over 1.2 times the average income in Denmark. This means that all income over $60,000 (1.2 times the average income of about $50,000 in the United States) would be taxed at 60 percent. Mr. Sanders and Ms. Ocasio-Cortez never tell us that.

Sweden and Norway have similarly flat income tax systems. Sweden’s top marginal tax rate of 56.9 percent applies to all income over 1.5 times the average income in Sweden. Norway’s top marginal tax rate of 39 percent applies to all income over 1.6 times the average Norwegian income.

Compare this to The United States. The top marginal tax rate (state average and federal combined rates) kicks in at 8.5 times the average U.S. income (around $400,000).

Wait, there’s more!

In addition to the high payroll and income taxes, all Scandinavian countries collect a significant amount of revenue from Value-Added Taxes (VATs). Value-added taxes are equivalent to sales taxes, but levied on businesses throughout the production process. As a tax on consumption, VATs are pretty efficient: they can raise significant revenue with relative ease. However, many (especially in the United States) see VATs as a regressive tax because they fall more on those that spend a larger share of their income, mainly the poor.

We think it is good that the nation is having this conversation about a substantial increase in the social services we provide in America. But let’s do it honestly. Let’s discuss what it will really cost almost every taxpayer.