Europe’s debt troubles have roiled global markets and led to much braying about people who live beyond their means. In the United States, many fear we face a similar reckoning, and deficit hawks in both parties appear to be in the ascendant as Republicans decry President Obama’s "European" tendencies. But something is missing from this discussion, and that is the fact that what helped get Europe into trouble was actually something very American: big, regressive tax cuts that were supposed to pay for themselves but didn’t. Thus, the problem is not that we will become Europe but that Europe was trying to become us. And voodoo economics didn’t work any better there than it did here.
I am aware that "tax cuts" and "Europe" are not concepts that go together in the minds of most Americans. But bear with me while we look at a few examples. If we take the period from the mid-1990s until today, Germany reduced its corporate tax rate by twenty-seven percentage points, while the top income tax rate was cut by 9.5 points. Over the same period, Spain and France slashed their highest income tax rates by about thirteen percentage points, and Italy reduced its corporate tax rate by 20.8 points and its top income tax rate by 6.1 points.
Along with rate cuts that have disproportionately benefited top earners, the long-term trend in Europe, as in America, has been to shift the source of revenue away from taxes on personal and corporate income, as well as away from employers’ share of payroll taxes, and on to workers’ share of payroll taxes, according to a 2009 report by the EU statistical agency Eurostat. Some countries have also increased the regressive value-added tax to try to pay for cuts in more progressive sources of revenue, like the income tax.
The upshot, according to Thomas Piketty, professor at the Paris School of Economics, is that taxation in Europe has become more regressive over the past decade and a half, as European countries fight among themselves to attract capital in an era of intensified integration. "We have tax competition in Europe, and the result is very simple: the mobile factor of production, i.e., capital, is taxed less and less; consequently, a less-mobile factor like low-skilled labor is overtaxed," says Piketty.
In Germany, regressive tax cuts have fundamentally changed the country’s economic model, according to Peter Bofinger, professor at the University of Würzburg and a heterodox member of the German Council of Economic Experts. "Germany was almost in the same league as Scandinavia [before tax cuts]," says Bofinger. "But now it’s no longer in that category."
The results for public finance are clear, according to Bofinger, who recently published an op-ed in the Süddeutsche Zeitung under the contrarian headline "Germany Is Living Below Its Means." "If we had the tax rates that were in place in 1998, we would have 75 billion euros more revenue per year. Meanwhile, countries that refrained from major tax cuts—as in Scandinavia—are in a better fiscal position," said Bofinger. (Germany now plans 81.6 billion euros in spending cuts over four years.)