A year ago, I expressed my thoughts in this piece:
The progressive left’s aspirations for a European-style welfare state through taxing the wealthy appear fundamentally flawed. The more astute voices within the progressive movement recognize this limitation. They understand that to elevate government spending to 45% of GDP in the U.S., a significant consumption tax would need to be implemented. Historically, this notion has faced staunch resistance from the GOP.
However, Trump’s recent suggestion of a substantial consumption tax—a 10% tariff on all imports, and a staggering 60% on Chinese goods—might just be the opening act. While it falls short of a full-fledged 20% VAT on goods and services, it serves as a crucial stepping stone. The next logical progression could occur when Democrats regain power. They may argue that these tariffs disproportionately affect the poor, given that wealthier households spend more on services, which remain untaxed. This could lead to a shift from a 10% tariff to a 10% VAT, potentially escalating to a 12% VAT as demands for revenue grow. In essence, we may find ourselves edging closer to a European-style welfare state.
Recently, Noah Millman noted in the NYT that advocates of tariffs often tout them as a substantial revenue source. Yet, the reality is that even high tariff rates are unlikely to significantly alleviate our fiscal woes, given that trade constitutes only a modest fraction of the American economy—imports of goods represented about 12% of GDP in 2024. Moreover, increased tariffs would likely diminish trade volume.
Nonetheless, tariffs do function as a consumption tax, and any serious effort to address America’s looming fiscal crisis will almost certainly involve higher consumption taxes. Currently, our federal tax revenues are heavily reliant on income taxes, which are comparatively progressive relative to other OECD nations. The disparity between U.S. tax receipts and the OECD average can be attributed almost entirely to the absence of a value-added tax (VAT) in America.
Under normal circumstances, implementing a VAT—a regressive tax on consumption—would be political suicide for either major party. Yet, in the face of a fiscal emergency, combined with potential offsets from cuts to even more regressive tariffs, it might just be a policy plank that both parties could be willing to consider.
In a recent analysis, Matt Yglesias highlighted that the capital taxation rates in Europe are not significantly different from those in the U.S.; rather, the disparity lies in the much higher consumption taxes in Europe. While tariffs are indeed a form of consumption tax, they do not neatly fit the definition, as they also apply to investment goods. A VAT, on the other hand, is a true consumption tax and is generally regarded by economists as more efficient than tariffs.
As time progresses, I find myself increasingly convinced that a high-tariff strategy will inevitably lead to the introduction of a substantial VAT, which is essential for establishing a European-style welfare state. We may still be quite distant from this outcome, but the door has been slightly ajar, and it’s becoming clearer how this scenario may unfold in the long run.
