Europe Leads the Way?
In reducing the role of government in the economy, the U.S. is a laggard.
Oct 14, 2013, Vol. 19, No. 06 • By IKE BRANNON
For much of the last century the United States was the world’s beacon for capitalism, but these days we’re far from such a lofty perch. Since the end of the Cold War, countries on both sides of the Iron Curtain have moved to reduce the role of government in the economy by changing the tax code as well as by privatizing government activities.
Neither has happened in the United States. The tax code’s complexity has metastasized to give the government more levers with which to influence the economy, and neither party has seen fit to push any significant government activity into the private sector.
The problem with the tax code is well documented: Since 1993 every single country in the Organization for Economic Cooperation and Development (OECD) has reduced its corporate tax rate, save the United States. Most have cut their rate multiple times. Today, the United States has the highest corporate tax rate in the OECD.
Naysayers respond that this is misleading because myriad deductions, credits, and the like mean the corporate tax raises much less money here than elsewhere, despite the high statutory rate. But this retort nicely illustrates the problem—namely, that Congress uses the tax code to prod and shape behavior in hundreds of ways rather than trust taxpayers to do what’s best for them.
The personal side of the tax code has even more nudges, fewer of which can be rationalized, along with high top marginal rates. While liberals point to our 39.6 percent statutory top tax rate—compared to European rates that breach 50 percent—to argue that our wealthy remain undertaxed, this is a misleading comparison. A more accurate picture of the marginal tax rate facing upper-income households would add the Medicare tax of 3.8 percent, the phaseout of various deductions for upper-income workers, and state and local taxes. In places like California or New York City such a calculus arrives at an effective federal/state/local tax rate over 55 percent—not terribly conducive to investment and risk taking and certainly nothing to brag about.
Transforming public pensions into personal retirement accounts has been occurring elsewhere as well: For instance, Sweden and the U.K. recently reformed their social security systems so that workers have a portion of their earnings put into an investment vehicle that they own and can invest, with certain restrictions. In an environment where declining birth rates and growing longevity make government pension promises less than certain, giving workers ownership over their retirement income provides a level of security Americans may soon come to envy.
Of course, nothing like that will occur in the United States anytime soon: The biggest opponents of the Bush administration’s 2005 Social Security reform plan were the boosters of personal accounts who felt it didn’t go far enough and decided to hold out for a better political and economic environment that would allow for a more radical reform. They’re still waiting, while demographics and longevity gains inexorably push the system towards bankruptcy, precluding such radical reforms.
More egregious—and less noticed—than the problematic tax code and bankrupt Social Security system is the reluctance of the federal government to privatize economic activities the federal government has no business doing anymore (if it ever did). It is here where the United States truly lags our European counterparts.
For instance, a number of ostensibly left-leaning EU countries, such as Sweden, Finland, and the Netherlands, have completely privatized their post offices. The U.K.’s recent announcement of the forthcoming sale of the Royal Mail actually makes them a laggard in this regard. The EU will soon end mail monopolies in its member countries, which will force the rest of its members to get serious about reforming or selling their postal services. Of course, neither political party in the United States would countenance such a thing despite U.S. Postal Service losses of $22 billion over the past two years. Congressional pushback was intense when the Postal Service tried to eliminate Saturday delivery and close little-used offices.
Europe also lets the private sector manage a good deal of the transportation infrastructure, something else that is well-nigh unthinkable here. A significant proportion of European airports are run by a private concessionaire, as well as most of their transportation security. And most countries use a market to allocate the takeoff and landing slots at airports and keep runway traffic manageable. Our failure to do so is the reason that every major airport in the United States becomes congested mid-mornings and late afternoons, rendering airline schedules little more than a joke. Such a sorry state of affairs is uncommon elsewhere, because market forces allocate scarce resources better than the combination of historical accident and government planning used in U.S. airports.
Countries all over the world have opened up their roads to pricing schemes and private management. Despite experiments here and there, American liberals and conservatives have by and large resisted such a move, despite the potential to greatly reduce congestion, air pollution, and the need to build more infrastructure.
The little-known uranium enrichment industry may best exemplify the difference between the European embrace of markets and America’s uneasiness with them. Nuclear power plants need to use uranium that’s been enriched so that it has a higher proportion of the lighter and more reactive uranium-235 isotopes. The U.S. market for enriched uranium has long been dominated by USEC, a company created in 1992 ostensibly to privatize uranium enrichment. But it has been hemorrhaging money and relying on government loan guarantees and Department of Energy subsidies to avoid bankruptcy. Keeping it afloat has cost the U.S. government billions, most of which gets justified by a blunt appeal to Congress to help save the well-paying jobs at the company.
Its European counterpart is Urenco, a company formed by the British, Dutch, and West German governments in the early 1970s. Unlike USEC, it has come to operate without government subsidies. Being in a heavily regulated industry with access to technology not widely available helps, of course, but with the Japanese tsunami and Angela Merkel’s pledge to end nuclear power in Germany, it’s not exactly a growing market. Despite falling demand, Urenco continues to improve its productivity and profitability, and the Dutch and U.K. governments, which have held onto their ownership stakes, recently announced their intent to sell their stakes to take advantage of this. Meanwhile, Urenco formed an American offshoot, investing a few billion dollars in an enrichment plant in New Mexico, and since then it has been eating USEC’s lunch.
For now the hopes and dreams of pro-growth policy wonks in the United States hang on achieving tax reform, but fixing the tax code will be tough: Not only are there nearly as many losers as winners for every major change, but the party lines are staked out much more clearly in the tax world than almost anywhere else.
But there’s a whole other realm where the U.S. government could—and should—cede its authority to private actors, which would improve the economy, the federal budget, and people’s satisfaction with government. Political parties of all stripes managed to make that happen in Europe. They could do the same here.
Ike Brannon is a senior fellow with the George W. Bush Institute and is president of Capital Policy Analytics, a consulting firm based in Washington.
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