Why can’t the U.S. build a social democracy like those in the Nordic countries? Progressives have wistfully asked this question for more than half a century. Why can’t Americans enjoy universal health care, free college tuition with generous universal student grants, universal pre-kindergarten education, and 18 months of paid parental leave? Why don’t policymakers just tax the rich and usher in the social-democratic utopia?
The inconvenient answer is that they can’t. Denmark, Finland, Norway, and Sweden are not quite the utopias that American progressives claim. Key aspects of their economic systems would be unpopular and unworkable in America.
On social spending, American progressives ignore U.S. priorities, while relying on an outdated caricature of Scandinavian social democracy. Importing Scandinavian social benefits without saving elsewhere would produce spending levels that far exceed those in any European nation.
Start with public expenditures. The Nordic governments at all levels spend roughly 50 percent of GDP, while the U.S. government spends nearly 40 percent, according to OECD accounting. Expanding American government by 10 percent of GDP would be radical enough (U.S. tax revenues are not sufficient to finance current spending). But adopting Nordic social welfare policies would push American spending far above Nordic levels.
This is because American progressive proposals seek to layer a Nordic social-welfare state on top of functions in which America already outspends other nations. The U.S. spends 3.5 percent of GDP on defense—roughly double the Nordic average—and is not likely to disarm itself significantly in the face of an aggressive Russia and emboldened China. (Finland, a new NATO member, and Sweden, a hopeful applicant, surely appreciate the security benefits of U.S. military largesse.) American veterans’ benefits add another 1 percent of GDP, and progressives are not rushing to reform an American infrastructure system that is more regulated, bureaucratic, and expensive than most of Europe. The Congressional Budget Office projects that Washington’s massive debt will push its interest costs to nearly 7 percent of GDP over the next few decades, or more than quadruple the levels of low-debt Nordic nations. Altogether, America’s defense, veterans, infrastructure, and interest costs are set to grow 8 percent of GDP above Scandinavian levels, leaving less room for social spending.
Next, consider health care, the most expensive government function. Again, Nordic-style generosity would merely layer new benefits on top of America’s bloated cost structure. The 17 percent of GDP that America spends on health care—roughly half by government—does exceed the roughly 11 percent spent by more government-run Nordic systems. But while one can always find room for efficiency savings, much of these higher costs are the inevitable result of America spending decades building the world’s most extensive health infrastructure, with widespread technology, roomy hospitals, and massive drug-research-and-development investments. (Note that “more extensive” does not necessarily mean better). Americans cannot pay Scandinavian prices for the more vast American health technology and hospitals any more than we can pay typical Scandinavian home prices for larger American homes.
The health-care labor market poses further challenges. American doctors, nurses, and medical administrators won’t accept drastic salary cuts to match those of their European counterparts. Expecting American primary-care physicians (average salary: $260,000) to accept the 70 percent salary cut to match Sweden’s $70,500 typical salary for that job is a fantasy. Nor will American nurses allow their average salary of $83,000 to be slashed to the Swedish average of $60,000. Even America’s promised administrative savings may prove illusory, given the bureaucracy of Nordic health-procedure approvals.
Indeed, by layering broad Scandinavian coverage mandates on top of America’s more expensive health infrastructure, salaries, and administration—essentially combining Nordic generosity with American inefficiency—progressives would create the most expensive public-health system on Earth. Economists across the political spectrum have concluded that the modest efficiency savings of “Medicare for All” would be reallocated into huge new utilization costs (as more people take advantage of “free” universal health care) and economic costs (from massive new taxes) to keep health-care costs near the current 17 percent of GDP. An American government that provides all 17 percent of GDP of its health spending would therefore exceed Nordic health spending by 6 percent of GDP—on top of America’s aforementioned 8 percent of GDP overage on defense, veterans, infrastructure, and interest costs.
In any case, the Nordic model is more complicated than its American advocates tend to admit. In the second half of the 1940s, Sweden began aggressively building a social-democratic welfare state that frequently pushed total government spending past 50 percent of GDP. But by the late 1980s, the system’s exorbitant taxes and regulations crushed economic innovation and growth. Sweden’s real wages fell between 1979 and 1995, bottoming out with a 10 percent decline, and were accompanied by an 11.5 percent yield on Sweden’s ten-year bond by 1995.
To resuscitate its economy, Sweden slashed tax rates, eliminated wealth and inheritance taxes, deregulated key industries, liberalized trade, and pared back its famous cradle-to grave welfare state. It implemented a 2 percent inflation target in 1996. A left-wing government partially privatized the nation’s social security system in 1998 to keep soaring costs from jeopardizing other spending. American progressives, who refuse even to discuss entitlement reform, have not shown such pragmatism. Yet these reforms improved growth, raised incomes, and made it easier for taxpayers to afford the remaining welfare state.
A Nordic-style approach to taxation would prove similarly elusive in the U.S. Washington already faces a baseline budget deficit that will rise to 6 percent of GDP within a decade and 10 percent of GDP within three decades. So simply paying for existing federal programs would require a near-doubling of middle-class taxes. A tax-the-rich agenda could not balance the long-term federal budget, much less finance vast new spending initiatives.
The Nordic reality doesn’t reflect the progressive caricature. Finland, Norway, and Sweden collect an average of 42.6 percent of GDP in taxes, versus the 26.6 percent collected by America’s federal, state, and local governments. However, 14 percentage points of this 16-percentage point overage come from higher payroll and value-added tax (VAT) revenues that broadly hit the middle class. These nations’ income and corporate tax revenues exceed America’s by only 3 percent of GDP, and the rest of their taxes raise less than those of America.
American progressives may be surprised to learn that Nordic capital gains tax rates are similar to the American rates that they wish to hike dramatically. Nordic wealth taxes exist only in Norway, where a nudge upward to a 1.1 percent tax rate has induced an exodus of the wealthiest Norwegians. (By comparison, Bernie Sanders has proposed a wealth tax with rates rising to 8 percent). Sweden abolished its estate tax and wealth tax almost two decades ago, and Nordic inheritance taxes are nowhere close to American progressive proposals. Denmark, Sweden, Norway, and Finland all have lower statutory corporate tax rates and lower effective average corporate tax rates than the United States, though all collect a higher share of GDP in corporate revenues due to a larger corporate tax base as a share of the economy.
Scandinavia’s additional tax revenues come mainly from slamming their middle classes with steep social security, consumption, and income taxes. How steep? Total social security taxes (including those employers pay) are twice as high in Sweden (31.42 percent) and nearly one-third higher in Norway than in the United States. Nordic VAT rates of approximately 25 percent raise roughly 9 percent of GDP in revenues, while America has no national VAT. America would need a higher VAT rate to match Europe’s VAT revenues because the traditionally tax-exempt sectors (such as health care and education) comprise a much bigger share of America’s tax base than that of Europe.
High payroll and consumption tax rates leave less room to hit the wealthy with exorbitant income tax rates. Finland, Sweden, and Denmark have top income tax rates in the low-to-mid 50s, not wildly above America’s top rate of 43.7 percent (which approaches 50 percent in blue states that charge high income tax rates). Norway’s top rate of 39.5 percent is lower than that of the United States.
America’s income taxes are highly progressive. The top-earning 20 percent of families pay 92 percent of all federal income taxes and 75 percent of total federal taxes. Washington allows a standard deduction of just under $13,000 for a single filer and $26,000 for a married couple, plus a refundable child tax credit of $2,000 per child (a third more than the Swedish national child allowance). Thus, the Internal Revenue Service reports that the typical middle-income American family earning $70,000 pays an effective federal income tax rate of just 2 percent, and a total tax rate of roughly 12 percent when including payroll and state income taxes. Families earning $100,000 pay an average federal income tax rate of 5.5 percent and roughly 18 percent overall.
Nordic nations do not let middle-income families off as easily. Sweden allows a standard deduction at the U.S. equivalent of just $2,150, after which tax rates immediately leap up. A full-time worker earning the U.S. federal minimum wage of $7.25 would pay an astonishing 33.7 percent in income and payroll taxes in Sweden. Tax rates also rise steeply: in Scandinavia, the top income tax rate kicks in at an average 160 percent of each country’s average wage, or roughly the equivalent of $96,000 in the United States. In Sweden, the typical full-time worker earning a national-average income of $49,800 (adjusted in American dollars) would thus pay 17 percent in income tax, plus 24 percent in payroll tax. Incorporating the sales tax and excise duties pushes the effective tax rate to 52 percent. A higher-earning Swede making $100,000 would face an effective tax rate (including sales taxes) of 60 percent.
Adding insult to injury, married couples in Sweden are not allowed to file joint income tax returns. This further punishes married couples with one primary earner relative to the American tax code. While a quarter of American mothers identify as stay-at-home moms, stay-at-home parents are virtually extinct in Sweden.
It’s a political impossibility that middle- and lower-earning American families would accept tax rates anywhere close to these Nordic levels. And it is a mathematical impossibility for America to finance a Nordic system on the backs of the rich, as some U.S. politicians claim to want. Even assessing 100 percent tax rates on all income over $500,000 would raise just 5 percent of GDP, assuming (generously) that affected families continued working and investing essentially for free. Even seizing and liquidating every dollar of billionaire wealth—every business, investment, home, and asset—would finance the federal government one time for only about eight months (while draining the stock market and thus nearly every 401(k)).
No country has ever built a massive welfare state on the backs of the rich. Enough millionaires and billionaires simply don’t exist. Most of the tax base consists of middle-class workers. Sweden and the other Nordic countries gradually raised taxes on these low- and middle-income earners during the postwar boom at a time when rapid wage growth allowed for taxes to increase without reducing take-home pay. Building a Nordic-style welfare state in a low-wage growth environment would require drastically reducing the take-home pay of American workers. This is not realistic economically or politically. And many of the progressive approaches of dramatically taxing corporations, investors, and wealthy citizens were already attempted and abandoned in Scandinavia—not because the governments felt sorry for wealthy people, but because the economic damage was not worth the disappointing revenue levels those policies produced.
None of this is to say that the U.S. system is perfect. There is certainly some room to raise taxes on wealthy Americans and corporations, particularly by paring back unnecessary tax preferences and perhaps nudging up marginal tax rates by a few points. But any changes will not be sufficient to eliminate current deficits much less build a social-democratic paradise. Before trying to layer an outdated caricature of Scandinavian social spending on top of America’s already-bloated government, progressives should focus on paying for the existing government programs that are already driving $100 trillion in projected budget deficits over the next three decades.
Brian Riedl is a senior fellow at the Manhattan Institute. John Gustavsson is a Swedish economist and policy researcher who received his Ph.D. in economics from Maynooth University in Ireland.
Photo: AlexandrRybitskiy/iStock
