FELIX SALMON has an intriguing post up today on the American tax base:




The problem here is that there is actually quite a lot of money to be raised from increasing the tax base and adopting revenue raising measures that fall across most of the population. The Economist pointed this out in its recent examination of the American fiscal deficit. If the government is desperate for cash, it's hard to beat the $324 billion per year that would pour in from a 5% VAT.

So if Congress needs all that money, then why doesn't it adopt a VAT, or something similar? Mr Salmon's logic would seem to suggest that it's because the rich understand that a government dependent on them for revenue will continue to enrich them. As such, the rich will actually fight to prevent a less progressive tax system. I'm not sure this is borne out by experience. 

Instead, I think that there are serious political difficulties in raising taxes broadly to fund social insurance programmes in a highly unequal society, because the social insurance is perceived as redistributing income over the population, rather than across time. Broad-based tax systems are how most European countries finance their social safety nets; nearly all of the redistributive effect of government programmes results from spending rather than tax policies.

There are all kinds of historical reasons for this, but one key thing to note is that pre-tax inequality in Europe is far lower than in America. Social insurance is much more about redistribution of resources over time than across the population. You pay taxes understanding that you'll rely on services, be they health care, unemployment benefits, or pensions, at some point in the future. In America, by contrast, the rich will pay far more than they'll ever demand from the government, while the poor will receive more than they'll pay in (though Social Security is a bit of an outlier here).

The end result is a society which is reluctant to tax itself, since much of the voting public perceives government taxation and spending as giveaways to the non-taxpaying poor. Furthermore, it likely seems unfair to many Americans to raise taxes on struggling households when the top 1% of earners are pocketing hundreds of millions of dollars. The government doesn't raise taxes on the rich because that's where the money is. It raises taxes on the rich because it has no choice, politically speaking.