From the WSJ Opinion Archives
THE BUSH AGENDA
Supply-Side Socialists
Europe's left is smarter about taxes than America's Democrats.
Suppose your federal government dramatically slashed tax rates for the well-to-do, all in the name of promoting economic growth. Suppose, too, that it is running a budget deficit and plans to do so for at least the next several years.
You might assume that you live in a country governed by a bunch of reckless right-wingers, willing to risk the nation's economic health for the benefit of a tiny fat-cat constituency. In fact, you reside in socialist Western Europe.
Though most of Europe's countries are ruled by left-of-center governments, taxes are coming down across the Continent. Not only are tax-loving countries like the Netherlands and Sweden cutting rates, but so are economic heavyweights like France (yes, France) and Germany.
Meanwhile, the only major industrial country that is running a large budget surplus, but where apparently respectable people still claim that it can't afford a major tax cut, is the U.S. Viewed from a European perspective, America's epic tax debate is strange indeed.
Of course, Europe's tax cuts aren't nearly as big as they might be, and opposition parties have vowed to push through bigger relief if they regain power. Yet measured by the standards of American liberals, countries like Germany are about to enjoy "irresponsible" tax relief. Indeed, the tax cut that Berlin started to phase in at the beginning of this year is bigger than President Bush's controversial $1.6 trillion plan.
Based on Congressional Budget Office projections, Mr. Bush's tax proposal would provide American taxpayers with an accumulated relief of about 3.6% of gross domestic product between 2002 and 2006. This number will be smaller if Wall Street economists are correct in their claim that the CBO's growth projections are too low. It will be smaller still if the Senate forges ahead with its plans for a tax cut of only $1.2 trillion.
Compare this with the plan from Germany's coalition of Social Democrats and Greens: Finance Minister Hans Eichel will hand back 4.1% of GDP of the world's third-largest economy between 2001 and 2005. This number will go up should Mr. Eichel's optimistic GDP growth assumptions turn out to be too high.
Moreover, in another break with American liberals, Europe's socialists aren't enacting tax cuts that are "targeted" at low-income households or certain industries with political ties to the government.
Rather, Germany's tax reform is heavily directed towards slashing marginal tax rates. The top marginal personal income-tax rate will fall to 42% by 2005, down 11 percentage points from its 1998 level. Contrary to most Americans, Germans don't face any additional personal income taxes at the state level. Thus, in the top bracket, you will end up with a considerably higher tax rate if you live in California or New York than if you live in Bavaria or Saxony. In the case of California, the difference will amount to almost seven percentage points.
Of course, taxation of individuals in Germany and the rest of Europe will continue to be higher than in the U.S. That's because Europeans pay higher sales and energy taxes, and because high marginal tax rates kick in at a lower income level. Still, the gap is shrinking.
All this is happening while Germany and many other European countries are still running budget deficits. Mr. Eichel, for instance, doesn't intend to equalize revenues and outlays before 2006, and even that is wishful thinking.
So how is it that Europe's socialists assume that their countries can afford tax cuts? Are they as nuts as their own political allies in America's Democratic Party must believe?
The truth is that Europe, including its left, has found out the hard way how high tax rates hamper innovation, economic growth and job creation. It's true that Europe's left-of-center governments argue that their tax cuts will prop up demand and increase economic growth in the short-run. But they also stress that to increase long-run potential growth rates, they need tax cuts that give people an incentive to work and invest.
Take, for example, the most recent annual report from the German government's Council of Economic Advisers: "It is expected that the tax reform will boost economic growth and job-creation, thereby enhancing tax revenues and reducing outlays, particularly those which are financing high unemployment." Simply put, many European left-wing politicians have finally come to believe in a notion that is ridiculed all too often on this side of the Atlantic: the logic of supply-side economics.
In the U.S., liberals first made the case that tax cuts were irresponsible so long as a country was running budget deficits. Then, when the first surplus projections popped up, they claimed it would be folly to accept these projections as fact.
Now, as it becomes evident that the federal government really will run huge budget surpluses, the answer from America's left is predictable. Before they agree to a meaningful tax cut, they want certain things to happen simultaneously: The government must fulfill all spending priorities, retire federal debt within a few years and ensure that the budget never again goes into the red.
Luckily for Europe, its politicians aren't waiting for such a day to arrive. For it never will.
Mr. Gersemann is Washington correspondent for the German business and economic weekly WirtschaftsWoche.
