America will come to regret its war on taxes

Beware any policy that is overwhelmingly popular. That usually means it has not been properly scrutinised. The latest example is taxes in America. The country is in the grip of a bipartisan tax-cutting mania. Tax-filing season has just closed and Americans are receiving hefty refunds from Donald Trump’s “Big, Beautiful Bill”—financed by trillions of dollars in deficit spending.

Not to be outdone, two Democrats in the Senate, Cory Booker and Chris Van Hollen, have put forward their own plans which, if implemented, would mean around 55% of tax filers would pay no federal income taxes. Unsurprisingly, those proposals poll tremendously well.

Giveaways are always appealing, and Americans are particularly disenchanted with the tax system at the moment; perceptions of tax fairness are at a 30-year low. Zany ideas are bouncing around at the state level, too. See, for example, the wave of property-tax exemptions for old folk, or a proposal in Georgia to eliminate income taxes that is specifically reserved for teachers.

This newspaper is certainly no fan of big government. But it is foolish to think that ordinary Americans should be exempted from taxes. For the burden to be bundled onto a disfavoured few—be they foreigners, via tariffs, in Republican plans or the rich in Democratic ones, as in California’s mooted 5% wealth tax on billionaires—would be economically unrealistic and politically corrosive.

First, the economics. It is hard to argue that Americans are over-taxed. Barring some Democrat-run states, America has low taxes compared with most other rich countries. The tax code is already progressive; making it more so would distort the incentive to earn. And America is running budget deficits worth 6% of GDP, the highest on record outside recession or wartime. The Congressional Budget Office, a fiscal watchdog, expects that figure to keep rising.

So this is a bad time for both parties to enter an irresponsibility spiral. At the IMF spring meetings in Washington this week, economists were beginning to wonder when, rather than if, America will suffer a bond-market reckoning worthy of Liz Truss, briefly Britain’s prime minister. As emerging-market finance ministers have long known and their counterparts in Europe are rediscovering, living under the bond market’s microscope is not pleasant.

Then take the politics. The notion that tax giveaways will buy politicians lasting popularity is dubious. Mr Trump’s first-term tax cuts did not prevent him from being beaten in 2020. His approval ratings have kept sliding during this refund season, too. Rishi Sunak, Ms Truss’s successor, jammed through payroll-tax cuts worth 0.7% of GDP ahead of his bruising election loss in 2024. When British voters were polled about his list of achievements, they ranked those tax cuts below banning the XL Bully, a nasty sort of dog.

Democrats hope that cutting taxes will assuage voters’ concerns about affordability. Yet that angst does not reflect actual falls in purchasing power. Wage growth for the average American has outstripped inflation for years. Instead, voters keep getting sticker shock from high nominal prices. Padding incomes by lowering taxes won’t fix that problem.

Removing so many Americans from the tax base entirely, as the latest Democratic ideas propose, sounds nice but comes with an additional downside. Taxes, if not quite the price of civilisation, do give citizens a reason to care about efficient and effective government. Severing that connection, and leaving large chunks of the electorate as mere recipients of state largesse, risks deepening America’s political dysfunction. That would be lamentable on its own terms, and put the mature political conversation about its fiscal choices that America needs even further out of reach. ■