We have an empirical example of what will happen to the US, US growth and US entrepreneurship, Sweden 1968-1993, the functional socialist years. What in Sweden is called the Crazy Quarter of a Century (Det Galna Kvartseklet).
We had a spending ratio well over 60% of GDP. Running inflation 10% per annum. Marginal taxation rate 85% and before that after payment of the FICA tax 35 %. VAT at 18%. A tax on wealth if more than $150k, 3%. Capital gains tax as income. Unemployment over 10% per annum.
The Social Security system was set to collapse in the early 90s.
Constant devaluations our currency to keep our competitiveness going (1964 1 Swedish Krona equaled 1 Swiss Franc, today the ratio is 1 [Swiss Franc]:7 [Swedish Kroner]).
We had Keynesianism run amok, huge debt, a tripling of the public sector and a doubling of the tax burden.
In 1993 Sweden had a similar housing crisis as now, all banks went bust. All but 2 were taken over by the government. The other 2 got guarantees.
So what did Sweden do? Hard core Keynesianism as the Obama administration did ballooning the debt or asset liquidation advocated by Hayek, Mises?
Sweden did hard core asset liquidation.
Cut the debtload from over 65% to today’s 45%, going down.
Wiped out bad banks that had done reckless lending. Wiped out bad equity. Cut Social Security, SS, by up to 1/3 for everybody over 55. ( I lost 30% of my already paid for SS). Under 55s got a 401k privatized account for 6% of their FICA. The rest of the FICA tax went into a fully funded system outside the Swedish political system. The first fully stable SS system in the world. Secured for all time.
Wealth taxes abolished, capital gains taxes at 30%, halved the top marginal tax rate. Abolished all itemized deductions and cut nearly all government subsidies to private housing.
Unfortunately Sweden as a function of it’s semi-socialist Keynesian experiment 1968-1993 has 60% dependent on the government so we can’t cut spending much lower than to 40% but that said Sweden was the first country out of the 2008-2009 recession, the US isn’t even close. The Swedish budget is balanced, inflation is low, interest rates are medium high and Sweden has stated cooling down, raising rates. What’s the US doing more fiscal stimulus in the firm of Quantitative Easing, higher taxes and probably a surtax/wealth tax as well as increasing the debt.
We have an empirical study over the effect. Compare Sweden and Switzerland, everything equal. Same natural resources, untouched after WWII, same hard core Lutheran work ethic, same welfare system but the huge difference was that the Swiss system us fully funded and fully privately owned and the Swedish PayAsYouGo.
So how is it today. Sweden has a spending ratio of 45%. the Swiss is stable at 30-35%. The Swiss has PPP GDP 70% higher than the Swedes. They’re still the worlds 3-4 strongest economy, Sweden fell to 17 but is now 12. (US is today just above the Swiss, will they fall as Sweden (Krugman's way) or retain it as Switzerland (Paul Ryan's way)?
In Sweden up until 2000 not 1 single net job was created in the private sector. All medium sized business were eradicated. All entrepreneurs left Sweden or was hounded out by politicians and the IRS. The IRS functioned like the Stasi, hunted high income earners in general and business owners in particular. This is still the case but they’ve become fair almost neutral.
PS: I moved to the US 2001 to give my children a better life, not to relive the functional socialist years when I grew up and worked 1968-1993.
IKEA and TetraPac (the inventors of the paper milk carton machine) left Sweden because of the consequences the combined heavy taxation had on family owned businesses.
A (in)famous case in Sweden at the time was the death of the owner of Astra, today AstraZeneca, the estate went into bankruptcy because of the 70% inheritance tax but mostly because of the capital gains tax when selling to pay the estate taxes.
Kamprad, IKEAs owner, and the Rausings, TetraPak, owners didn’t want to loose their company to outside interests or to the government as in Astras case, nor did they want to have their companises socialized. In Sweden at that time a legislation was passed that would have created an extra corporate tax of 20%. The peculiarity, intentional, was that it was to be paid in form of shares in the company abs the recipient wasn’t the government treasury but the trade unions. It was calculated that after 20 years the trade unions would hold majority shares in all Swedish larger corporations (in Sweden it didn’t exist or even exist today many medium sized business, in fact the lowest within the OECD).
So the move was for IKEA self defense. Many small business people followed suit. Extreme aggressive tax planning became the norm for any medium wealthy and small business owner. As a result Sweden has the largest per capita wealth in offshore havens, 90% of it legal tax planning.
The further result of the high taxes is whilst Sweden has the worlds lowest income inequality, GINI, it has the western worlds highest wealth inequality, GINI. It's hard to understand this but if you think about it it becomes self-evident. The already rich, before the tax hike get their wealth locked in. The aspiring inventor cannot make enough money to start a business because of the high income tax. No new businesses is started and no small business can grow from small to medium to large.