Why politicians keep falling for a myth.
Should America look up to Europe? For many Americans, it seems like Europe is the paradise continent with high salaries, good education, and free healthcare. So they advocate for the US to adopt a “European Model”—tax and tax, spend and spend, regulate and regulate. Politicians like Senator Bernie Sanders, Congresswoman Alexandria Ocasio-Cortez, and New York Mayor Zohran Mamdani are pushing for a 70% top tax rate, Medicare-for-All, and strict bank and business regulation. But does the European model really work?
Every dollar of government spending comes from taxes, either directly or indirectly, so high government welfare spending (funded through high taxes) inhibits job creation, and employers move to lower-tax jurisdictions. Consequently, countries with massive welfare states like Sweden, France, and Belgium have high unemployment—approximately 9%, 8%, and 6%, respectively.
Welfare also disincentivizes people from working, as employment will cause many to lose their recipient status. So for people who receive benefits, it is more profitable (at least in the short term) simply to stay on welfare. In 1965 Germany, before the massive expansion of the welfare state by Willy Brandt’s government, only 1 out of 75 children lived in families on welfare benefits. By 2007, it was 1 out of 6. This pushes people to stay on benefits, leading to lower income, nullifying any progress welfare might have achieved at reducing poverty. Hence, Germany has a relative poverty rate of 17.2%; Norway, 13.2%; France, 18.7%; Sweden, 16.1%.
Taxation cuts profit margins, undermining the attractiveness of European countries for entrepreneurs and making it harder for small businesses to secure investment. High tax rates therefore make the EU venture capital market far smaller than its US counterpart. Total VC investment in the US in 2024 reached $215 billion; meanwhile, in the EU, it only reached $51 billion. So, US companies receive 80% more funding than their EU peers on the seed stage, 73% more in the early stage, and 82% more in the later stage (data on page 27 of the linked European Commission report).
EU companies are less attractive not only to VC, but to banks also. Since 2008, corporate lending has decreased by more than two-thirds in some sectors. EU companies can’t raise money from either banks or VC, leading to low business survival rates across Europe, making it harder for Europeans to start major companies. In the last 50 years, there has been no European company that started from scratch that achieved a market valuation of over $1 trillion, while US entrepreneurs have started 6 such companies.
High taxes disincentivize keeping established companies in the EU. Between 2008 and 2021, about 30% of EU-based unicorns (companies valued at over $1 billion) have left Europe, primarily for the US (data in link on page 6). There is no EU country with over 50 startup-unicorns, while the US has over 700. Contrarily, the situation per capita is similar, as the US has 2.29 startup-unicorns per million people, while Germany has only 0.55.
The lack of employment opportunities leads to brain drain. Europeans account for 30–60% of elite professional visas to the US. In total, since the year 2000, around 60,000 brains a year have moved from Europe to the US on elite professional visas. High taxes also deter foreign investors. In Germany, for example, total FDI inflow was about €10.5 billion, while outflow was about €135.5 billion.
European countries rely on an oversized public sector to fund and administer welfare programs. The government sector is less productive than the private sector: while private companies stay profitable by satisfying the needs of customers, government programs practically can never be shut down, even when they are ineffective. But in many countries, the public sector employs almost a third of the workforce, which dampens innovation and therefore productivity. EU productivity today is almost 20% lower than that of the US.
Freedom has benefits. Some American politicians and economists only see the beautiful facade of Europe. But if you look deeper, you discover that the foundation of European prosperity was built long ago, by brave entrepreneurs, who weren’t scared to risk or to act; and, importantly, the government allowed them to. Yes, America has some very severe problems to solve, but they are not unique. Almost every developed country faces high housing costs and inequality, but European solutions don’t work as advertised. As for Europe, with high taxes and stifling regulation, it faces an existential choice: reform, allow freedom, and encourage entrepreneurship, or see the sun set on its once mighty economies.