For Whom the Tax Bell Tolls

Funding warfare and welfare in a fragmenting world

Second in a series on global taxation policies. First: Taxation is the Death of Empires

As the One Big Beautiful Tax Bill advances toward becoming law, US stock markets have reached new highs. This is perhaps a relief rally in response to long-awaited fiscal and regulatory certainty. But given the scale of underlying US debt, will the celebration prove short-lived?

Speaker of the House Mike Johnson: As Budget and Spending Debate Roils Capitol Hill…(image credit-The New York Sun)

Last week President Trump called on NATO members to spend 5% of GDP on defense, more than double the existing benchmark. Europe faces an existential fiscal dilemma. Can nations sustain both security and societal needs with the same shrinking tax base? Aging populations, high entitlement spending, and low birth rates coupled with migrant populations utilizing significant state support, have already pushed the European model to its fiscal limits. If defense budgets surge, the strain on schools, pensions, and public health resources could trigger a deeper political rupture.

In the US, a different but equally financially perilous shift is unfolding. Local governments, responsible for the bulk of everyday needs—from schools to sewers, streets and power, fire departments and police—are losing ground. Competitive migration from high-tax states, and populist tax cuts like those in Missouri, are eating away at the property and sales tax base. Meanwhile, national fiscal demands, from global defense to debt servicing, are growing. From China to France to the American Midwest, as revenue sources diminish, the capacity to govern is weakening.

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Europe’s Fragile Fiscal Model

European countries have built a larger social safety net than any other continent, financing expansive welfare states through relatively high taxes and low defense spending. This model was sustainable in part because EU defense expenses were minimized by the uninterrupted American military presence after the end of World War II^¹. But that subsidy is ending.

This inevitable fiscal transition from the US to Europe would have been much less onerous had it occurred during an era of economic prosperity and peacetime, before the Russian invasion of Ukraine. Instead, Europe must now confront rearmament and welfare reform simultaneously. Overlay this with a demographic map that includes very low birth rates among high earners, and high birth rates among low earners and new immigrants², and the contradictions in the current tax base become clearer.

Without structural reform, the European project may face a crisis of both capacity and legitimacy. Immigration strains housing, education, and health care systems, especially in countries where benefits are generous and universal. The tension between a shrinking tax-paying elite and growing populations with high dependency ratios is now at the heart of European politics. It is no longer a matter of ethics, but has moved on to become a contest for resources. Japan, China, and Northeast Asia, face similar demographic challenges. But China’s structural problems run especially deep.

Property taxes are critical. (image credit: Caixin Jul 1, 2023)

Local Taxation—China and the U.S.

In China, land sales accounted for 38% of local government revenue in 2021. After the property market downturn, this dropped to 27%—leaving gaping budget holes. Still, there is no nationwide property tax in sight ³. This is what led to the crash of China’s real estate sector, when there was no more land to lease to developers, and payments to local governments stopped.

By contrast, the US, which relies heavily on local property and sales taxes to provide services to citizens, shows broad divergences in local taxation based on city, county, and state boundaries. This mosaic leads to tax competition, and unintended effects, such as migration from Chicago to nearby Indiana, which has a much lower tax rate ⁴.

According to Illinois Policy, of the 115,719 residents who left Illinois in 2022, 17,223 relocated to Indiana—the second-largest destination behind Florida—highlighting the pull of lower-tax states like Indiana. 

Labor mobility and mortgage lending rates have slowed this somewhat, but the wealthy who pay the most taxes have choices—witness Ken Griffin who moved Citadel from Chicago to Miami in 2022. But even the average person has choices which can affect everyday purchases and local businesses. I never buy gasoline in Chicago, because the taxes are so high compared to the suburbs.

Some states have no income taxes, such as Texas, Florida, and Tennessee. It is easy to understand why Missouri pursued a bill that would overhaul its taxation policies. However, slashing property taxes can lead to shortages of school funding and fire departments, for example. Taxation is about the long run.

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Case Study: Missouri’s Recent Tax Reforms

In 2025, Missouri enacted significant changes to its tax code:

• Capital Gains Tax Exemption: Missouri became the first state to eliminate capital gains taxes on individual income⁵. This move aims to stimulate economic growth by encouraging investment. However, critics argue it disproportionately benefits the wealthy and could reduce funding for public services like education.

• Flat Income Tax Rate: The state implemented a flat individual income tax rate of 4.7%, with provisions to reduce it further to as low as 3.7% if revenue growth targets are met⁶.

Update (July 2025): The capital gains exemption was signed into law, with corporate gains expected to follow if rates drop below 4.5%. Analysts estimate an annual revenue loss between $262 million and $600 million. The state’s FY2026 budget ($50.8B) faces a projected $1 billion shortfall in FY2027, prompting hundreds of vetoes. Meanwhile, new spending initiatives—stadium incentives, disaster relief, and senior tax relief—are straining fiscal sustainability. Short term gain, long term pain.