As we approach the 2020 election where the reality of becoming more of a socialist, welfare state like Europe is represented by the Democratic candidates and their platform, it seems wise to look at how this affects the middle class in particular. This was a topic in the Wall Street Journal at the end of 2019 referencing data from the OECD (Organization for Economic Cooperation & Development). The moral of the story is that if we become more socialist taxes will have to rise a lot! (See below for some good links on this topic).
A review of the data below highlights some key points:
- Among most European countries, taxation is not progressive as median earners pay roughly the same proportion of earnings in taxes as the highest earners.
- Germany’s tax system was a bit progressive for income and capital gains tax, the wealthiest paying more in income and investment, but consumption i.e. VAT/sales tax and payroll taxes had a much larger impact on the middle class
- In fact, it seems Europe’s welfare system would be bankrupt without the payroll taxes. Because employees don’t pay it directly, it is a hidden tax on the middle class as it reduces the cash employers can offer in salaries.
- The VAT (value-added tax, similar to our sales tax) is at least three times our sales tax and is universally regarded as regressive as lower-income households devote a larger share of their income to consumption.
In contrast, compared to the USA, the middle-class income tax rate in Britain and Germany is nearly double our rate; and in Sweden it’s three times our rate in Sweden. A similar pattern occurs with payroll taxes and sales taxes, but it doesn’t stop there. Compared to the USA where corporate taxes provide significant government revenue, these three taxes account for the majority of revenue captured by government. However, there is more. See this link that provides further breakdown on government sources of revenue by the Tax Foundation.
Even here in this fine State of New Hampshire that took great pride since its founding in the 18th Century in limiting the size of government and thus taxation, the newly Democratic legislature passed tried to pass our first income and sales tax in 2019. Luckily, it was vetoed by our Republican Governor.
As Democrats promise to help the middle-class, it would be good for them to look at the data of those countries who found the only way to provide more government services was to tax the largest portion of their people – the Middle-Class!!
Income Tax Rates, Marginal Rate Married Households
- USA 22% ($124K+); 37% ($612K+) – top rate
- Germany 42% ($124K+) – 2nd highest rate
- Britain 40% ($64K+) – 2nd highest rate
- Sweden 55% ($47K+) – top rate
Employer and Employee Payroll Taxes
- USA 16% (on average of gross labor costs)
- Britain 20%+
- Sweden 40%
- Germany 40%
- USA 6.6% (on average among States)
- Europe 21% on nearly all consumption
Much of this post was gleaned from two important articles and webpages:
- An overview of UK payroll costs: https://paulbeare.com/2018/08/14/an-overview-of-uk-payroll-costs/
- Insights into the Tax Systems of Scandinavian Countries: https://taxfoundation.org/bernie-sanders-scandinavian-countries-taxes/#:~:text=Sweden%27s%20top%20personal%20tax%20rate,U.S.%20income%20(around%20%24500%2C000).