The welfare state is enslaving European workers

For the Germans, July 8 was a good day. Not just because it also happened to be your columnist’s birthday or because of Germany’s emphatic 7-1 win over Brazil in the World Cup, but because this year, it also marked Germany’s Tax Freedom Day. Until then, theoretically all that the average German earned in income over the year was taxed away by government. Now Germans can actually start earning money for themselves for the rest of the year.

Tax Freedom Day is calculated by a number of think tanks around the world. The German version is compiled by the Federation of Taxpayers. To celebrate the day, the lobby group released a short research paper which not only puts today’s Tax Freedom Day into its historical context but also provides some telling international comparisons.
 
The first thing that stands out about the development of German tax levels is that they have been remarkably constant over decades. In 1960, taxes accounted for 28.2 per cent of GDP. Today’s value is 31.5 per cent, and the fluctuations in between have been moderate.
 
However, actual taxes are only part of the story — otherwise Tax Freedom Day would have been celebrated in April. What has changed quite dramatically are contributions towards social security systems. They may not be called taxes but in effect that is what they are. In Germany, these include compulsory levies for health insurance, nursing care insurance, pension insurance, unemployment insurance and accident insurance. In 1960, the total of these contributions only accounted for 12.1 per cent of GDP; they have risen to 20 per cent today.
 
Once you add up the 31.5 per cent in taxes and 20 percent in social security levies, the total burden on national income is 51.5 per cent. With a bit of sarcasm, you could call this half-socialism — the government takes more than half of all earnings. However, that is the reality in most modern welfare states.
 
You can take the German example as a case in point. Indeed, Germany is not unusual at all in a European context.
 
In most European countries, there has been a similar growth in the redistributive state. Practically all of the government’s expansion has been driven not by an increase in government-provided services but by increased redistribution of income. The result is a remarkable wedge between gross and net incomes, which is hard to imagine from an antipodean perspective.
 
Based on OECD data, the German Federation of Taxpayers calculated the difference between gross wages and net take-home pay, including the effect of value added taxes. For a single income earner on the national average income, the tax burden was 21.9 per cent in New Zealand and 30.4 per cent in Australia. These tax burdens are considerably lower than in Europe. Belgium tops the list of predatory governments with a tax burden of 59.1 percent, followed by Hungary on 54 percent and Germany on 53.1 percent. In most large European economies, the burden is well above 40 percent.
 
The respective tax burdens for families with two income earners and two children are somewhat lower, but still tax burdens in Europe range from 47 per cent in Greece to 29.4 per cent in the UK. Again, Australia and New Zealand are much less taxing on 23.2 per cent and 15.5 per cent respectively. From these comparisons it looks that Europeans work far more for the taxman whereas Australians and New Zealanders can more freely enjoy the fruits of their labour.
 
These remarkable differences in tax rates have a levelling effect on net incomes despite vast differences in labour costs. Again, the report provides some telling calculations. For a single income earner on the average national wage, the table lists on the left hand side what this person costs to employ and how much net pay this person earns:

taxdifferential

It may seem extraordinary that Belgium is the country in which it is most expensive to employ an average income earner, and yet Belgium is only ranked 15th for net take-home pay. Similarly, there may appear to be a massive difference between German and New Zealand labour costs ($69,000 compared to $36,000). However, thanks to New Zealand’s much lower taxes this difference almost disappears when it comes to employees’ net pay ($35,000 compared to $30,000). A similar comparison could be made between Australia and New Zealand, where despite substantial differences in gross labour costs, net wages are not too far apart, although the adjustment for purchasing power parity probably also accounts for some of the closing of this gap.
 
For European taxpayers, the wedge between gross and net salaries is certainly unpleasant. However, it should be reason for even greater concern. In Europe’s ageing societies, the contributions to fund pensions and health care are likely to increase further in the future. At the same time, globalisation will make it harder to justify Europe’s extraordinarily high labour costs.
 
For future Tax Freedom Days in Germany and the rest of Europe, this is bad news. It will require some tough decisions to even keep the day where it is now.
 
For Australians and New Zealanders, meanwhile, there may be some consolation in looking at Europe. We may certainly feel overtaxed at times but at least compared to European levels, we are in the fortunate position of mainly working for ourselves and not for the government. Let’s keep it that way.

This article was originally published in Business Spectator (Melbourne) on July 17, 2014 and was republished with author’s permission in course of the AtlasOne syndication project.

2014-07-24T14:09:43+00:00

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