As the progressives in America think they are starting to smell blood, progressives in Europe understand that what they are now smelling is coffee.....and they don't like it. The days of bribing the masses with handouts that the country can't afford are coming to an end slowly, but surely, all over the developed world.
Europe’s Taxes Aren’t as Progressive as Its Leaders Like to Think
Thanks to the VAT and ‘insurance contributions,’ the lower and middle classes pay and pay.
PHOTO: ARNE DEDERT/EUROPEAN PRESSPHOTO AGENCY
By
Joseph C. Sternberg
Aug. 3, 2017 4:49 p.m. ET
141 COMMENTS
The Germans specialize in devising pithy nicknames for tax problems. The “middle-class belly” describes the way in which Berlin’s income-tax code applies steep marginal rates at lower incomes before leveling off—it looks like a protruding stomach on a graph. And now comes the “whale in the bathtub.” It’s the most serious problem of all, and an illustrative one for the rest of Europe.
Europeans believe their tax codes are highly progressive, giving lower earners a break while levying significant proportions of the income of higher earners and corporations to fund generous social benefits. But that progressivity holds true only for direct taxes on personal and corporate income.
Indirect taxes, such as the value-added tax on consumption and social-security taxes (disguised as “contributions”), are a different matter. The VAT disproportionately affects lower earners, who spend a higher proportion of their incomes. And social taxes tend to kick in at lower income levels than income taxes, and extract a higher and more uniform proportion of income.
The result in Germany is a progressive system that isn’t. If you looked only at the income tax, the headline rate varies by some 45 percentage points across incomes, from zero on incomes below €8,820 (about $10,500) to a high of 45% on incomes above €255,000 or so.
But if you look at the proportion of gross household income paid in all forms of tax, the rate varies by only 25 points. The lowest-earning 5% of households pay roughly 27% of their income in various taxes—mainly VAT—while a household in the 85th income percentile pays total taxes of around 52%, mostly in social-security taxes that amount to nearly double the income-tax bill.
Tax expert Stefan Bach at the German Institute for Economic Research has graphed this in a laborious process using survey data to estimate how the tax code affects households. The result is shown in the nearby chart. The striking feature is how irrelevant the personal income tax is, both in terms of the proportion of households that pay it and the proportion of household income it collects from those who do.
The real money is in the VAT and social taxes. The visual effect is very much like, well, a large marine mammal luxuriating in a bubble bath.
Although this writer has yet to find similar graphs for other European countries, there’s ample reason to believe Germany is not unique. The way German total revenues are split among income taxes, social taxes and the consumption tax is in line with the rest of Western Europe, as are its tax rates, according to OECD data. If other countries are more progressive than Germany, it’s only because Germany applies its second-highest marginal income-tax rate of 42% at a lower level of income than most.
This amounts to further evidence that Europe is debating tax policy in the wrong way. Tax cuts have emerged as an issue ahead of Germany’s national election next month, with both major parties promising various timid tinkers to the personal income-tax rate and exemptions. That’s an important debate, since the income tax is often the vector for the sort of marginal change in incentives that affects household well-being and the tendency to work or invest more.
But it’s not going to be enough if the goal is to use tax reform to create a significant change in either household consumption or saving. For that, you need to tackle indirect taxation. Mr. Bach, in a report published this week, argues that reducing Germany’s top rate of VAT to 18% from 19% would deliver tax relief of €11 billion a year, mainly for households at the lower half of the income ladder.
Not gonna happen. The VAT and social taxes are too important to the modern welfare state. The great lie is that there are a) enough “rich people,” b) who are rich enough, that c) taxing their incomes heavily enough can pay for generous health benefits and an old-age pension at 65. None of those propositions are true, and the third is especially wrong in an era of globally mobile capital and labor.
That leaves the lower and middle classes, and taxes concealed in price tags or dolled up as “insurance contributions” to obscure exactly how much voters are paying for the privilege of their welfare states. European politicians now generally understand the stimulative power of rate cuts on direct taxes. But reform of the indirect taxes that impose such a drag on European economies awaits a more serious discussion about the proper role of the state overall.
Until that debate happens, make room for the whale.
Mr. Sternberg is editorial page editor of The Wall Street Journal Europe.
Appeared in the August 7, 2017, print edition.
Europe’s Taxes Aren’t as Progressive as Its Leaders Like to Think
Thanks to the VAT and ‘insurance contributions,’ the lower and middle classes pay and pay.
PHOTO: ARNE DEDERT/EUROPEAN PRESSPHOTO AGENCY
By
Joseph C. Sternberg
Aug. 3, 2017 4:49 p.m. ET
141 COMMENTS
The Germans specialize in devising pithy nicknames for tax problems. The “middle-class belly” describes the way in which Berlin’s income-tax code applies steep marginal rates at lower incomes before leveling off—it looks like a protruding stomach on a graph. And now comes the “whale in the bathtub.” It’s the most serious problem of all, and an illustrative one for the rest of Europe.
Europeans believe their tax codes are highly progressive, giving lower earners a break while levying significant proportions of the income of higher earners and corporations to fund generous social benefits. But that progressivity holds true only for direct taxes on personal and corporate income.
Indirect taxes, such as the value-added tax on consumption and social-security taxes (disguised as “contributions”), are a different matter. The VAT disproportionately affects lower earners, who spend a higher proportion of their incomes. And social taxes tend to kick in at lower income levels than income taxes, and extract a higher and more uniform proportion of income.
The result in Germany is a progressive system that isn’t. If you looked only at the income tax, the headline rate varies by some 45 percentage points across incomes, from zero on incomes below €8,820 (about $10,500) to a high of 45% on incomes above €255,000 or so.
But if you look at the proportion of gross household income paid in all forms of tax, the rate varies by only 25 points. The lowest-earning 5% of households pay roughly 27% of their income in various taxes—mainly VAT—while a household in the 85th income percentile pays total taxes of around 52%, mostly in social-security taxes that amount to nearly double the income-tax bill.
Tax expert Stefan Bach at the German Institute for Economic Research has graphed this in a laborious process using survey data to estimate how the tax code affects households. The result is shown in the nearby chart. The striking feature is how irrelevant the personal income tax is, both in terms of the proportion of households that pay it and the proportion of household income it collects from those who do.
The real money is in the VAT and social taxes. The visual effect is very much like, well, a large marine mammal luxuriating in a bubble bath.
Although this writer has yet to find similar graphs for other European countries, there’s ample reason to believe Germany is not unique. The way German total revenues are split among income taxes, social taxes and the consumption tax is in line with the rest of Western Europe, as are its tax rates, according to OECD data. If other countries are more progressive than Germany, it’s only because Germany applies its second-highest marginal income-tax rate of 42% at a lower level of income than most.
This amounts to further evidence that Europe is debating tax policy in the wrong way. Tax cuts have emerged as an issue ahead of Germany’s national election next month, with both major parties promising various timid tinkers to the personal income-tax rate and exemptions. That’s an important debate, since the income tax is often the vector for the sort of marginal change in incentives that affects household well-being and the tendency to work or invest more.
But it’s not going to be enough if the goal is to use tax reform to create a significant change in either household consumption or saving. For that, you need to tackle indirect taxation. Mr. Bach, in a report published this week, argues that reducing Germany’s top rate of VAT to 18% from 19% would deliver tax relief of €11 billion a year, mainly for households at the lower half of the income ladder.
Not gonna happen. The VAT and social taxes are too important to the modern welfare state. The great lie is that there are a) enough “rich people,” b) who are rich enough, that c) taxing their incomes heavily enough can pay for generous health benefits and an old-age pension at 65. None of those propositions are true, and the third is especially wrong in an era of globally mobile capital and labor.
That leaves the lower and middle classes, and taxes concealed in price tags or dolled up as “insurance contributions” to obscure exactly how much voters are paying for the privilege of their welfare states. European politicians now generally understand the stimulative power of rate cuts on direct taxes. But reform of the indirect taxes that impose such a drag on European economies awaits a more serious discussion about the proper role of the state overall.
Until that debate happens, make room for the whale.
Mr. Sternberg is editorial page editor of The Wall Street Journal Europe.
Appeared in the August 7, 2017, print edition.
