What High-Tax Europe Really Looks Like
Calls to tax the rich are everywhere
Pledges are piling up in the Democratic Party’s primary debates as candidates try to outbid free health care, free public education or, in Andrew Yang’s case, just free money. Senator Elizabeth Warren plans to make college free in addition to canceling student debt for millions of people at an estimated cost of $1.25 trillion over 10 years. Sen. Bernie Sanders’ Medicare For All bill would cost $34 trillion over 10 years.
This bill alone would nearly double the spending of the entire US government. Double! Current expenditures include interest on the huge national debt, aircraft, carriers, tanks and missiles, numerous agencies, NASA and its contributions to the International Space Station, road construction, aid foreign, etc.Bernie Sanders and Elizabeth Warren often compare their tax ambitions to make the rich “pay their fair share” to tax rates in Europe. Sanders’ plan would essentially add a second US government on top of the existing one despite the current government already spending more than it takes in.
Highlighting this has been called a “Republican talking point” (as if Republicans have ever cared more about balancing a budget). It is heartening, however, to see that reporters are willing to pressure Democrats on how they will actually pay for these sweeping programs.
Both Bernie Sanders and Elizabeth Warren suggest taxing the wealthy as a solution to the revenue problem their proposals would create. They often compare their tax ambitions to make the rich “pay their fair share” to tax rates in Europe. A new report on marginal tax rates offers some perspective on this claim.
The real cost of taxation
EPICENTER, the European Policy Information Center located in Brussels, has just published its report “Taxing High Incomes”, written in cooperation with the Swedish think tank Timbro and the Tax Foundation, which answers the most interesting questions on the marginal rates of taxation.
The marginal tax rate is the rate that applies to the last unit earned. In a progressive tax system, this is the rate at which the last portion of a taxpayer’s income is taxed, that is, the amount you pay for each additional dollar. A distinction is made between the marginal tax rate and the effective marginal tax rate, which also takes into account the sums paid by the State to the taxpayer (allowances, subsidies, etc.). Thus, answering the question of how much the rich really paying taxes is complicated.
Nominally lower income tax rates do not correspond to lower marginal rates.
That’s why the EPICENTER report, which compares the top effective marginal tax rates on labor income in 41 OECD (Office for Economic Co-operation and Development) and EU countries, is so interesting. . For example, the report examines social security contributions such as health care and pensions that are tied to past earnings. However, as the authors explain, social insurance benefits are capped in most cases. Therefore, all social security contributions paid on high earners can generally be considered as pure taxes.
The report shows how much tax high-income earners can incur for each additional dollar. Nominally lower income tax rates do not correspond to lower marginal rates. For instance:
Hungary has a flat income tax of 15%, while the United States has a progressive federal income tax with a top marginal tax rate of 37%. Since payroll taxes and consumption taxes are low in the United States, the effective marginal tax rate is not much higher, at 47%. In Hungary, on the other hand, significant social security contributions are paid by both employers and employees. Moreover, the country has the highest VAT in the world. The result is an effective tax rate of 57%, 13 places higher than the United States in the country rankings.
The United States actually doesn’t have low marginal tax rates, as they approach 50% on the highest earners. A number of states analyzed, namely Cyprus, Switzerland, Turkey, Chile, Slovakia, Lithuania, New Zealand, Mexico and Bulgaria all end up with lower marginal tax rates.
As capital flight increases and interest in investment and entrepreneurship declines, who will pay for these programs?
Is the 76% tax rate in Sweden the end goal of the Democratic candidates? If so, they should exercise caution. The EPICENTER report describes the conflict between efficiency and fairness in tax systems and explains how, in the long term, high marginal tax rates can affect career choices and migration decisions, in addition to reducing returns education and entrepreneurship.
As capital flight (people moving due to high tax rates) increases and interest in investment and entrepreneurship declines, the question remains: who will pay for the programs that Elizabeth Warren and Bernie Sanders promise?