By The Editorial Board | The Wall Street Journal
PHOTO: ISTOCKPHOTO/GETTY IMAGES
Europe
shows how the Warren-Sanders agenda really works.
Democratic presidential candidates insist that America
could afford a European-style welfare state if only it taxed the rich more
heavily. Europe’s beleaguered middle class knows better.
Most European nations have larger welfare and entitlement
states than the U.S., though they spend less on defense. According to the
Organization for Economic Cooperation and Development, government spending
as a share of GDP ranges from about 56% in France to 44% in Germany and 41% in
Britain.
The U.S. share of about 40% is financed largely by income
taxes on the affluent and the payroll tax that funds Social Security and
Medicare, plus state and local taxes and borrowing. Europe has learned the
hard way that the rich aren’t rich enough to pay for their entitlements, so the
Continent duns the middle class.
***
Start with the income tax. Most European governments tax
most household income more heavily than Washington does because they impose
their highest marginal rates on lower levels of income. Germany’s second-highest
marginal income-tax rate of 42% kicks in for married households earning around
€112,000 ($124,000). An American couple with that income pays a marginal rate
of only 22% and would need to earn $612,350 before paying the top marginal rate
of 37%.
Sweden’s top marginal income-tax rate of about 55%
applies to earnings as low as $47,000, and in the U.K. the second-highest rate
of 40% hits taxpayers earning £50,000 ($64,000). By this standard America’s
income tax is highly progressive. The U.S. top marginal rate applies only to
taxpayers whose wages are 9.3 times the average wage. In Belgium the top
marginal rate ensnares workers earning 1.1 times the average, and in the
Netherlands 1.4 times.
The income tax isn’t enough to finance Europe’s vast welfare
states, so governments also impose payroll taxes they describe as “social
insurance contributions.” For a single American earning the average wage, the
employer and employee payroll taxes for Social Security and Medicare average
16% of gross labor costs, according to the OECD.
In Britain the share for similar social-benefit payroll
taxes is a little over 20%, and in Sweden and Germany about 40%. Such
middle-class payroll taxes account for 35% of government revenue in Spain, 30%
in Italy, and 37% in France and Germany, and without them Europe’s welfare
systems would be bankrupt.
Elizabeth Warren has figured this out. Her Medicare for
All plan includes an expanded payroll tax for employers that she says isn’t a
tax on the middle class, but Europeans know better. Employer payroll taxes
for social insurance account for as much as 25% of revenue in France or 20% in
Belgium. This is a hidden tax on the middle class because it reduces the cash
employers can offer in salaries.
Europe also imposes a value-added tax (VAT) with a flat
rate averaging 21% on almost all consumption. These taxes account for up to a
quarter of total government revenue in many countries. They’re regressive since
lower-income households devote a larger share of income to consumption taxed by
a VAT.
There are other middle-class revenue grabs. Excise
taxation, including on fuel, accounts for 3% of total revenue in the U.S., but
above 7% in Britain and 6.4% in Italy. As last year’s yellow-vest protests
showed in France (where fuel and other excise taxes account for nearly 6% of
annual revenue), this burden is more onerous for middle-class suburbanites and
tradesmen than on the Ferrari-driving 0.1%.
Britain also soaks its middle class with a stamp tax on
property purchases, amounting to about 1% of the price for the median home
nationwide, and up to 3% for the median home in London. This discourages
property transactions, making it harder for older middle-class households to
cash out of their home equity while raising a barrier for the younger middle
class to climb onto the property ladder.
***
Calculating how all this affects different income groups
combines analysis of tax rates with consumption patterns and the like. Where
economists have crunched the numbers, the result is grim for the middle class.
Researchers at the DIW think tank in Berlin looked at
Germany’s tax system in 2017 and found that median earners pay roughly the same
proportion of income in taxes as the highest earners do—43%. Germans in the
60th and 70th percentiles of income pay a higher proportion of earnings in
taxes than anyone else, approaching 52%. The wealthiest paid more tax on income
and investment, but consumption and payroll taxes walloped the middle class.
This is how Berlin balances its budget.
American voters, beware.
Politicians promising that Medicare for All and a Green New Deal can be
financed by the rich are lying to you. The middle class will pay because that’s
where the real money is.
