Sen. Bernie Sanders and former Secretary of State Hillary Clinton, Democratic candidates for president, keep calling for the European model of expanded benefits. They just don’t tell us that it takes sky-high payroll and value-added taxes to pay for them.
For instance, Sanders reiterated his call for free college tuition in Saturday night’s debate with Clinton and former Maryland Gov. Martin O’Malley. Sanders said: “It is an extraordinary investment for this country. Germany, many other countries do it already.” Clinton is calling for free community college tuition, debt-free four-year college, and free federally funded universal pre-school.
Yet here in Germany, the payroll tax is 33%, more than double the 16% for the U.S. Plus, Germans pay a value-added tax of 19% on most products they buy. Residents in European countries that offer free tuition pay for the privilege out of tax dollars. It would be politically impossible in the United States to levy an additional 17% payroll tax and a 19% sales tax so that some can go to college.
Nor should all Americans be paying higher taxes for free tuition for some. As University of California professor Armen Alchian wrote in the 1970s, a college education is an investment that results in a stream of benefits in the form of higher earnings. Why should those without college educations pay for others to go when the uneducated will not reap the rewards?
Tax wedge for the average worker, 2015
|Rank||Country||Income Tax||Employee||Employer||Total tax wedge|
Germany is not alone in its high payroll taxes. According to the Organization for Economic Co-operation and Development, France’s payroll tax rate is 38% — 12 points higher than the European average of 26%, the highest in the OECD. Its value-added tax is 24%. France’s top tax rate on personal income, 54%, is also one of the highest in the OECD. Only Denmark, Sweden and Portugal maintain higher personal income taxes.
Payroll taxes in Austria, at 37%, and Hungary, at 36%, are not far behind. Austria has a VAT of 20% and Hungary’s is 27%.
Income taxes are about the same in Europe as in the United States. The average effective income tax rate for a worker earning the average wage in Europe is 15%, and it’s 16% in the United States. But payroll taxes and VATs are far more regressive than income tax rates because everyone pays them, regardless of income. Such taxes finance not only free college in Europe, but also early retirement, unemployment benefits and, depending on the country, sick leave and maternity leave.
Payroll and value-added taxes are insidious because they are practically invisible. Payroll taxes are removed from the paycheck before it is received by the worker. And unlike the United States, where the sales tax is a separate item on a receipt, in Europe the VATs are invisible, added into the cost of the product. This makes it easy for policymakers to gradually raise these taxes without people protesting.
In “The Almost Nearly Perfect People: Behind the Myth of the Scandinavian Utopia,” Michael Booth argues that the Scandinavian countries that are frequently cited by Democrats as examples of progress are far from ideal. In addition to their high cost of living, the countries have some of the highest tax rates in the developed world. Across Europe, to varying degrees, governments are spending heavily on public programs they can only fund by taxing their people, the middle class included, at astronomical rates.
Compared with other developed countries, the education systems in Sweden, Denmark, Hungary, Greece, Italy and Portugal are all substandard, according to Booth’s research. Similarly, according to the World Bank, the United States has far higher college-enrollment levels than almost all of its European counterparts.
Presidential hopefuls can paint as rosy a picture of Germany and Europe as they wish, yet no amount of praise can obscure the plain truth that “free” education and maternity leave is anything but free. Government programs impose a real cost on taxpayers, the middle class included. If the American people want to avoid excessive levels of taxation for benefits more efficiently provided by the free market, then they will have to look past debate rhetoric to take a long look at those countries that have already fallen to prey to the lure of “free” government programs.