Europe's Payroll Taxes

The Wall Street Journal made this overnice graph on Saturday.

Forget "who bears," it's the totals hither that are mind-boggling. In most countries, if you lot add together upward the "employer" in addition to "employee" contributions, you lot larn betwixt thirty in addition to 40%. So, if a worker produces 100 euros worth of output, 30-40 euros forthwith become to the government. And at that spot is an additional 20%+  VAT when the worker goes to purchase something. So, correct out of the gate, nosotros convey a 50-60% wedge betwixt working in addition to the fruits of labor. Income taxes, corporate taxes in addition to property, excise, in addition to other taxes are all on top of that! It's a wonder anyone inward Europe bothers to live on at all.

(I haven't looked inward to the numbers, but I presume the European numbers include financing of their wellness systems, in addition to the the U.S.A. publish does not. Don't experience therefore cheeky.) 

The even was almost a proposal to shift "employer contribution" to "employee contribution" inward Portugal, every bit "the title" who bears the burden" suggests.

Economists volition chop-chop tell you lot that who pays the revenue enhancement doesn't matter. Gas stations pay the gas tax, but everyone tin run across that it is all passed on every bit higher gas prices; we're non "socking it to the rich crude companies" amongst gas taxes.

But if reward are "sticky," particularly if fixed past times matrimony contract or police forbidding cuts, in addition to then this declaration fails, in addition to the Portugese transfer is an interesting way to lower reward without devaluing the currency, changing the overall revenue enhancement wedge, or repealing laws forbidding wage cuts. 

Apparently the protesters inward the streets figured that 1 out. If they figure out that nominal wage increases offset the whole thing, in addition to then we're dorsum to the touchstone theorem.

Updates.

Casey Mulligan in addition to 1 commenter noticed that I oversimplified.

It's non huge but non rounding fault either: you lot cannot merely add together the employer in addition to employee rates inward guild to quantify the combined distortion, unless reward are held fixed, because the employer contribution is omitted from the payroll revenue enhancement base. The formula typically used past times revenue enhancement economists is:

(Employee+employer)/(1+employer)

Eg a 100% employer revenue enhancement is real different, in addition to much less damaging, than a 100 per centum employee tax. Your fault is largest when the employer charge per unit of measurement is far from zero, which it is inward Europe.

Good point, in addition to inward retrospect it's meliorate to role the correct formula than simplify also much, fifty-fifty here. However, for everyone else, boot the bucket on inward heed that this is non a serious endeavor to stair out the overall full marginal disincentive inward revenue enhancement in addition to transfer systems. The indicate is that this rather large social insurance wedge is at the beginning; nosotros add together income taxes, means-tested transfers, phaseouts, wealth taxes, etc to this rather large base. We boot the bucket on talking almost income taxes every bit if they existed inward a vacum.

On the quesiton whether it's a revenue enhancement because you lot larn benefits: What counts is the margin. H5N1 forced savings excogitation has real fiddling disincentive. If you lot convey to relieve 10% of income, you lot larn the results eventually. The wedge is entirely how much you'd actually rather convey the income today. the U.S.A. social safety has a fleck of you lot larn to a greater extent than if you lot pay more, but non that much. And my impression is that european social insurance systems give much less marginal orbit goodness for marginal contributions. (Commenters, I'm curious to need heed facts on that)