The Middle Class Always Pays
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The US middle class pays less in taxes than their European counterparts, with median earners in Germany paying 43% of their income in taxes. @WSJ.
Editorial Board, "The Middle Class Always Pays," Wall Street Journal, November 28, 2019, https://www.wsj.com/articles/the-middle-class-always-pays-11574967052
“…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….”
Europe shows how the Warren-Sanders agenda really works.
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.
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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.
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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.
Ed Comment:“We saw in recent paper that the quality of researchers declines as the share of researchers increases. For the same reason (.i.e., a shortage of talent) every increase in a research is a decrease in the quality of people employed to other critical endeavors such as commercialization.”
New paper replicates Bloom'sAre Ideas Getting Harder To Findfor China and Germany and finds evidence of a decline in research productivity in both countries providing support to Bloom's work
What they did, “….Following Bloom et al., we calculate the research productivity parameter,𝛼𝛼, in equation (1),by taking the average of output growth per firm and decade (1990s, 2000s, and 2010s), and dividing by average input levels. As measures for output we use sales revenue, employment, revenue labor productivity, and market capitalization (monetary units deflated by the GDP implicit price deflator). Market capitalization is not available for Germany’s predominantly privately owned companies and we substitute it with sales revenue from innovative products and services. Regarding inputs, Bloom et al. (2020) show theoretically that research inputs in (1) can be measured by𝑆𝑆̃𝑡𝑡, the“effective number of researchers”, by deflating a firm’s R&D expenditures, 𝑆𝑆with the nominal wage rate for high-skilled workers in the economy…”
Bottom line, “….Table 1 depicts our results. In Germany, the effective number of researchers grows at an annual rate of 1.5% to 4.9%. Like Bloom et al.’s findings for the U.S., however, such input growth is not met with a proportional growth in output.As a result, we find declines in research productivity ranging from3.7% to 7.8% per year. The average of the four estimates, equal to -5.225%, implies that research productivity halves every fourteen years, which is very close to the estimated halflife of thirteen years for the U.S. (Bloom et al., 2020). In China, we observe an extremely rapid expansion of research activities during the first and second decades of the 21st century, with growth rates for effective researchers ranging between 21% and 24%.5 The resulting output growth, again, is not proportional to such inputs, which is reflected in a decrease in research productivity estimated between 15.4% and 29.3%. Averaged across estimates, this amounts to a decline of -23.775% per year, or a half-life of around 3 years….”
Note they theorize that China might see a quicker decline in research productivity due to internal constraints, “….Overall, ideas are not only getting harder to find in the U.S., but that the same holds true for the largest R&D-spending countries in Europe and Asia respectively. Although estimates are difficult to compare, due to differences between data sources, negative growth rates are, in fact, remarkably similar across Germany and the U.S. China has undergone an even larger decline in research productivity in the last two decades, which reflects its rapid transformation from principally capital-driven growth toward more innovation-led growth. It remains to be seen whether China will start to follow productivity trends of advanced economies. The increasingly inward looking and mission-driven nature of Chinese innovation policy (Chinese State Council, 2020), however, suggests that research productivity might continue to decline faster in China than elsewhere. Knowledge production at the technology frontier crucially relies on creative freedom, serendipitous discovery, and exchange…”
