Taxing wages

The "tax wedge" is the percentage of total labour costs that never reaches the employee's wallet but goes straight into the coffers of the state. As such, it's a good approximation for much of what's wrong with Europe's economy, says Peer Steinbrueck, German Minister of Finance.

Consider:

The average tax wedge last year for a single employee without children in an Organisation for Economic Co-operation and Development country was 37.5 per cent, compared with 28.9 per cent in the United States.

In the 15 countries that formed the European Union (EU) before the recent enlargements, the tax wedge was a whopping 42.6 per cent.

In France, Germany and Belgium, the tax wedge is 50.2 per cent, 52.5 per cent and 55.4 per cent, respectively.

The average employee in these three countries takes home less than half of what it costs to employ him; most of the money goes to the state through income and payroll taxes.

Yet when EU finance ministers met this week and railed against the rising gap between wages and company profits, Europe's enormous tax wedge didn't merit a mention. Corporate greed – not government greed – was blamed for the discrepancy.

Calling on industry to divide profits more "fairly" is like calling for world peace: It's always popular but never accomplishes very much, says Steinbrueck. Blaming big business, though, helps governments to distract voters from their own responsibility for meagre pay checks. Europe's politicians could do more to raise take-home pay if they would keep their eyes on the tax wedge, and work on reducing government's share of workers' wages.

Source: Peer Steinbrueck, Taxing Wages, Wall Street Journal, March 1, 2007.

For text: http://online.wsj.com/article/SB117270492642822603.html

For more on International Issues: http://www.ncpa.org/sub/dpd/index.php?Article_Category=26

FMF Policy Bulletin/ 06 March 2007