Europe's payroll taxes

The Wall Street Journal made this squeamish graph on Saturday.

Forget "who bears ," it's the totals hither that are mind-boggling. In most countries , if yous add together upwards the "employer" as well as "employee" contributions , yous instruct betwixt thirty as well as 40%. So , if a worker produces 100 euros worth of output , 30-40 euros forthwith instruct 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 bring a 50-60% wedge betwixt working as well as the fruits of labor. Income taxes , corporate taxes as well as belongings , excise , as well as other taxes are all on top of that! It's a wonder anyone inward Europe bothers to run at all.

(I haven't looked inward to the numbers , but I presume the European numbers include financing of their wellness systems , as well as the USA publish does not. Don't experience thence cheeky.) 

The storey was nearly 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 yous that who pays the taxation doesn't matter. Gas stations pay the gas taxation , but everyone tin flaming encounter that it is all passed on every bit higher gas prices; we're non "socking it to the rich crude oil companies" amongst gas taxes.

But if reward are "sticky ," particularly if fixed past times wedlock contract or police line forbidding cuts , as well as thence this declaration fails , as well as the Portugese transfer is an interesting way to lower reward without devaluing the currency , changing the overall taxation wedge , or repealing laws forbidding wage cuts. 

Apparently the protesters inward the streets figured that ane out. If they figure out that nominal wage increases offset the whole thing , as well as thence we're dorsum to the touchstone theorem.

Updates.

Casey Mulligan as well as ane commenter noticed that I oversimplified.

It's non huge but non rounding mistake either: yous cannot simply add together the employer as well as employee rates inward lodge to quantify the combined distortion , unless reward are held fixed , because the employer contribution is omitted from the payroll taxation base. The formula typically used past times taxation economists is:

(Employee+employer)/(1+employer)

Eg a 100% employer taxation is real dissimilar , as well as much less damaging , than a 100 per centum employee tax. Your mistake is largest when the employer charge per unit of measurement is far from cipher , which it is inward Europe.

Good betoken , as well as inward retrospect it's improve to purpose the correct formula than simplify likewise much , fifty-fifty here. However , for everyone else , continue inward heed that this is non a serious endeavor to mensurate the overall full marginal disincentive inward taxation as well as transfer systems. The betoken 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 continue talking nearly income taxes every bit if they existed inward a vacum.

On the quesiton whether it's a taxation because yous instruct benefits: What counts is the margin. H5N1 forced savings conception has real picayune disincentive. If yous bring to relieve 10% of income , yous instruct the results eventually. The wedge is exclusively how much you'd actually rather bring the income today. USA social safety has a fleck of yous instruct to a greater extent than if yous pay to a greater extent than , but non that much. And my impression is that european social insurance systems give much less marginal hit goodness for marginal contributions. (Commenters , I'm curious to involve heed facts on that)