Europe, Taxes, and Quality of Life
I’m always amazed at the stereotypes about Europe that so easily roll off the tongues of Americans: Europeans are socialists, they have weak, noncompetitive economies, their populations are dying off, they are being overrun by Muslims, the list goes on and on.
One of the most prevalent stereotypes is that the poor Europeans are overtaxed serfs. I ran into this stereotype in the form of a know-it-all American who happened to attend one of my lectures in Berlin. He tried to contest some of my observations, and raised the tax bugaboo. “‘No taxation without representation’ Americans would never pay taxes as high as Europeans pay”, he said.
Americans like him always give me a chuckle. They sound so dogmatically sure about things, even when they don’t know much about the subject. I remember attending a seminar in Washington DC along with a couple dozen Members of the European Parliament (MEPs) who invited several members of Congress to participate in their discussions about the global economy, the recent crisis, and the role of China.
This one member of Congress, a Republican from Virginia, showed up and rather than participating in a broad discussion along with everyone else seated around a large table, instead he stood to command the floor and proceeded to hold forth. He lectured the MEPs, and the sum total of his erudition was that the problem with China is that -- ready for the punch line? -- it does not have freedom of religion. Say what??? These MEPs, all of whom were highly educated people, who speak at least three or four languages, some of whom had been freedom fighters behind the Iron Curtain during the struggle against communism, sat there with eyebrows raised. I sat there holding my breath, mortally embarrassed for my country.
So at my talk I suddenly was confronted by this latest example of the breed, standing in front of me, an American guy smiling out of context, grinning apropos to nothing, over his insistence that Europeans pay so much more in taxes than Americans. So I replied to him, perhaps a bit testily.
“Actually, if you break it down, Americans pay out just as much as Europeans do, we just get a lot less for our money. The fact is, in return for their taxes, Europeans are receiving a generous support system for families and individuals for which Americans must pay exorbitantly, out-of-pocket, to enjoy the same level of support. That includes quality health care for every single person, the average cost of which is about half of what Americans pay even as various studies show that Europeans achieve better results, health-wise.
“But that’s not all. In return for their taxes, Europeans also receive affordable child care, a decent retirement pension, free or inexpensive university education, job/skills training, paid sick leave, paid parental leave, ‘kiddie’ stipends after the birth of a child, generous vacations, affordable housing, senior care, efficient mass transportation and much, much more. To get the same level of benefits as Europeans, most Americans fork out a ton of money in out-of-pocket payments -- in addition to our taxes. Either way, you pay. Yet that factor is never considered when they start figuring out who’s paying out more to receive what services.”
Elaborating further, I told him that, for example, many Americans are paying escalating health care premiums and deductibles (and of course 50 million Americans don’t have any health insurance at all -- a travesty from the European point of view). Not that long ago, Anthem Blue Cross announced that its individual premiums were going to increase by up to 40 percent, and people are going to pay for that out-of-pocket. Many Americans are paying higher deductibles in order to reduce their premiums; I have a friend who bought a health care policy for his family of three children with a $10,000 a year deductible in order to keep his premiums affordable. But Europeans receive health care in return for a modest amount deducted from their paychecks.
Friends have told me they are saving nearly $100,000 for each of their children’s university education, and most young Americans graduate with tens of thousands of dollars in debt (unless they happen to be independently wealthy). But European children attend university for free, or nearly so, depending on the country.
Child care in the United States costs more than $12,000 annually for a family with two children. In some countries in Europe, child care is free. In others, they pay $1000-$2000 per year, depending on their income. So they are paying at most only one-sixth of what Americans are paying -- and the quality is far superior.
Millions of Americans are stuffing as much as possible into their IRAs and 401(k)s because Social Security provides a measly amount towards retirement -- only about 35% of your final salary, which is not enough income for a comfortable retirement. The more generous European retirement system provides 70 percent to 80 percent of one’s final salary (depending on the country), and does a much better job of ensuring that seniors don’t suffer a drop in their living standards. That’s more money that Americans have to save out of their own pockets.
Americans’ private spending on old-age care is nearly three times higher per capita than in Europe because Americans must self-finance a significant share of their own senior care by paying out of pocket. Americans also tend to pay more in local and state taxes, as well as property taxes. Americans also pay hidden taxes, such as $300 billion annually in federal tax breaks given to businesses that provide health benefits to their employees -- that’s $1000 for every man, woman and child in the United States
“When you sum up the total balance sheet,” I told him, “it turns out we Americans pay out just as much as Europeans, perhaps more. Because we pay a lot more out-of-pocket, even as we receive a lot less service for our money.”
Unfortunately, these sorts of complexities are not calculated into simplistic analyses like Forbes’ annual Tax Misery Index, a ‘study’ that purports to show that European nations are the most ‘tax miserable.’ Sure enough, there are the European countries at the top of the list, while down there near the bottom, happy as a clam, is the United States right next to Indonesia, Malaysia and the Philippines. That’s because the Forbes Tax Misery Index only takes into account income tax, Social Security or retirement tax, sales tax or VAT and a few other minor taxes. It doesn’t consider the vast amounts that Americans are paying out of pocket, nor what people are receiving in terms of supports for families and individuals.
Ideologically-bound Americans counter that, at least in the U.S. it’s discretionary about whether or not you purchase these services, the government isn’t picking your pocket through higher taxes. But in this economically insecure age, these kinds of services increasingly are necessary to ensure healthy, happy and productive families and workers. Who doesn’t need health care, higher education or some kind of skilled job training, child care, retirement, senior care? Yet because the Europeans collect the necessary revenue via taxes, they can create all these pools of social insurance -- healthcare, childcare, university education, etc. -- in a way that allows them to plan better and create more cost-effective systems, to reach certain economies of scale with built-in efficiencies. That allows them to offer these services for a lot less money per person than we can offer them in America, with our very decentralized, hodgepodge systems that can’t reach economies of scale and therefore are much less affordable. That’s why Americans pay more per capita for health care, child care, university education and so much more.
So Europeans receive these supports for families and workers at an affordable price, but most Americans do not, unless you pay a ton of money out-of-pocket, which many hard-working Americans can’t afford. Or unless you are a member of Congress, which of course spare themselves nothing and provide European-level support for themselves and their families.
Interestingly, an American acquaintance of mine who lives in Sweden told me that, quite by chance, he and his Swedish wife were in New York City once and ended up sharing a limousine to the theater district with one member of Congress, a U.S. Senator and his wife. This Senator, a conservative, anti-tax southern Democrat, asked my acquaintance about Sweden and swaggeringly commented about “all those taxes the Swedes pay.” To which this American replied, “The problem with Americans and their taxes is that we get nothing for them.” He then told the senator about the comprehensive services and supports that Swedes receive.
“If Americans knew what Swedes receive for their taxes, we would probably riot,” he told the Senator. The rest of the ride to the theater district was unsurprisingly quiet.
Yet that kind of silence only serves to perpetuate this myth and prevents Americans from understanding the vast shortcomings of our own system, which is a real shame. Americans don’t realize how far we have fallen behind our international counterparts because our sense of national identity is clouded in such myths and stereotypes.
New America Foundation
Originally published in the Washington Monthly. Republished with the author’s permission.