What High European Taxes Buy

Following up on my post from a few days ago, here's a section of a much longer David Cay Johnston called "Nine Things the Rich Don't Want You to Know About Taxes." Here, Johnston compares American and German tax policies:

We measure our economic progress, and our elected leaders debate tax policy, in terms of a crude measure known as gross domestic product. The way the official statistics are put together, each dollar spent buying solar energy equipment counts the same as each dollar spent investigating murders.

We do not give any measure of value to time spent rearing children or growing our own vegetables or to time off for leisure and community service. 

And we do not measure the economic damage done by shocks, such as losing a job, which means not only loss of income and depletion of savings, but loss of health insurance, which a Harvard Medical School study found results in 45,000 unnecessary deaths each year.

Compare this to Germany, one of many countries with a smarter tax system and smarter spending policies.

Germans work less, make more per hour and get much better parental leave than Americans, many of whom get no fringe benefits such as health care, pensions or even a retirement savings plan. By many measures the vast majority live better in Germany than in America.

To achieve this, unmarried Germans on average pay 52 percent of their income in taxes. Americans average 30 percent, according to the Organization for Economic Cooperation and Development. 

At first blush the German tax burden seems horrendous. But in Germany (as well as in Britain, France, Scandinavia, Canada, Australia and Japan), tax-supported institutions provide many of the things Americans pay for with after-tax dollars. Buying wholesale rather than retail saves money. 

A proper comparison would take the 30 percent average tax on American workers and add their out-of-pocket spending on health care, college tuition and fees for services, and compare that with taxes that the average German pays. Add it all up and the combination of tax and personal spending is roughly equal in both countries, but with a large risk of catastrophic loss in America, and a tiny risk in Germany. 

Americans take on $85 billion of debt each year for higher education, while college is financed by taxes in Germany and tuition is cheap to free in other modern countries. While soaring medical costs are a key reason that since 1980 bankruptcy in America has increased 15 times faster than population growth, no one in Germany or the rest of the modern world goes broke because of accident or illness. And child poverty in America is the highest among modern countries—almost twice the rate in Germany, which is close to the average of modern countries.

On the corporate tax side, the Germans encourage reinvestment at home and the outsourcing of low-value work, like auto assembly, and German rules tightly control accounting so that profits earned at home cannot be made to appear as profits earned in tax havens. 

Adopting the German system is not the answer for America. But crafting a tax system that benefits the vast majority, reduces risks, provides universal health care and focuses on diplomacy rather than militarism abroad (and at home) would be a lot smarter than what we have now.

Comments

[Andrew]

@Hepkat,

Anselmus makes some good points. It's a bit hard to praise a society as valuing freedom above all else when it incarcerates a higher proportion of its citizens than any other society in history. Also, the evidence shows Americans reject the word socialism while eagerly embracing the substance of it, as shown by the untouchability of programs such as Social Security, Medicare, etc.

The most popular way to lower the deficit, according to recent U.S. polls, is significantly increasing taxes on the rich. Not that this is likely to happen. And the reason this is not likely to happen is precisely what Johnston and others are commenting on. And, of course, calls into question the notion that "Americans" have "chosen" the policies that led to the current arrangements.

Now it's off to Berlin. Happy Easter.

[Anselmus]

I don't thnk comfort needs to be the enemy of superiority. It's certainly possible to envision a Harvard coexisting with the collective infrastructure and collective burden-sharing Andrew appreciates in Germany. England maintains some decent very low-cost universities for the general masses, and also boasts Oxford for the elite. England's public transit still blows away that in the US.

In a number of spheres, Americans permit considerably more state intrusion into their private and corporate affairs than any European would dream possible. Cases in point: laws on drinking in public, nudity, affirmative action and SOX. Different experiences lead to different priorities, but Americans are not fundamentally any more incapable of establishing comprehensive state support of health care reasonable transportation infrastructure or base educational support than - say - Canadians are, who offer both.

The rest of your monologue on general US/EU historical differences doesn't really have much purchase on the specific examples Andrew - and the articles referred to - deal with.

[Hepkat]

Well, I for one am disappointed in Andrew. He fell into that large gaping hole of a trap that messes up the majority of die-hard America-critics in Europe: that of equating comfort with superiority. He has lost all objectivity and in my view, has allowed emotions to trump reason and logic.

It is absolutely ridiculous to complain that the U.S. lacks the social benefits available in Western Europe, as the two peoples of these societies have made the conscious decision to plot two very divergent courses. I would have expected this key foundational fact to be glaringly obvious to any educated American living in Europe (or European living in the U.S. for that matter).

On account of their turbulant past and most especially the punishing experiences of two world wars, Europeans understandably chose a path that emphasizes the security and well-being of society at the expense of individual rights and liberties. Americans, on the other hand, have no such concept of tragedies on a national scale. They settled North America in an attempt to gain greater liberties and freedom from their restrictive societies back in Europe. American society understandably therefore places the freedom and happiness of the individual above that of the greater collective good.

These are two very divergent philosophies that have their roots in historical, national experiences. Arguing that Americans are unwise for not giving socialized spending a chance is just as pointless as expecting European universities to achieve American-style efficiency. The point is, neither side is capable because each is psychologically rooted and vested in their respective national founding principles.

Americans will always reject European socialism with firm condescension. We value freedom above social order, and although Americans might complain about the current state of financial ruin now, you can rest assured that we will find our own American solution out of this mess. I guarantee you that Europeans will once again be marvelling at the resilience and can-do attitude of America within a decade or two. Europeans, for their part, will also always reject the risks and potential threats to personal security that comes with American capitalism and democracy. The inefficiency found in European insittutions are merely a small price to pay for a life where the state guarantees a good life by removing certain risks but unfortunately also certain freedoms. Europeans are quite content with this system however, especially whenever they reflect on the chaos and suffering of the past.

Many Americans might not have universal health coverage or years or parental leave, but they will NOT be willing to give up their First and Second Ammendment rights to achieve it! Arguing otherwise is simply pointless.

[Andrew]

I think you're missing the point about Johnston's piece. As he says, he's not advocating that any other country take over Germany's social-insurance framework lock stock & barrel. He is, however, pointing out that bare comparisons of the tax burden between the US and Germany miss the point that the 'extra' taxes Germans pay actually go to providing them with valuable services -- such as health insurance, reliable transportation, education for their children -- that Americans must try to buy on the open market.

A German automatically gets decent health insurance for a flat fee, an American has to hope some insurance company will offer something to him that he can afford, and has very little control over how much will be insured. A German can get most anywhere he wants using rail and trams and buses; an American must own a car and pay gas, taxes, insurance, etc. A German's children, if they qualify, can go to university for a trivial fee; an American must reckon with about $100,000 in expenses for each child.

That's the point Cay was making. And as for Munich being expensive, it's expensive by German standards, which Germans love to bitch about, but not by world standards -- especially when it comes to rent (http://www.numbeo.com/cost-of-living/compare_cities.jsp?country1=Germany&city1=Munich&country2=United+Kingdom&city2=London) Plus, who says you have to live in Munich? You can live less centrally and commute, on subways that put the Tube to shame.

As for the mediocrity of German universities, there are plenty of causes for that. One of them, I would certainly agree, is that students who don't have to pay for their education won't take it as seriously. This is why I favor making students participate financially in post-secondary education -- just not in the form of front-loaded debt financing.

But the deeper question is what universities are for? If their main purpose is to provide extremely expensive, high-quality education to the elite, then the U.S. does a great job of that. But if you focus away from the top tiers to the broad mass of university students who aren't extremely gifted or extremely rich, but who need a solid education, Germany and the U.S. aren't that far apart -- except for the cost. And have you looked at the budgets of American mass public universities lately? Not a pretty sight.

[Thomas]

Of course, most American higher education institutions are not as good as Harvard, either, but still charge considerable tuition fees.

The problem of how to create universities of the same quality as the best American universities, using the "European model", is a valid one, though.

[FJM]

I think I’ll have to agree with Ferdinand Kleist. The German system of taxation can only be praised by someone who never had to deal with German tax return forms. Besides, the “decline of the middle classes” is a popular theme in European politics as well, and for good reasons. Try to live in a city like Munich, Paris or London as “someone of average talents with an average job”, and you’ll be amazed at how difficult it has become to “afford the basic incidents of civilized life”.

But all this aside, I have a question for you regarding the point you and David Cay Johnston made about higher education (how it is so much cheaper and fairer in Europe compared to the US etc.):
Doesn’t that plainly contradict the countless amusing rants you posted on this very blog about the mediocrity of German higher education? Or, differently put, doesn’t the difference in academic quality between, say, Harvard and the University of Duesseldorf in the end simply boil down to the fact that Harvard has a lot more money, some portion of which is being raised through high tuition fees?

[Ferdinand Kleist]

The thing with the "higher income" is simply not true and the horrendous German tax system schould not be the model for anyone.