New Report: Big Government Means High Taxes on Everyone, Not Just the Rich

An average worker in Europe pays about $12,000 more in taxes.

The United States is at a fiscal policy crossroads. If federal spending remains on its current upward trajectory, the US budget will increasingly resemble government budgets in Europe, where government spending dominates economic activity. Judging by the campaign rhetoric of both Republicans and Democrats, neither party is serious about cutting spending.

To our benefit, the United States has historically been a relatively low-tax country. However, without significant spending reform, Americans should be prepared for a future that looks more like Europe.

To illustrate this potential future, a new Cato Institute policy analysis puts numbers to how typical workers fare under the tax system of the United States and EU countries. Using data from the Organisation for Economic Co-operation and Development (OECD), I calculate the total tax burden faced by workers, including the costs of income taxes, employee payroll taxes, employer payroll taxes, and consumption taxes.

Figure 3 from the analysis shows that an average single worker with no children in the 22 countries that are both members of the OECD and EU faces an all-inclusive average tax rate of 47 percent. A similar worker in the United States faces a 32 percent tax rate and pays almost $12,000 less in taxes. 

Belgium, Germany, Austria, and France confiscate more than half of their workers’ pretax earnings. Compared to the EU countries, workers in the United States face the lowest average tax rate.

The discrepancy in taxes paid also exists for lower-income taxpayers, higher-income taxpayers, and families. For example, a family of four with two earners making a combined $125,000 in an EU country pays $21,500 in higher taxes than a similar American family of four. 

Beyond the obvious effects of reducing workers’ take-home pay, the European fiscal system disincentivizes productive market activity by reducing the private return to work. In countries with high income and payroll taxes, individuals work fewer hours, take longer vacations, work shorter careers, and spend more time on nonmarket activities, like housework, childcare, and eldercare.

The full paper includes a summary of the tax systems and the size of government across Europe and the United States and discusses in detail how Europe’s high tax burdens incentivize people to work less, making them materially poorer than their American counterparts.

Importing the European fiscal system to the United States would not only require a roughly 50 percent tax increase on lower- and middle-income American workers and families, but the higher taxes would also have broader economic costs, making society as a whole worse off.

The United States has been trapped in a fiscal illusion for more than two decades. When deficit financing can no longer sustain the illusion, Americans will have to face the reality that the only way to fund a big and growing government is with high taxes on the middle class. However, Congress can and should avert a stagnant, high-tax European future by decisively cutting spending—the sooner and deeper the cuts, the better.

Read the full Cato policy analysis, “A Bigger Government Means Giving Up Almost Half Your Paycheck.”