by Frank Thomas
Continued from Part I
PART II: U.S. vs. DUTCH TAXES & BENEFITS
AMERICA’S DIVIDED TWO-
Part II will detail differences in U.S. vs. Dutch personal income taxes/benefits and societal implications. Corporate tax differences are excluded. Combined U.S. federal/state company tax rates average higher at +-38% vs. OECD’s 30%. (On an “effective” corporate tax rate basis, this difference becomes negligible). Part II will put in proper perspective the conservative repetitive “fairy tale” that Europeans are drowning in taxes and stagnant economies … admittedly, Europe now has its 3 or 4 Californias in the intensive financial care ward.
TABLE 1 shows total progressive “effective” tax rates at various household income levels excluding all allowable deductions. A U.S. state income tax rate averaging 5% (net of federal tax credit) is included. The Netherlands has no such added income tax. The Dutch maximum rate is 52% on incomes over $75,000 (€55,000) vs. U.S. maximum rate of 35% on incomes over $375,000 … which Obama proposes to increase to 39.5% on incomes over $250,000.
TABLE 1 excludes sales/vat taxes, excise and use taxes, property taxes, estate taxes, gift taxes, unemployment, severance taxes, etc. Despite sharp differences in specific taxes (e.g., fuel tax, property tax, sales and vat taxes) between the two countries, taken as a whole the total tax rate difference from these miscellaneous taxes as a % of income isn´t significant. U.S. state and local taxes, including individual and corporate income taxes, added ±$700 billion or ±33% to total U.S. federal tax receipts of $2.1 trillion in F/Y2009. Comparable Dutch miscellaneous taxes added about 28% to total tax receipts in 2009.
Note: 1 Euro = $1.35
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Table I | ||
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Progressive Tax Rates Up To 65 | |
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SCALE I: |
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Incomes Up To $25,000 Married Filing Jointly |
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The |
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Income Tax |
11.6% |
1.8% |
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Social Security |
6.2% (a) |
17.9% (b) |
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Medicare (Exceptional Med./Disability) |
1.9% |
12.2% |
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State Income Tax |
5.0% |
0.0% |
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GRAND TOTAL |
24.7% |
31.9% = +29% |
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Above 65: |
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14.0% |
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(a) Plus 6.2% paid by the employer
(b) Also covers May paid vacation allowance of +-$1,200 per couple
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SCALE II: |
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Incomes Up To $45,000 |
United States |
The | ||
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Income Tax |
13.1% |
5.2% | ||
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Social Security |
6.2% |
17.9% | ||
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Medicare (Exceptional Med./Disability) |
1.9% |
12.2% | ||
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State Income Tax |
5.0% |
0.0% | ||
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GRAND TOTAL |
26.2% |
35.3% = +35% | ||
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Above 65: |
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17.4% | ||
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SCALE III: |
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Incomes Up To $75,000 |
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The |
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Income Tax |
14.8% |
20% |
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Social Security |
6.2% |
0% |
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Medicare (Exceptional Med./Disability) |
1.9% |
0% |
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State Income Tax |
5.0% |
0% |
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GRAND TOTAL |
27.9% |
20% = –28% |
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Above 65: |
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20% Lower |
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SCALE IV: |
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Incomes Up To $150,000 |
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The |
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Income Tax |
20.0% |
35.9% |
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Social Security |
4.5% (a) |
0.0% |
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Medicare (Exceptional Med./Disability) |
1.9% |
0.0% |
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State Income Tax |
5.0% |
0.0% |
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GRAND TOTAL |
31.4% |
35.9% = +14% |
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Above 65: |
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35.9%
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(a) 6.2% Soc. Security tax is Capped at income of $108,000
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NOTE: Incomes Up To $375,000 |
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--TOTAL Tax @ 39.5% U.S maximum rate on incomes above $250,000 |
37.9% |
45.6% = +20% |
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--TOTAL Tax @47% Netherlands maximum rate on incomes above $75,000 |
37.9% |
41.6% = +10% |
Obama’s proposed increasing of the maximum tax rate back to 39.5% on incomes above $250,000 means the Dutch total tax rate will be 20% higher than American rate on an income of $375,000. The Dutch government may decrease the 52% maximum tax rate to ±47% on incomes above $75,000. If both changes occur, the Dutch tax rate will be only 10% higher than the American rate on an income of $375,000. Irregardless, a 10-20% tax rate difference is hardly very dramatic.
In brief, total tax rates before allowable deductions for a household couple in the Netherlands vs. the U.S. are:
· 29% higher on incomes up to $25,000
· 35% higher on incomes up to $45,000
· 28% LOWER on incomes up to $75,000
· 14% higher on incomes up to $150,000
· 10-20% higher on incomes up to $375,000 depending on whether U.S. maximum tax rate goes up to 39.5% on incomes over $250,000 and the Dutch maximum rate goes down to at least 47% on incomes above $75,000.
Furthermore:
· On incomes up to $45,000, over 90% of Dutch household taxes go to Social Security (AOW) and to Exceptional Medical & Disability expenses (AWBZ) i.e., the Dutch Medicare equivalent. NO Dutch AOW (17.9%) and AWBZ (12.2%) taxes are paid on incomes above $45,000, just a 42% wage tax on incomes between $45,000 and $75,000, increasing to 52% on incomes above $75,000.
· Dutch tax rates are a meager 1.8% on incomes up to $25,000 and 9.4% on incomes between $25,000 and $45,000. This explains why the Dutch total tax rate is 28% LOWER than U.S. rate on incomes up to $75,000. Dutch marginal tax rates thus rise more quickly and
progressively to 52% on incomes above $75,000 compared to current U.S. 35% maximum rate on incomes above $375,000. Despite this, the Dutch total tax rate is only 14% higher than the U.S. rate on an income of $150,000!
· The Dutch tax system broadens the tax base substantially on the principles of ability to pay and equitably sharing in society’s progress. And yet total marginal rates for various wage scales are still NOT outrageously higher than U.S. rates … even at quite high income levels. This becomes increasingly obvious when one compares the benefits one gets with Dutch taxes … benefits that are out-of-pocket expenses for an American household. More on this in a moment.
· Medicare’s 1.9% payroll tax is paid out over one’s working lifetime until 65. The Netherlands’ equivalent AWBZ plan with a 12.2% payroll tax is paid out over one’s working lifetime up to a maximum income of $45,000. But here’s the real gigantic difference. Medicare coverage for exceptional medical and disability expenses doesn’t begin until age 65, whereas the AMBZ plan begins from the moment one starts paying into the program!
A first central point of above data is that clearly overall tax rates in Europe are higher than in the U.S. … although not as much as demagogues misleadingly proselytize. The European broad-based tax structures like in the Netherlands also redistribute a lot back to everyone. They are broad-based in taking from the poor-middle classes as well as the rich. Simultaneously, they are generally funding progressive programs: high quality free public education and low-cost university education; universal basic health care that in Holland is 40% of the U.S. annual cost for a family of 4 (see Thomas-Lawrence study of U.S. vs. Dutch health care systems); state-of-the-art mass transit and inner-city transit systems, water, waste and disposal systems; child care and children’s allowances, paid parental leave and sick leave; a government paid-in-May vacation allowance of +-$1,200 for a household, support for the arts, etc.
The Dutch are willing to pay for their social-capitalism because they know the supports are an integral part of their shared prosperity and success … in Steven Hill’s words, “a symbiotic balance between workers and their employers, between corporations and communities, and between the ‘the steady state society’ and social system.” In contrast, U.S. public spending on old age care is +-25% less per capita than in Europe while private spending is 2-3 times higher. Why? Because many Americans self-finance their own senior care. In fact, Americans are paying out-of-pocket and extra charges for many things beyond their taxes, i.e., prolonged unemployment, sick leave, parental leave, escalating health care premiums and copays, tuition costs, etc. The Center for Medicare and Medicade found that U.S. households in 2007 paid 31% of total health care expenses out-of-pocket amounting to an average of $2,300 per person. Americans fund out-of-pocket many of their social services at the state and local level, making federal tax rates lower than other advanced European countries. Also, State and Local taxes are normally flat making them regressive since poorer people spend a higher proportion of their income.
Making matters worse are the precipitous decline in federal and state taxes due to deep recession and state laws constraining tax increases. In 2009, total federal tax receipts of $2.1 trillion were $400 billion less than 2008, or 15% of
The U.S. – Netherlands tax comparison does not reflect US Employee lost wages from employers paying much higher health insurance premiums … and recovering these costs by treating them as employee benefits replacing wage increases. But Europeans in advanced countries like the Netherlands get these benefits (plus normal wage increases) with hardly any out-of-pocket extras by simply paying their higher taxes.
Success of the European solidarity and sharing culture shows up, for example, in an EU 15 average poverty rate of 5% (4% in the Netherlands) compared to 13% in the U.S. in 2008. The EU success story is also reflected in a 1980-2008 Dutch average unemployment rate of 3.2% vs. 4.1% in the States; a Dutch average real
Steven Hill quotes Conservative leader of Norway’s Christian Democratic Party, Valgard Hangland: “Americans like to talk about family values but we have decided to do more than talk.” In Hill’s words, “It is difficult for the United States to put our money where our rhetoric is when doing so is derided as ‘welfare’ or ‘creeping socialism,’ instead of being seen as support for working families and family values, i.e., ‘workfare’ as in Europe.” The classic ultra-conservative dogma is that Americans are free to try for what they want (i.e., as if Europeans don’t have these freedoms) … to keep government from “mandating” anything like social supports/tax increases/fair commercial practices because we Americans want to have more choice in the free market place . But lack of government support and the inputs of fully participating Unions, Cooperatives, Community & Regional Banks actually limit choice … often quite a bit as the average citizen has little power on his or her own. As one person wisely concluded, “Neutralizing government’s role in society doesn’t really give you more choice as much as it gives the multinational employer more choice and power to limit your choices.”
A second central point of above data is the U.S.’s extraordinarily thin tax base compared to that of the Netherlands. This means extending the Bush tax cuts on incomes below $250,000 not only places more pressure on U.S. state and local taxes to make up tax revenue shortfalls but also increases America´s insecure dependence on the top 10% wage earners … further exacerbating “The Divided Two-Tier Society.” For the federal tax code is riddled with complexity and loopholes favoring the wealthy and only the wealthy know how to exploit them to the hilt. No progressive country in Europe, including the Netherlands as shown in my presentation of the Dutch tax system, has such a lopsided heavy taxation dependence on such a relatively few wealth builders.
Internal Revenue Service data show clearly that in 2007 the top 10% income class paid 70% of all federal taxes collected and the top 1% class paid more taxes than the bottom 95%! Now some conservatives cleverly, but lyingly, misuse this information to advance a number of self-serving policies like lowering (or at least maintaining current) taxes on the global-connected top 10% income class and increasing taxes on the bottom 50% wage earners.
What the ultra conservatives ignore is that when one talks about the top 10% and 1% classes, one must distinguish between WEALTH concentration as opposed to INCOME concentration when making claims of a disproportionate tax contributions. As my quote by former Wall Street economist Michael Hudson stated, the rich are less concerned about income than they are in building relatively tax cheap and/or even tax-free wealth by exploiting the many loopholes in our tax laws. So the same conservatives conveniently forget to mention the correlating disturbing facts that the top 10% own 70% of our nation’s wealth and the top 1% own more of our nation’s wealth than the bottom 95%. The same conservatives conveniently ignore the fact that the bottom 50%, and most in the bottom 80%, have been hammered the past 30 years with stagnant wages, job insecurity, and rising health care costs. A 2007 Internal Revenue Service report shows that a very high 50% of total
In sharp contrast, in advanced European countries the top 10 % own less than 45% of a nation’s wealth. Dutch household tax scales are an example of European equitable income redistribution. The Dutch focus effectively and fairly on increasing the overall tax base to the benefit of all citizens. This has not hurt dynamic market forces or possibilities to earn attractive incomes. So what’s the answer to the U.S. dilemma? First, we Americans have to come to grips with the hard reality that taxes need to be raised broadly to bring our huge deficits under control. Spending cuts and economic growth will not do the job of bringing deficits down to less than 3% of GDP … nor will extending the Bush tax cuts to families earning less than $250,000.
A more rational approach,difficult for obvious political reasons, would be to broaden the tax base, for example, by limiting the extension of Bush tax cuts to incomes under $100,000 rather than $250,000. Not going to happen though. Of course, the maximum tax rate must go back to 39.5% for incomes over $250,000 … a must for many reasons but also in light of a 2006 law allowing high income taxpayers to transfer individual retirement accounts into so-called Roth I.R.A.s. Unlike regular I.R.A.s, no tax is due when money is withdrawn from a Roth… another insidious deal for federal tax revenues and deficits if tax rates are higher in coming years. But, as noted in Part I, closing tax loopholes and tax havens, levying taxes on the finance industry’s unproductice, speculative activities, developing a culture of tax compliance rather than tax evasion and avoidance is how the U.S. can and must achieve a much needed increase in declining federal tax revenues.
Over the past 35 years, I’ve watched the Dutch multiparty system act very sensibly and realistically in constantly fine-tuning and balancing its social capitalism between the interactions of free market forces and government measures. Given a projected 10 year budget shortfall of +-$38 billion, the Dutch are now discussing eliminating mortgage interest deductions over a 25 year period, reducing a well-paid unemployment benefit from 36 months to possibly 18 months, reducing the number of civil servants, raising minimum health care deductibles from $200 to a maximum of +-$600, possibly lowering the maximum progressive tax rate on personal income from 52% to 47%, etc. The Dutch will ultimately reach a consensus on policy actions while not undermining fundamental cultural values of ability to pay, equitable sharing of the nation´s economic progress and required tax funding in good and bad times.
America has got to get equally realistic about a budget cost system – even if cut back substantially, including a bankrupting Defense spending level that exceeds that of the rest of the world – that will not bring deficits down to 3% of
Summary:
In short, the U.S. economy has become an engine of inequality driven by the profound illusion that
Frank Thomas
The Netherlands
May 9, 2010
To be continued....
PART
