Economics

Southern European workers are paying more tax than their Scandinavian counterparts

BY Giovanni Caccavello   /  31 July 2017

In a recent article written for La Repubblica, one of Italy’s largest daily newspapers, Roberto Perotti, Professor of Economics at Bocconi University, explained how Italy, under Mr Renzi and then Mr Gentiloni, has cut public spending by only €772 million since 2014. Contrary to conventional wisdom, there has been no such thing as deep austerity in Italy. In addition to this, during the same period, the government has been very quick in raising workers’ taxes. As the latest Institut Economique Molinari Tax Burden report underscores, Italian workers celebrated their 2017 “Tax Freedom Day” on 8 July. In 2014, the average Italian worker celebrated this day on 30 June (8 days earlier than in 2017). By comparison, in 2010, Italy’s Tax Freedom Day occurred on 18 June (20 days earlier than this year). The government’s economic formula to boost growth in recent years has been the worst possible mix: no cuts to public spending, no structural reforms, and no real tax cuts for workers.

France’s story is unfortunately quite similar. Despite a much more modest rise in workers’ real tax rate (+0.96% between 2010 and 2017 compared to Italy’s +5.6%), the French government has been very reluctant in promoting structural reforms and cutting the deficit. France is in desperate need of good policy-making: the country’s labour market is extremely rigid; government spending as a percentage of GDP is very high and the process of liberalisation has stalled for too long. Mr Macron has a massive task on his hands. On top of this, with a real tax rate of 57.41%, the average French employee is Europe’s most taxed worker. Due to incredibly high social security contributions, French workers celebrate their national Tax Freedom Day on July 29. In other words, the typical French employee works for the State for the first 210 days of the year whilst starting earning for himself only at the very end of July. France’s Tax Freedom Day has remained unchanged over the last three years.

What is most striking, however, is the generally large divide between southern and northern EU Member States. In fact, on one hand, Greek, Spanish, Italian, Portuguese and French workers’ have seen their real purchasing power sink since the aftermath of the deep 2009 recession. On the other hand, Danish, Dutch, German and Swedish employees have enjoyed real tax rate cuts between 1.95% and 4.34% since 2010. This means that, overall, northern EU Member States responded to the great financial crash and the subsequent dramatic European sovereign debt crisis by lowering taxes and keeping public spending on target. As the April 2017 IMF World Economic Outlook highlights, Denmark, Germany, Sweden and the Netherlands have been able to balance their public account without increasing their public deficit or debt. For example, for the current year, Germany is set to have a 0.6% government surplus as a percentage of GDP whilst the Dutch government is on course to perfectly balance its books. Sweden and Denmark, instead, will see their public debt decreasing again to 40.4% and 39.8% respectively.

This leads us to a final, albeit interesting, consideration. The two EU Scandinavian Member States (Denmark and Sweden) stand out of the crowd in the Institut Economique Molinari study for their free-market policies. For everyone who followed the historical economic development of these two nations, this is no surprise. Contrary to what academics, journalists and politicians often claim, over the last 25 years Denmark and Sweden have moved away from democratic-socialism and are now amongst the freest economies in the world, well ahead of all their southern European cousins. Norway, the third Scandinavian giant, is no exception to this rule.

Whilst Swedish workers’ still have to deal with a real tax rate of 47.40%, they celebrated their 2017 Tax Freedom Day 7 days earlier than in 2010 (23 June vs. 30 June). Moreover, as the latest European Commission data suggest, given the country’s current robust growth and solid public finances, this decline is likely to continue in the upcoming years. Danish workers, instead, celebrate their Tax Freedom Day on 1 June. Danish employees enjoy one of the lowest real tax rates in the EU28, almost on par with Luxembourgers, who have to sustain a real tax rate of 40.79%.

Giovanni Caccavello is a Research Fellow at Epicenter