President Bush’s tax cuts over the last four years were strongly opposed by liberals, and even many moderates saw them as at least controversial. So it is interesting to discover, according to a new report from the Organization for Economic Cooperation and Development, that governments of the left in Europe have been doing pretty much the same thing as President Bush has done here.
First of all, there have been a number of major tax cuts in Europe that have lowered taxes as a share of the gross domestic product by 1 percent, from 39.9 percent in 2000 to 38.9 percent in 2002. Among the 15 members of the European Union, the reduction has been a little greater, from 41.8 percent in 2000 to 40.6 percent in 2002.
Such a tax cut may not seem terribly significant, but one must realize that taxes have been climbing very sharply in Europe for decades and this is the first sustained reduction since records started being kept in 1965. At that time, the 15 EU countries took only 27.9 percent of GDP. By 1975, that figure had risen to 33.2 percent and by 1985 it was up to 38.8 percent.
Interestingly, European tax cuts have included meaningful cuts in individual income-tax rates for the rich — the most controversial element of Bush’s program. According to the OECD, 17 of 30 countries cut tax rates on the rich between 2000 and 2003 — some by much more than here. The rich are defined as those with 10 times the average worker’s income.
Among those countries with the largest rate reductions are the Netherlands, which reduced its marginal tax rate on the wealthy from 60 percent to 52 percent; Luxembourg, where the rate fell from 47.15 percent to 38.95 percent; and Belgium, which dropped its rate from 60.5 percent to 53.5 percent. Germany’s rate fell from 53.8 percent to 51.17 percent, and in France it went from 61.25 percent to 56.09 percent. The U.S. rate went down from 46.51 percent to 41.42 percent by the OECD’s reckoning, which includes state and local taxes.
Looking at corporate tax rates, we see even larger reductions in taxes on the rich. Again we see that 17 of 30 OECD countries cut corporate tax rates between 2000 and 2003 — but this time not including the U.S., where the rate was unchanged at 39.4 percent (including state and local governments).
The most dramatic reductions occurred in Germany, Iceland, and Ireland. In Germany, the rate was cut from 52 percent to 42.2 percent, a reduction of 23 percent. In Iceland, the rate fell from 30 percent to 18 percent — a reduction of 40 percent. And in Ireland, the corporate rate was lowered from 24 percent to 12.5 percent — a 48 percent reduction.
Other countries with large corporate rate cuts include Belgium (40.2 percent to 34 percent), Luxembourg (37.5 percent to 30.4 percent), and Canada (44.6 percent to 36.6 percent). Only two countries, Germany (40.2 percent) and Japan (40.9 percent), now have higher corporate rates than we do.
Perhaps the most interesting reforms have taken place in the area of dividend taxation. Although Bush’s reduction in the top rate on dividends received by individuals to 15 percent was highly controversial, the U.S. still has one of the highest tax rates on dividends. Only 8 countries have higher rates, with 21 having lower rates. Indeed, the average for all OECD countries is well below the rate here — 46.4 percent versus 51.3 percent. (The OECD includes taxes on corporations as well as separate taxes on dividends in its calculation.)
The most dramatic change has been in the Netherlands, where taxation of dividends fell from 74 percent in 2000 to 54.2 percent in 2003. This was accomplished by removing income from saving and investment from the individual income-tax base. It will now be taxed separately at a flat rate of 30 percent, as compared to a previous top rate of 52 percent.
Finally, the tax structure of the OECD continues to move much more toward the taxation of consumption. Every OECD country except the U.S. now has a value-added tax or other form of national sales tax. These taxes provide about 20 percent of government revenue. Higher VAT rates have financed many of the tax reforms of recent years.
Historically, liberals have been the principal opponents of a VAT here, on the grounds that it takes more from the pockets of the poor than the rich. But the tide may be turning. Monday’s New York Times ran two articles by prominent liberals arguing that a VAT is necessary to pay for government programs for the poor and to save as many as 100 million taxpayers from having to file tax returns. It will be interesting to see if liberals in Congress follow through.