March 1, 2007
The "tax wedge" is the percentage of total labor costs that never
reaches the employee's wallet but goes straight into the coffers of
the state. As such, it's a good approximation for much of what's
wrong with Europe's economy, says Peer Steinbrueck, German Minister
The average tax wedge last year for a single employee without
children in an Organization for Economic Co-operation and Development
country was 37.5 percent, compared with 28.9 percent in the United
In the 15 countries that formed the European Union (EU) before the
recent enlargements, the tax wedge was a whopping 42.6 percent.
In France, Germany and Belgium, the tax wedge is 50.2 percent, 52.5
percent and 55.4 percent, respectively.
The average employee in these three countries takes home less than
half of what it costs to employ him; most of the money goes to the
state through income and payroll taxes.
Yet when EU finance ministers met this week and railed against the
rising gap between wages and company profits, Europe's enormous tax
wedge didn't merit a mention. Corporate greed -- not government
greed -- was blamed for the discrepancy.
Calling on industry to divide profits more "fairly" is like calling
for world peace: It's always popular but never accomplishes very
much, says Steinbrueck. Blaming big business, though, helps
governments to distract voters from their own responsibility for
meager paychecks. Europe's politicians could do more to raise take-
home pay if they would keep their eyes on the tax wedge, and work on
reducing government's share of workers' wages.
Source: Peer Steinbrueck, "Taxing Wages," Wall Street Journal, March
For more on International Issues: