The top editorial in the WSJ on 3/16/09 was a review of OECD (Organisation for Economic Co-operation and Development) data on the “tax wedge” as a percentage of labor costs. In an accompanying chart graphic Germany is shown at 52.2%. The U.S. is shown at 30.0%. The countries in the European Union have an average tax wedge cost of 42.5%. The editorial uses this data to argue against the Employee Free Choice Act, unionization, universal health care and the “Obama revolution” and warns of the impending transition of the U.S. into a “European Model” economy.
What is the “tax wedge”? According to the OECD it is the personal income tax, employer and employee Social Security contributions for a single worker without children making the average wage in a particular country.
The OECD warns that they are simply reporting the data that was reported to the organization by the various countries.
As a small employer, the 30.0% tax wedge figure for the U.S. struck me as incorrect.
In May 2007, the Bureau of Labor Statistics (BLS) reported that the average annual income was $40,690, or about $3391 a month. The IRS withholding tables for 2007 show $431 withholding for a single person with one exemption, or 12.7%. The OECD Table 0.2 shows 15.7% income tax, a 3% discrepancy.
In the U.S., the employer and employee each pay 7.65% in Social Security (SS) and Medicare (MC) tax for a combined 15.3%. 15.3% + 15.7% (as reported to OECD) should equal 31.0%. OECD shows it as 30.0%.
I then checked on Germany’s data as reported to the OECD. Table O.2 shows an 18.4% income tax, and a 33.8% combined social security contribution by the employee and employer for a total of 52.2%.
I found some easier to read (I don’t read German) data on employer, employee costs at Sonnenberg Law Firm. In Germany, pension insurance (SS insurance in the U.S.) is 19.5% of gross and is split between the employer and employee. Nursing care insurance is mandatory (I am cautiously presuming this is similar to Medicare in the U.S. but it may be a long term care insurance?) is 1.7, split between employer and employee. This gives a total of 21.2% plus 18.4% income tax for a total of 39.6% cost compared to the 30.0% in the U.S. But what did Germany report to the OECD? 52.2% – almost 13% higher. Sonnenberg reports that basic mandatory health care insurance in Germany is 12-15% so I can only guess that Germany reported 13% in health care costs as a “Social Security” benefit.
Different countries have different definitions of what “Social Security” means. In the U.S., it does not include health care insurance. In Germany, it does. The OECD data is flawed because it is comparing apples to oranges to pears. I have not taken the time to check the other countries in the OECD data set.
Let’s consider adding in U.S. health care costs. The Kaiser Family Foundation’s 2008 survey of health care costs found that an employer paid $9325 and an employee paid $3354 annually for their health insurance. That is a total of $12679, or 31.2% of average income.
How To Germany reports that “benefits include in-patient (hospital) care as a ward patient with doctor on duty at your nearest hospital, out-patient care with registered doctors (Kassenärzte) and basic dental care. Your non-working dependents resident at your address in Germany are included in your insurance at no additional cost.” In 2008, a Kaiser family plan HMO in Colorado with a $30 copay for a 45 year old employee was just under $12,000, including basic dental with a $1000 benefit cap.
Add that 31.2% health care cost to the reported 30.0% for the U.S. and the comparable tax wedge percentage is about 61.2%. But the tax wedge concept is based on a single person with no children. The same Kaiser HMO plan was $3600 annually for a single 40 year old employee. That is only 8.8%, far less than the 13% health care costs reported by Germany to the OECD.
In Germany, you pay for coverage for non-working dependents, whether you have them or not. In the U.S., you pay for the dependents you have and that you can afford. If you have a family and a non-working spouse, your health care costs are lower in Germany. If you are single, your health care costs are lower in the U.S. However, because of the way health care costs are structured differently in the U.S. and other countries, it is difficult to make a good comparison of averages.
What we do know is that Social Security and Medicare contributions are about 4% of income less in the U.S. than they are in Germany and that the Social Security benefit is better in the U.S. than it is in Germany. In the U.S. “Social Security replaces 43 percent, slightly more than two-fifths, of the amount that someone retiring at normal retirement age in 2006 (age 65 and 8 months) was earning before retirement.” Source here. Germany pays about 33% on average.
Data sets taken at face value can be deceiving. When data seems to confirm our beliefs, our ideologies, we are less likely to question that data.