Paris, 16 July 2022 – Using data calculated by EY, the Institut économique Molinari is issuing its 13th annual study on the real social and fiscal pressures faced by the average wage earner in the European Union (EU).
This ranking has the distinct feature of providing figures for the current year on the social and fiscal pressure faced by the average worker, applying a solid, uniform methodology across all 27 EU member countries. It provides a firm understanding of the real impact of taxes and social contributions and the changes they are undergoing.
WHAT THE 2022 NUMBERS TELL US ABOUT EUROPE
In four European countries, taxes and social contributions exceed disposable income.
Before achieving €100 of real purchasing power, the average employee faces €115 in taxes and social contributions in Belgium, €118 in France and €119 in Austria. For comparison, the EU average stands at €83.
In light of current upheavals and soaring prices, particularly those linked to the COVID-19 pandemic and the war in Ukraine (fuel, food, etc.), workers in these countries have much less room to manoeuvre and are handicapped by the scale of their taxes and social contributions.
Austria wins the gold medal for the highest total taxation on the average employee with a Tax Freedom Day of July 18th, one day earlier than in 2021. The tax burden on the average employee stands at 54.3%, slightly lower than last year (-0.4%) due to stagnation in the average wage causing a small decrease in income tax.
France comes in second by a nose with a Tax Freedom Day of July 17th, two days earlier than in 2021. The total tax burden on the average worker is 54.1%, down 0.5% from last year due to a drop in the average wage causing a more than proportional reduction in income tax.
Belgium is third on the podium, achieving their fiscal liberation on July 15th, one day earlier than in 2021. The tax rate on the average employee there is 53.5%, also down 0.5% from last year due to a small drop in the average wage.
Germany comes in fourth, winning its tax freedom on July 6th with 51% taxation on the average employee. Together with Austria, France, and Belgium, it is one of only four EU countries with a total tax burden on the average worker of more than 50%.
Italy’s Tax Freedom Day of June 27th puts it fifth and knocks it out of the club of countries over 50% taxation, though it was a member in “good” standing from 2016 to 2021. Taxes and contributions for the average employee there now total 48.6%, with income tax rates having been reduced in the 2022 Finance Law, resulting in a gain of ten days of social fiscal freedom.
In the European Union as a whole, the pressure on average wage earners fell very slightly reaching Tax Freedom Day on June 11th, 2022, a whole day earlier than in 2021. This small decrease is linked to tax cuts in some countries (Italy, Hungary, Ireland) and, in others, stagnating wages that have led to more than proportional decreases in income tax.
- In 2022, the effective tax rate on employees in the EU-27 is 44.2%, down 0.3% from 2021 and 1.4% from the 2014 peak.
- An average worker generating €100 of income before taxes and contributions will have to pay €44.20 in compulsory deductions in 2022. This leaves only €55.80 of real purchasing power at their disposal, representing €0.31 more than in 2020 and €1.41 more than in 2014.
Over the last year, sixteen EU countries have recorded a decrease in compulsory levies.. In 14 countries, this reduction allows recovery of at least one day of tax freedom: Austria, Belgium, Estonia, Finland and Sweden (+1 day); Spain, France, Luxembourg, Poland and the Czech Republic (+2 days); Slovenia (+4 days); Hungary and Ireland (+6 days); and Italy (+10 days).
Eight countries in the EU-27 are experiencing year-over-year increases in compulsory levies. These include Cyprus, Denmark and the Netherlands (-1 day of tax freedom), Lithuania and Portugal (-2 days), Germany, Croatia and Malta (-3 days). Three countries have seen no change (Bulgaria, Slovakia and Romania).
LESSONS FROM FRANCE
Record social security contributions
- These now represent 102% of net salary. This is the highest among the EU-27 countries, which average 52%.
- All on their own, French social contributions (€25,474, 1st in the EU) are higher than net pay (€25,032, 11th in the EU).
Purchasing power particularly limited
- French workers are relatively well paid by their employers, averaging €54,594 before taxes and social security contributions (10th in the EU). But this work is so highly taxed (54.1%), that they are left with a net pay averaging only €25,032 (11th in the EU).
- For the same cost to employers, the average French employee receives 20 to 30% less net salary than the Finnish or Irish, who also benefit from significant social benefits and public services. The purchasing power of the average French employee is also more constrained than in the northern countries with a social welfare tradition (Denmark, Sweden, Finland, etc.) or the countries with a Beveridgian tradition (United Kingdom and Ireland).
- While French employers face labour costs on the same order as those of the northern EU countries, the average worker has a net salary between that of the northern and southern countries.
Higher taxes do not mean better public services
- Our study shows that French social and fiscal pressure is not explained by more attractive collective services. French social and public benefits are not known for being “a good deal,” as the work of the Institut économique Molinari illustrates.
- This is notably the case for retirement benefits, which account for 25% of public spending and €10,600 of social contributions for the average employee. Funded almost exclusively on a pay-as-you-go basis, these are less efficient than in countries where contributions are supplemented by savings. They are 30% more expensive for French workers, with contributions representing 28% of gross salary compared with the EU average of 22%, for an additional gain of 10%, with a future replacement rate of 74% compared with 68% in the EU.
- The value for money is also poor with respect to education, which accounts for 9% of public spending. France’s position is deteriorating, despite major collective investment. While France spends €155 billion per year, it ranks only 17th among 27 European countries. If France were to emulate the most efficient countries in terms of matching with the labour market, it could save up to €43 billion per year.
Higher taxes do not mean better quality of life
- The study shows that French social and fiscal pressure is not synonymous with well-being.
- The EU life-satisfaction indicator shows that satisfaction with life is higher in eleven countries with lower burdens of taxation. This is true for continental countries (Germany, Belgium, Luxembourg, the Netherlands, Poland, Czech Republic), Beveridgian countries (Ireland, Malta), and northern countries (Denmark, Finland, Sweden) alike.
Nicolas Marques, general manager of the Institut économique Molinari, co-author
“Despite adjustments to social security contributions and income tax in recent years, the average French worker remains among the most taxed in Europe, along with the Austrians and, to a lesser extent, the Belgians.
“Over time, average French workers have become the leaders in compulsory contributions, resulting in limitations on their purchasing power.
“It is an illusion to think that companies can achieve structural correction of this situation by increasing wages. Taxes and contributions account for 54% of gross pay, and when an employer pays an extra €100 to an employee, the latter receives only €46 once compulsory contributions have been paid.
“In order to restore employees’ purchasing power, we must find the courage to face these structural issues with systemic reforms that boost net wages.
“Taxes that penalise job creation and wage growth must be reduced further. A significant proportion of taxes on production, which are abnormally high in France, are passed on to employees in the form of less generous wage increases. These taxes are detrimental to both wealth creation and purchasing power, and represent societal errors. Despite the announcement of further reductions, they remain around 30 billion too high with respect to the European average.
“In terms of expenditures, we must diversify the financing of pensions, which in France is based almost exclusively on compulsory levies detrimental to competitiveness and employment. In our neighbouring countries, a significant portion of pensions is financed by collective capitalization. This makes pension funding less costly for the economy, increases the value for money for both working people and pensioners, all while reducing wealth inequalities with an even wider sharing of the value.”
Cécile Philippe, president of the Institut économique Molinari, co-author
« Faced with price increases due to the upheavals of the COVID-19 pandemic and the war in Ukraine, the average French wage earner has less room to manoeuvre due to high levels of taxation.
“To make matters worse, and contrary to popular belief, high social contributions and taxes are not an indicator of better public services.
“Our health insurance spending, which absorbs 20% of all public spending, is poorly allocated. Despite significant health spending, the French suffered a multitude of shortages at the start of the COVID-19 pandemic and the situation with respect to the health system continues to deteriorate.
“Our education spending, which absorbs 9% of public expenditures, also suffers from poor value for money. France’s position is deteriorating, despite major collective investment. If France were to emulate the countries that optimise the balance between education spending and the labour market, it could save up to €43 billion per year.
“To spend money wisely, one must have to have the courage to verify the value achieved for price. But we have lost the habit of taking this common-sense approach and of correcting course when the value for money in collective services is inadequate.”
James Rogers, associate researcher at the Institut économique Molinari, co-author
“Despite the good news, French and Belgian wage earners are still devoting more than half of the amounts distributed by their employers to social contributions and taxes.
“It’s worth asking why they are not getting the top schools, the best health care and the most generous pensions in return and why they are not the leaders in indicators of human development or well-being.”
The study, La pression sociale et fiscale réelle sur le salaire moyen au sein de l’UE en 2022 (13ème édition, 46 pages) is available at the links below.
French (EU and UK version) at: https://www.institutmolinari.org/wp-content/uploads/2022/07/etude-fardeau-fiscal-eu-2022.pdf
English (Extended version including South Africa, Brazil, Canada, the US, Japan, and the UK) at: https://www.institutmolinari.org/wp-content/uploads/2022/07/tax_burden_on_global_workers2022.pdf
Four Datawrapper infographics are available, one map and three tables:
ABOUT THE AUTHORS AND THE METHOD
Tax and social contribution Freedom Day is the date when the average employee stops, in theory, paying compulsory social contributions and taxes and can use the fruit of her labour as she pleases.
This indicator measures the date starting on which the employee becomes free to apply the fruits of her labour in the way she wishes and not the date starting on which the employee may stop “working for society.”
The particularity of this indicator of economic freedom is that it puts the situation of average EU wage earners in tangible form by bringing together each country’s taxation of labour (social contributions and income tax) and of consumption (VAT). Calculations of employer and employee social contributions and of income taxes are done by EY for each of the 28 EU countries.
The study was written by Nicolas Marques, Cécile Philippe and James Rogers of the Institut économique Molinari (IEM).
The Institut économique Molinari (Paris and Brussels) is an independent research and education organisation. It seeks to stimulate the economic approach in the analysis of public policy, offering innovative alternative solutions that favour the prosperity of all individuals making up society.
FOR INFORMATION OR INTERVIEWS, PLEASE CONTACT THE AUTHORS
- Nicolas Marques, General manager of the Institut économique Molinari (Paris, French),
firstname.lastname@example.org, +33 6 64 94 80 61
- Cécile Philippe, president of the Institut économique Molinari (Paris, French or English), email@example.com, +33 6 78 86 98 58
- James Rogers, associate researcher at the Institut économique Molinari (Brussels, English),
firstname.lastname@example.org, +32 497 946 840