Taxing and (Less) Spending
This article is from the archive of The New York Sun before the launch of its new website in 2022. The Sun has neither altered nor updated such articles but will seek to correct any errors, mis-categorizations or other problems introduced during transfer.
The Organisation for Economic Cooperation and Development has just released the latest edition of its Economic Outlook, and its findings are illuminating. While it predicts that the American economy will grow by 3.6% in 2005 and 3.3% in 2006 (well above the OECD average), Europe doesn’t do nearly as well. The Euro-zone is expected to clock in with growth rates at 1.2% this year and 2.0% next. Likewise with unemployment, which the OECD projects at 5.1% this year and 4.8% next in America, compared to 9.0% and 8.7%, respectively, in Europe.
Europe’s persistent anemia should serve as a cautionary tale for American politicians who want to emulate continental taxing and spending. The OECD notes that the key difference between Europe and America has been the resilience of domestic demand. Oil prices, or the war in Iraq, or a strong euro aren’t to blame for Europe’s nagging sluggishness. America has weathered similar shocks and consumers have kept buying (just yesterday witnessed reports of stronger-than-expected growth in durable-goods orders and an increase in home sales in April).
Instead, it’s about the tax code. According to another OECD report issued earlier this year, in Germany, a chronic slowgrower, the top marginal rate on a single person is 60.5% once you factor in social security “contributions.” In America, that rate is 42.9%. But the numbers are even worse than they appear. Germany applies that top rate to workers earning as little as $57,000. In America, the top rate doesn’t kick in until earnings hit $327,000. The picture in the rest of Europe is closer to Germany than America.
The bottom line is that domestic demand forms the foundation of a resilient economy, and consumers can’t spend money the government is taking away from them. Our politicians might consider Europe’s plight as they weigh misguided suggestions to increase payroll taxes by raising the amount of income that can be taxed for Social Security, and as they decide whether the alternative minimum tax should be allowed to continue stretching the greedy hand of top marginal rates into the middle class.
