Comparing the tax burdens of countries around the world is complicated by the wide variety of taxes and how they are applied. The Organization for Economic Cooperation and Development (OECD) computes an "aggregate tax burden" consisting of the ratio of tax revenues to gross domestic product (GDP). Data contained in the 2010 edition of its Revenue Statistics report show that Denmark and Sweden are the highest taxed of the 34 OECD members that represent many of the world's largest economies. The lowest taxed are Mexico and Turkey. (A few tax credits can greatly increase the amount of money you get back on your return. Check out Give Your Taxes Some Credit.)
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The overall tax burden for all the OECD countries since 2000 has hovered in the range of 35-36%. In comparison, the latest complete data for 2008 reveals a tax to GDP ratio of 48.3% for Denmark and 47.1% for Sweden.
Are there advantages to having the highest taxes in the world? Let's take a look at what the citizens in these countries get for their money.
Contrary to its famous advertising slogan, Disneyland may not be the "happiest place on Earth." According to studies conducted through the Blue Zones Project, that distinction belongs to the tiny country of Denmark. How is this possible when the Danes pay the highest taxes in the world?
What they get in exchange for their money includes complete health care coverage and educational expenses. The government also spends more money on its youngest and oldest citizens per capita than any other country.
The advantage of having a population of only 5.5 million is evidenced in the efficiency of a social system that relies on personal friendships that are encouraged and supported by the government. Ninety-two percent of Danes are members of subsidized social clubs, and consumerism is not a high priority among them.
A model of the modern welfare state, Sweden boasts high taxes that pay for a variety of social programs. These include retirement pensions, sick leave, parental leave, universal healthcare and childcare, and education through to college level. When all the taxes are added together, the highest rates approach 80% of individual income. Despite this, most Swedes are quite content with what they get in exchange for their taxes. Like Denmark, a relatively small population of about 9 million people allows for efficient benefit distribution and management by the government.
An open question is whether or not the generous benefit programs are sustainable on a long-term basis. Since the late 1950s, the composite tax rate as a percentage of GDP has grown from 27% to 47.1%. In addition, in 105 local districts more people are living off of public benefits than those that are working to support them. As an increasing number of people become dependent on welfare, this leaves less money to fund other services that many people are dependent on. (After World War II, Germany was in ruins. Learn about the country's quick rise to the third strongest economy in the world. To learn more, read The German Economic Miracle.)
Belgium is no exception when it comes to high taxes across Western Europe. It sports a 34% corporate tax rate, 21% VAT and upper limit of 50% on personal income. In spite of those rates, the country still ranked 18th in the world in GDP while exporting over $300 billion worth of goods annually.
The people enjoy a high per capita income and standard of living, and the country consistently ranks high in the quality of life ratings published in the United Nations Human Development Report. The welfare programs funded with the high taxes have kept the poverty rate low. The main elements are medical benefits, unemployment insurance, family allowance, retirement plans and disability payments in the event of illness. In addition, there is a constitutional right to freedom of education.
While the country has a wide social safety net, there are indications that the substantial cost is beginning to take a toll on economic prosperity. Some experts expect the country to suffer from rising unemployment, a 3% annual deficit and negative growth.
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Italy may be a classic case of what happens when the will to work is supplanted by a reliance on government benefits. Burdened with a 43.3% tax-to-GDP ratio, the country imposes a personal income tax rate as high as 45% and a 20% VAT. It once considered incentivizing males over 30 to leave home by granting them tax incentives. Apparently the problem is severe as one-third of men still live with their parents.
While government benefits are generous, there are signs of trouble on the horizon. Italy has not yet experienced the banking and housing implosions that hit Ireland and Greece, but slow growth may result in tax revenues coming in well short of future expenditures. Italy finds itself in a similar situation as the other PIIGS nations (Portugal, Italy, Ireland, Greece, Spain – considered the weakest economies in the eurozone). Italy's debt is projected to exceed 118% of GDP in 2010, a level that is unsustainable over the long term. (Government benefits can cost you big money! Know the income thresholds before you file. See Avoid The Social Security Tax Trap.)
No Free Lunch
The future of socialism in Europe is very much in doubt. Several countries are teetering on the brink of insolvency as a result of decades of excessive government spending for the welfare state. High taxes have handled the burden in the past, but people are now living longer, they are drawing longer pensions and healthcare costs have continued to escalate. At some point, the working population will no longer be able to support everyone else who depends on the government for their general welfare.
Bailouts for Greece and Ireland may have to be repeated many times over for other countries. The ultimate questions will be: At what point is a country no longer too big to fail and will the other European nations get tired of bailing them out?
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