Belgian Workers’ Wages are Highest-Taxed in Western Europe

WITH ONLY HALF OF POPULATION IN WORKFORCE, BURDEN IS HEAVY

Flat Tax? Read the Fine Print

By James Rogers and Cécile Philippe
[version française ici – Ed.]

BRUSSELS – As part of its annual “Tax Misery Index” survey, Forbes magazine examines the tax burden for professionals earning between 50,000 and 1,000,000 euros (gross) per year. For this fortunate lot, it ranks Belgium the third most “miserable” in general; on a million a year, Belgium is the second-worst place to be tax-wise, says Forbes.

EMPLOYMENT TAXES IN THE EU27 Percentage of the total cost¹ of employing a typical worker that goes to paying personal taxes and social security contributions.  ¹ Total cost = gross salary + employer’s social security contribution ² “Flat tax” countries

Think tanks have also demonstrated that the land of beer and mussels is no picnic for top earners and entrepreneurs: In its 2009 edition of Economic Freedom of the World, the Fraser Institute (Canada) ranks Belgium as the 47th “freest”, just below Jamaica worldwide and 20th in the EU. Washington’s Heritage Foundation, in its annual Index of Economic Freedom, shows Belgium at No. 20 worldwide – more reassuringly, just below Japan and 8th in the EU. 

While high-earning foreigners seem to have every right to complain about them, are Belgian taxes really so high for the typical employee, the Average Joe? 

Belgium’s top marginal tax rate – the top rate is 50%, and communal taxes can add as much as 9% – is a factor in all of these studies’ calculations.  But as the OECD Observer once noted, the income tax isn’t the only tax levied on employment, and “concentrating on these ‘headline’ rates can be misleading.” Indeed, in many European countries, income taxes are dwarfed by the sums demanded for social security contributions.

And surely not everybody is paying the top rate, anyway, are they? What about the Average Joe earning a typical wage in Belgium?  How does he compare to his European neighbours? For those of us who aren’t enjoying cushy expat contracts or the virtually tax-free status of Eurocrats, L’Anglophone decided to find the answer. We looked up the average wages of employees in the 27 EU member states and asked Ernst & Young to uncover the tax data. 

The results revealed that, when personal taxes and social security contributions are factored in, the wages of the typical worker in Belgium are the highest-taxed in Western Europe, and the second-highest in the EU as a whole. (Hungary takes the proverbial cake – 56.55% of it, that is – and with a European Commissioner of Taxation who hails from Budapest, the word “harmonization” might now strike a dissonant chord among the populations of the member states.) 

The average gross salary of a Belgian employee in the industry and services sector in 2006, according to Eurostat, was 37,674€. In addition to this salary, an employer today would pay 11,501€ in social security contributions, thus making the total cost of employment 49,175€. The employee’s net pay would be 21,903€, or 44.54% of the total employment cost; taxes and social security contributions thus comprise 55.46% of the “real” gross income. 

As for the top marginal rate: Yes, it is imposed on Average Joe in Belgium; for the year 2010, the 50% rate applies to each euro of gross income over 34,300€.



OTHER FINDINGS

Is the “Flat Tax” a myth?

Most of the EU member states have “progressive” systems under which earners pay higher income tax rates on increasing levels of income. Seven EU countries – Bulgaria, Czech Republic, Estonia, Latvia, Lithuania, Romania and Slovakia – have adopted “flat tax” systems under which the tax rate, often below 20%, remains constant at all levels of income. 

These “flat” rates generally apply only to income tax, however – not social security. Slovakia has a “flat tax” rate of 19%, but its employers pay a 35.2% contribution to social security (higher than the 34.8% in Belgium) and, in addition to the flat income tax, employees have 13.4% deducted for social security (also higher than the 13.07% in Belgium).  While a typical Slovak’s taxes remain lower than those of his Belgian counterpart, the Average Joe in Slovakia is hardly living in a low-tax state; he works a day longer than the typical Finn to pay his tax burden each year (see full data table). 

Compared as groups, employment-related taxes in “flat tax” countries (40.3% of the total employment cost) were actually higher than those in “progressive tax” countries (40.2%), suggesting that a flat tax on income – by itself – is not a good measure of the tax pressure on workers and employers. 


Methodology and “Real” Gross Salary

L’Anglophone’s research analysed income tax, social security and VAT rates for salaried employees earning an average wage in each of the EU member states. From average wage data published by the Organisation for Economic Co-operation and Development (OECD) and Eurostat, income and social security tax obligations were calculated by Ernst & Young. 

For the sake of simplicity, figures provided are for an unmarried employee with no children. Further, it was assumed that our Average Joe has no additional sources of income and is a renter – thus neither paying property taxes nor benefitting from a mortgage interest deduction. 

Employer contributions to social security programs, which are paid “on top” of gross salaries and are often unseen by employees, were factored in to calculate what we call Average Joe’s “real” gross salary.


Other Taxes and “Tax Freedom Day”

Many think tanks and consumer groups calculate “tax freedom days” (TFDs) for various countries around the world, with the goal of determining the average calendar date on which a citizen has finished paying his tax obligations and begins to keep his earnings. 

To calculate June 10th as Belgium’s Tax Freedom Day in 2009, for example, PriceWaterhouseCoopers (PWC) divided Belgium’s total tax revenue (including social security contributions) by its Gross Domestic Product.  These figures count revenue from all taxes (including those on corporate profits, petrol, cigarettes, &c.) and thus present a more complete picture of the country’s total tax burden. 

PWC’s date, however, is an average applied to all Belgians – not all Belgian workers; in 2008, less than half of Belgium’s population (4.99 million working out of 10.67 million citizens) was legally working. Consequently, a huge share of Belgium’s tax burden is borne by the working population.

While it would be nearly impossible to precisely define the impact of every Belgian tax on a typical worker, L’Anglophone has made an effort to more nearly estimate the Average Joe’s tax burden by comparing the impact of standard value-added tax (VAT) rates, which vary in the EU from 15 to 25%.

If Average Joe spends 35% of his take-home pay on rent (around 550 euros per month), and half of what remains on items not subject to VAT (groceries, for example), he pays an additional 1,495€ in VAT at the cash register each year. In this scenario, Average Joe’s total tax burden rises to 28,767€ or 58.5% of his “real” gross salary. 

Applied to the calendar year, these numbers show that our typical Belgian employee works until August 2nd to pay the government, making August 3rd his “Tax Freedom Day” (TFD) on which he has finished paying his personal taxes, social contributions and VAT and begins to choose for himself how his salary is spent (or saved – though this could mean more taxes). 

The hypothetical TFDs shown in our table range from March 13th (Cyprus) to August 6th (Hungary). Because our calculations are not nearly as exhaustive as those undertaken by many of the organizations calculating TFDs, for a reality check we visited the website of  Britain’s Adam Smith Institute (ASI), which is known for its exacting methodology. As it turns out, ASI set May 14th as 2009’s TFD for the United Kingdom; our data put it just one day earlier, on May 13th. [A simplified calendar of L'Anglophone European "Average Joe" Tax Freedom Days is here.]


The Rise of “Stealth” Taxes

Other taxes can further delay workers’ TFDs, and many of them are invisible to consumers. As The New York Times noted on 17 March, “taxpayers from California to Copenhagen should brace themselves for more “stealth taxes” — indirect levies like sales taxes, or microcharges on services once provided free, like registering a pet.” 

In France, for example, Contribuables Associés says the Sarkozy government has created 20 new taxes since 2007, raising TV license fees and medical copayments, and even taxing lobsters.  The Times article also mentions new taxes on candy in Finland, on fatty foods in Denmark and on dog licenses in Northern Ireland. 

Here in Belgium, the price of a pack of cigarettes has remained stable, but now only 19 are allowed in the pack – a 5% tax increase. For Average Joe, smoking 20 cigarettes a day now adds 1241€ to his annual tax bill – or 7 more days at work for the public coffers.


Island surprise

In the course of L’Anglophone’s research, the islands were an unexpected discovery. Only four of the EU’s 27 member states are situated on islands: Cyprus, Malta, Ireland and the United Kingdom. In that order, these are the countries with the smallest tax burdens for typical workers. 

Perhaps there is something in the water...


Value for Money?

Among the questions raised by these numbers is this: In which countries are European taxpayers getting the most value for their tax contributions? In neighbouring countries with similar salary levels – such as Hungary and Slovakia – is the quality of government service provided as disparate as their tax rates? L’Anglophone leaves this matter to the think tanks, politicians and commentators to discuss.
 

Cécile Philippe is president of the Institut Économique Molinari.
James Rogers is editor of L’Anglophone.
Jordana Merran contributed research for this article.

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