Around the World in 80 Taxes

Taxes in this world differ a lot. That’s why Google and Facebook base their European operations in Dublin, why Russian Oligarchs form shell companies in the Cayman Islands, and why the extent and quality of public services vary between countries.

Looking at total tax revenues per GDP (otherwise known as tax burden), OECD countries have averaged around 33.3% over the past 20 years. Germany and France skew higher, collecting between 38% and 45% of GDP in tax revenues, while Mexico is much lower, at 11% to 17%. The United States’ tax burden stood at 25.5% in 2019, having decreased from 28% in 1998.

How a nation constructs its tax system often relates to tradition, governance, and the type of political system in place. Here are some key examples.

France

L’Hegaxone’s tax burden sat at 45% in 2020 – enough to make any libertarian red in the face! That puts it 2nd of 38 OECD countries for tax burden, with Denmark out in front. Increased social security contributions, payroll taxes, and property taxes (vs. the OECD average) is what pushes France up to 2nd – though interestingly the French exact a lower proportion of tax revenue on personal income, and on corporate income and gains.

France’s ‘social charges’ (contributions sociales) consist of general social charges, pension contributions, old-age insurance contributions, and contributions to healthcare and unemployment benefit. They are taxed at a flat-rate percentage of an employee’s total gross earnings, with no lower/higher tax bands, and with no tax-free allowance. These contributions can be high for businesses and self-employed workers (as high as 42% for the latter in some instances), though at 24.8% for most, the income of a typical working family is similar to the OECD average.

The great advantage of France’s social charges is access to an extensive social security system, with universal state healthcare, high state pensions, generous maternity and paternity packages, excellent childcare and other family benefits, and assurances for illness, disability, and unemployment.

Germany

Often lauded for its rent controls and coalition governments, Europe’s heart of efficiency had a tax burden of 38.3% in 2020, compared with a 33.5% OECD average, ranking it at 11th out of 38 countries. It skews even higher than France for social security contributions and, unlike its neighbour, taxes more on personal income, profits and gains, while taxing property and goods and services less than the OECD average.

Like France, all that money invested in its social security system means Germany offers an elaborate safety net for its citizens, including healthcare, long-range nursing care, pensions and unemployment. Healthcare is provided via mandatory health insurance, with around 86% of the population enrolled. The first iteration of the scheme was established in 1883 by Chancellor Otto von Bismarck – it is credited as the first social health insurance system in the world – and it influenced the foundation of France’s own universal healthcare provision.

United Kingdom

According to Hall & Soskice’s Varieties of Capitalism (2001), Germany is a coordinated market economy (CME), whereas the UK is a liberal market economy (LME). An LME is characterised by its competitive market arrangements, competitive inter-firm relations, unequal income distribution, and employment conditions that skew towards full-time/general skill and short-term/fluid jobs. In contrast, a CME has non-market arrangements, collaborative inter-firm relations, a more equal income distribution, and employment conditions that skew towards shorter hours/specific skill and long-term/immobile jobs. The authors also identify ‘Mediterranean capitalism’ (France, Spain, Italy etc.), which are (sort of) a hybrid of the two.

I would argue that the type of capitalism practiced in each country influences its tax system, and in the UK we experience a lower tax burden than Germany, for instance – 32.8% vs. 38.3%. We can see the UK’s ‘freer’ approach to tax play out in the OECD statistics.

Immediately, we can see that UK social security contributions are lower than the OECD average – and 18 points lower than Germany. Where the UK skews higher than average is tax on personal income and property.

One could argue that, in comparison with France and Germany, lower social security contributions affect the service provided by the state to UK citizens. In 2015 it was found that UK family benefits were in line with the middle to lower end of the range for other wealthy countries. Further, the UK’s focus on the family means less support for people without children when compared with the mixed-policy approach of other wealthy countries. While both sides of the House of Commons agree that the NHS is a great British achievement, the German healthcare system has more doctors and hospital beds per patient, and much lower waiting times for operations. On the other hand, you could argue that the UK’s reduced ‘safety net’, so to speak – and the fact that it is an LME, rather than CME – creates a more competitive environment, fostering hard work and innovation, but that really is an argument for another time!

United States

With a tax burden of only 25.5%, the US ranks 32nd of 38 OECD countries. Nicknamed the ‘Land of the Free’, its tax system appears to reflect this moniker somewhat, with zero value added taxes. Like the UK, its social security contributions rank lower than the OECD average, while taxes on personal income, profits and gains skew very high.

When he was elected president, Donald Trump claimed that “America is one of the highest-taxed countries in the world” and proceeded to announce his tax reform plan. While you can measure tax in different ways, the OECD tax burden rating suggests Trump was wrong. While the chart above shows that much of US tax revenue comes from personal income, profits and gains, Americans do not face the highest tax rate in the world. The US top rate of income tax is 39.6%, far behind Finland (57%), Japan (56%), Denmark (55.9%), Sweden (52.9%), and the UK, France, and Germany (45%).

Monaco

Yacht rock

There is no OECD chart for this one because it is a certified tax haven. Home to Lewis Hamilton, Bono, Björn Borg, Max Verstappen, Ringo Starr and Lily Safra, the tiny island country offers a high quality of life and excellent education and medical systems. Monaco does not tax personal income, capital gains, or property (apart from a 1% tax on rentals).

Other states are well aware of individuals’ use of Monaco for tax evasion purposes. French nationals are subject to France’s income taxes if they are a Monaco resident (unless they became one before 1957).

Monaco not your thing? Try some of the Earth’s other tax havens – the Cayman Islands, Switzerland, Luxembourg, Singapore and the British Virgin Islands and more!

While we are about navigating the tax system in the best possible way for our clients, we are not about tax evasion! If you’d like help with your business finances, get in touch today!