Declining Payroll Taxes: The European Example

Historically, payroll tax rates—with a few notable exceptions—have been much higher in Europe than the United States. Burdened by high payroll tax rates that stifle job creation, unemployment in Europe was much higher than the U.S for several decades. In the years prior to the "great recession" Europe set about slowly closing the employment gap. One critical reason: they lowered payroll tax rates.

Between 2000 and 2006, payroll tax rates declined in a dozen European nations, and still more payroll tax cuts are coming. Russia in 2004, following the lead of these European nations, reduced its payroll tax rate from 35.6 to 26 percent. In April of 2005, the World Bank urged the eight newest members of the European Union [the Czech Republic, Estonia, Hungary, Lithuania, Latvia, Poland, Slovakia, and Slovenia] to reduce their payroll taxes in an effort to boost employment. In 2006, Angela Merkel vowed to cut Germany’s payroll tax rate by 2 percentage points; Italy’s government, led by Romano Prodi, pledged to cut its payroll tax rate by 5 percentage points; and Sweden's  government cut the payroll tax burden on employees working in small businesses. Slovenia, in 2006, voted to abolish its payroll tax altogether by 2009. Romania and Bulgaria also cut payroll taxes. In France, president Nicolas Sarkozy won election in 2007 on a pledge to lower payroll taxes. More recently French leader Hollande (elected in 2012) moved to cut payroll taxes on business and industry with a specific goal of boosting employment.

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Gregory Mankiw Harvard economics professor and former chair of the Council of Economic Advisers under President George W. Bush, says, "Ask any economist or businessperson what kind of tax cut would be the biggest boost to job creation and the answer is clear: a cut in payroll taxes, because it would directly reduce the cost of employment. Ask any social justice champion which tax is the unfairest tax of all and the answer is clear: the payroll tax, because on the employee side it is 6.3 percent of wages up to a cap of $106,800, thus taking a bigger bite, proportionally, out of a dishwasher's paycheck than a CEO's."