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 has been much higher than the U.S for several decades. In recent years, however, Europe has been slowly closing the employment gap. One critical reason: lower 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 new government, led by Mario Prodi, pledged to cut its payroll tax rate by 5 percentage points; and Sweden’s new government cut the payroll tax burden on employees working in small businesses. Slovenia, in 2006, voted to abolish its payroll tax altogether by 2009. In France this year, president Nicolas Sarkozy won election on a pledge to lower payroll taxes. Romania and Bulgaria are also cutting payroll taxes.

Between 2000 and 2003, Social Security payroll tax rates fell in Austria, Belgium, Denmark, Finland, Hungary, Ireland, Italy, Luxemburg, Netherlands, Spain, Sweden, and Switzerland: