European taxes tend to be more regressive than US taxes but they offset this fact by virtue of having more efficient welfare states. (European welfare states are not really so much larger than the American one.)
Countries with "high taxes" tend to be pretty good at keeping people employed. In recent years, European countries have done a much better job than we have of preserving and creating jobs. This fact is best illustrated by the employment/population ratio—the percentage of people with jobs in the population.
In 2013, most European welfare states had ratios of more than 80% for those in their prime working years, while the US ratio was barely above 75%.
One reason for this is that European companies are not burdened with the enormous cost of providing health insurance for their workers, as American employers are. That cost is financed by broad-based consumption taxes that do not fall on businesses. Moreover, the VAT is rebated at the border on exports, so that the tax does not raise the price of exports. These two factors make European exporters very competitive relative to those in the United States, where many taxes such as the corporate tax cannot be rebated and therefore
reduce international competitiveness.
Not having to provide health insurance also makes it much easier to
start and grow businesses in many welfare states. The fact that entrepreneurs receive valuable services for their taxes makes them much less sensitive to them than Americans are. A recent article in
Inc. magazine about booming entrepreneurship in heavily taxed Norway
made this point:
In the US, workers are forced to bear all of the burden of economic adjustment through layoffs and unemployment when there is a recession, even as Republicans contend that all recessions are caused by the Federal Reserve or government screw-ups. European countries, by contrast, have been highly successful with
short-time schemes that allow workers to
reduce work hours while
subsidizing their pay. These allow businesses to
hold on to valuable workers and
prevent their skills from deteriorating, and also makes it much easier to ramp up production when growth is restored. And wage subsidies are a powerful means of
fiscal stimulus.
Many analysts have
testified to the efficiency of this system and urged its adoption in the United States even though it would involve “big government.”
In addition to wage subsidies, the European welfare state facilitates labor adjustment when necessary. And an important part of the welfare state in Europe involves strong support for education. Germany, for example, recently abolished college tuition. By contrast, American college students must often go deeply into debt just to get an education. High education and skill levels plus wage compression that is augmented by government benefits combine to offset the negative economic effects of the welfare state in Europe to a large extent (see
here,
here,
here, and
here).
