Marginal tax rates (how much you are taxed for earning additional money) have a big impact on incentives to engage in productive activity such as work, saving, investment, and entrepreneurship.
This is why governments should keep tax rates at modest levels.
But as you can see from this map from the Tax Foundation, European governments generally cannot resist the temptation to impose onerous top tax rates on investors, entrepreneurs, business owners, and other successful taxpayers.
Congratulations to Hungary for having the lowest rate, followed by Estonia, the Czech Republic, and Slovakia.
And “congratulations” to Denmark for having the highest top tax rate, followed by France, Austria, and Spain.
At this point, a few caveats are necessary. A nation’s top income tax rate is important, but it’s not the only thing that matters for tax policy.
- It’s also important to look at social insurance (payroll) taxes, particularly if they apply to all income.
- It’s also important to look at the level of “double taxation” on income that is saved and invested.
- It’s also important to look at VATs, which increase the wedge between pre-tax income and post-tax consumption.
Needless to say, other economic policies also matter. A nation might have a good tax system but very dirigiste policies in other areas. Or vice-versa.
For instance, even though Hungary has the lowest top tax rate on personal income and Denmark has the highest, there’s actually more overall economic liberty in Denmark.
Some readers may be wondering how the United States compares to the European nations shown in the above map.
The good news (relatively speaking) is that the top tax rate in the United States is 42.9 percent, so that’s lower than the average in Europe.
The bad news is that the US would have the highest tax rate if Biden’s budget was approved.
However, the top income tax rate in the United States can vary substantially depending on state.
A resident of New York or California, for instance, will face a much higher top tax rate than a resident of a zero-income-tax state such as Texas or Florida.
The same thing is even more true in Switzerland, where top tax rates vary substantially.
A successful taxpayer in Zug pays a top tax rate of 22.22 percent, less than half as much as a similar taxpayer in Geneva.
I’ll close by noting that this map is another example of the advantages of genuine federalism.
When the central government is small and most government takes place at the state and local level (or, in the case of Switzerland, at the cantonal and municipal level), there is more diversity, choice, and jurisdictional competition.
That type of federalism still exists in Switzerland, but unfortunately is eroding in the United States.
International Liberty 
[…] Mirror, Mirror, on the Wall, Which Nation Punishes Success Most of All? […]
Hi John,
Please tell me where I have criticized federalism? I have only criticized Dan’s fetish for it. And I have cited the need to recognize the importance of the “federal” part of federalism. Contrary to what you say, Jim Crow actually makes a perfect example of that:
“The Little Rock school board had established a plan to desegregate its schools, beginning with Central High School. Nine young African American students offered to enroll. But Arkansas governor Orval Faubus announced his opposition to integration and called out the Arkansas state National Guard. When the nine students arrived at the school, the National Guard blocked their way of entry.
“None of the nine students gained entrance into the school that day. Up until the Little Rock crisis occurred, President Eisenhower had provided small leadership on the civil rights front. When Governor Faubus resisted the will of the federal courts, Eisenhower had to act. President Eisenhower sent federal troops to Little Rock to protect the students and to enforce the court’s decision (which happened after the Brown decision).” (lost track of the source, but this is commonly known history)
Did you notice as you wrote about what happened in the 1860s and what happened in the 1960s that you were talking about a century passing in between in which there was terrific fighting among politicians regarding treatment of the newly freed blacks? Andrew Johnson set back Lincoln’s plans for giving the freed slaves a hand up. U.S. Grant tried to revive Lincoln’s hopes, but there were far too many southern congressmen fighting bitterly to keep the blacks down. And for a century they won out. Our “federalism” could have benefited from some greater degree of “federal” during that time.
Jim Crow laws lasted about a century. I think that speaks very clearly to the dangers of letting states have too much power.
P.S. Now I have to go the website of my denomination, (the ultra progressive UCC) and answer their ridiculous “woke” claim that white people have used the train derailment tragedy in Ohio to bring out the race card in reverse:
“Various commentators and politicians (outside agitators) began to cast a predominantly White rural community as the “forgotten” people of our country in contrast to the “favored poor” living in “favored cities” such as Detroit and Philadelphia – i.e., Black urban centers. The old-time canard for stoking fabricated racial resentment and grievance had been pulled out of the playbook once again.”
OMG, can you imagine what we would be hearing if East Palestine, Ohio, were predominantly black?
P.P.S. Even when we disagree, I am thankful that your posts are not ridiculous!
Phil,
Hopefully you now agree Jim Crow laws are not a good example if you want to claim the harms of small government or the benefits of big government.
About federalism, you say, “But the federal piece can only be effective if it is strong enough.” Let’s put it this way. If the federal government was strong enough in the 1860s to pass the post-Civil War constitutional amendments, and strong enough in the 1960s to pass the Civil Rights Act, I’m pretty sure you needn’t worry yourself about it being too weak in 2023. Hmmm… it’s almost like Jim Crow laws aren’t a good example for criticizing federalism, either.
I’m looking to emigrate from the UK and I’ve been looking at tax rates across Europe.
Mr Mitchell is correct about income tax rates (and corp tax rates broadly follow the same trend), but be aware that a lot of taxes are hidden in the very high social security rates in these countries, including Hungary, Romania and Bulgaria.
Hi John,
I agree with your closing sentence. But the federal piece can only be effective if it is strong enough. If you click on “genuine federalism” in Dan’s post, you get the following:
“These numbers should be very good news for anyone who wants to push a “federalism” agenda. And Gallup also has found considerable – and growing – hostility to the federal government.” Dan just feeds on that stuff because there is nothing he would rather do than continue to shrink the size of the federal government. Until when, one has to wonder.
But the ratio of federal to state and local spending has remained at roughly about 55-45 (fed to state/local) for some time, and that is less than most other peer countries. Interestingly, federal spending, as a percentage of GDP, topped Reagan’s ’82 and ’83 years only six times since 1946 (through 2011). One was Bush II’s last year, three were Obama’s first three years, all four obviously related to the crash of 2008, and the other two were 2020 and 2021 (COVID). Also interesting is the fact that in the other five Obama years, federal spending as a percentage of GDP averaged less than it did in Reagan’s other six years. (Wikipedia article: “Government spending in the United States)
I’m having a bad day. Should be, “Jim Crow laws are not really examples of why small government is bad or big government is *good*.”
Phil,
You said you took exception with praise for small government and federalism, and also that if small government was the unchallenged norm in the US we would probably still have segregated schools and other forms of Jim Crow. That’s why I responded that Jim Crow laws are not really examples of why small government is bad or big government is bad. I’d say more like an example of federalism working, and why the federal piece can be useful.
Hi John,
I don’t think I’ve used it as an argument about the overall size of government. I didn’t say anything about that.
Dan was clearly making a case for federalism (related to the old idea of “states’ rights”).
Here is Britannica on federalism:
Federalism is a combined and compound mode of government that combines a general government (the central or “federal” government) with regional governments (provincial, state, cantonal, territorial, or other sub-unit governments) in a single political system, dividing the powers between the two. Federalism in the modern era was first adopted in the unions of states during the Old Swiss Confederacy.[1]
You’ll notice that federalism, in and of itself, says nothing about the size of the federal government (nor did I). It may be small; it may be large; it may be somewhere in between. Dan seems to assume that federalism is going to give most of the control to the states. That ain’t necessarily so. The Britannica explanation talks about dividing the powers between the two. It doesn’t assume the power will be split equally, or assume that one or the other will get the greater power.
Hi John,
Huh?
Well, in any event, should small government federalism (USA style) be able to maintain poll taxes?
Phil,
Maybe you should stop using Jim Crow laws as an example of why small government is bad. Remember, those were Jim Crow laws, enacted by state and local governments. They illustrate the tyrannical power of government more than a need for large government. Although you could say they’re an argument in favor of federal versus local power. But not so much an argument about the overall size of government.
Phil,
Maybe you should stop using
Heres the thing. In the 70’s America had a top percentage of 75 percent!!! And there was still rich, poor and a strong middle class. (No one left America)….raising rates certainly sucks, but its not going to make the super rich leave America. Leave and go where?
I enjoyed reading this post. I thought it gave both sides of a number of issues (mostly). I would take exception, however, with the generic praise for small government and federalism. They have an important role, and I think there is much good about them, but if small government was the unchallenged norm in the U.S., we would probably still have segregated schools in Mississippi and Alabama and who knows where else (or, even if we were rid of them by now, they – and other forms of Jim Crow – would have lasted much longer than they did). And if you think I’m veering too much away from tax policy, there is a tax directly related to these issues and also related to the issue of small government and federalism: the poll tax. It was used not only in the South, but also in other parts of the country. Small government and federalism are good things in their proper place. So is gasoline.
Never mind. One, I omitted the base 1.45% Medicare tax on high incomes and two, that data specifically excludes this kind of tax.
I think top marginal US rate should be more like 43.7% instead of 42.9% (37 base federal + 5.8 median state & local + 0.9 Medicare surtax). The US at 43.7% is not much below the median European rate of 46.3%.