Different Social Models Reflected in U.S. and European Tax Systems

This blog is part of an ongoing series of contributions from participants in The German Marshall Fund’s flagship leadership development program, The Marshall Memorial Fellowship (MMF).

During the spring 2018 GMF Memorial Fellowship Program, I had the opportunity to compare the U.S. and European tax systems. Both of these reflect significant differences in social models. Two main distinctions stand out.

Estate Tax

The estate tax (or inheritance tax) plays a key role to “redistribute” wealth in present-day societies. To a certain extent, this tax avoids the perpetuation of wealth empires or dynasties.

In France, the exemption threshold for inheritance tax is $125,000 per child and per parent. In the United States, this threshold is much higher, reaching around $5.5 million per taxpayer in 2017. Due to the Tax Cuts and Jobs Act of 2017, the exemption will double to $11.2 million per taxpayer. As a result, while 15 percent of the deceased persons are subject to the estate tax in France, the figure only reaches 0.2 percent in the United States.

Obviously, one can consider the estate tax as an unfair way to tax revenues and wealth that has already been imposed upon during a lifetime. Some even call it the “death tax.” However, in a certain libertarian point of view, the estate tax is the best way to redistribute wealth, and prevent wealth perpetuation. As the United States pretends to be a free-market country, this low level of estate tax questions this core principle.

In South Dakota, a stop on my fellowship tour, one could observe that the state has a specific regulation on trusts that give an incentive to many wealthy people to organize their death, in order to minimize taxation.[1]  

State Taxes

In five of the U.S. cities I had the opportunity to visit — Washington, DC, Boston, Rapid City, Seattle, and New York City — I noticed that state taxes, which are made up by personal income tax, sales tax, property taxes, and estate taxes may vary significantly. The French system is different as there is a harmonization of the different levies (only property taxes may slightly vary).

It is not surprising that a Republican state such as South Dakota does not have any state tax (neither personal income tax nor inheritance and estate taxes) aside from a sales tax of 4 percent. The residents I met argued that they preferred to organize their private life — including health, education, and retirement — on their own rather than leaving it to government authorities.

However, in a very progressive and liberal state such as Washington, DC, I was surprised to see that there is no state tax[2] (it is one out of only nine states that does not levy a personal income tax, nor any corporate tax). This has a huge impact on housing policies, which are unfunded. Meanwhile, with the surge in housing prices in Seattle, homelessness is exponential. There are about 10,000 homeless people living in the whole King County Seattle area.

The chief editorialist of Real Change, a newspaper sold by many vendors who are homeless, informed our MMF group that a head count tax is under consideration in Seattle. It would apply to the biggest companies in the state such as Amazon, Starbucks, and Microsoft. Two council members made this proposal in October 2017, which should generate about $24 million per year ($100 per employee). The city has been changed by the huge development of Big Tech Companies, and their corporate image will depend on their will to accept such levies in the future.

—Benjamin Lancar, Auditor at Cour des Competes in Paris, France, is a Spring 2018 European Marshall Memorial Fellow.