Birth and Taxes

Minor differences between US and European taxes explain a lot, I believe, about how each of those groups of people view their governments, and each other.

In the US, for example, parents get a $1000 per year tax credit for each child. If you would have otherwise been taxed $15,000, but have 2 children, your taxes are reduced to $13,000. And the credit is ‘refundable’, which means it can cause your tax burden to become negative, so you’ll still receive the full amount regardless of how much money you earned or what your tax burden was that year.

In many European countries, there is no tax reduction for having children. Instead, the government offers a benefit where parents are simply paid a monthly stipend. Often this also works out to be about $1000 US per year per child (relative to the cost of living).

From the perspective of pure mathematics, these two systems are identical. Whether the government gives you $1000 per year in the form of a benefit, or whether it simply reduces your tax burden by that same extent in the form of a refundable credit amounts to the same thing for both you and the government.

But, to me at least, these two systems psychologically feel very different. In the European case, the government appears Give something to parents. In the American case, the government is simply allowing parents to Keep more of their own money.

I think this psychological difference in how these systems are perceived explains quite a few things.

First, I think it explains some of the difference in attitude Americans and Europeans have toward what the government does and what it should do. Europeans, in my experience, often perceive the purpose of government to be a ‘safety net’, sort of like a loving grandma who’s always there to help. Grandma knows how tough it is to raise children, so she gives parents a little money every month to help pay for basic expenses. But the math isn’t any different for the American. He gets the same net amount of money in his pocket as the European, just as a tax break instead of a government benefit.

Second, I’ve heard it said that, among industrialized nations, “Americans are taxed the least but complain the most about taxes”. But if you think about it, this makes sense. If Andy the American has a tax burden of $15,000 reduced to $13,000 due to the child credit, and Erwin the European pays the full $15,000 but gets $2,000 in a child care stipend deposited into his bank account in monthly payments, both are in exactly the same position. Andy is taxed less, but if a politician wished to raise his income tax rate, his burden will become greater than Erwin’s. That is, Andy is justified (in this particular case) in complaining about the possibility of a tax increase.

In fact, the US Internal Revenue Service (IRS) refers to breaks like the child credit as “tax expenditures”, because that’s exactly what they are – Tax reductions (which seem to be favored by about half of the US population) are no different from normal government spending (which seems to be favored by the other half).

This example also makes comparisons of what percentage of a nation’s GDP is spent by the government, in my opinion, sort of meaningless. The percentage of the US economy spent by the federal government tends to be less than in many European countries. In Erwin’s case, the government spends more, but again, the underlying mathematics are exactly the same for both men.


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