When Higher Taxes Are Good.
Foreign taxes are a key issue for clients of my consulting service. But there’s a lot more to the story than dollars and cents.
Whilst there are some places Americans can go and pay no foreign income tax—Panama and Costa Rica, for example—any place in the European Union will probably take a bite out of your income. I’ve written about this extensively (and my Global Citizen members enjoy exclusive reports on how to minimize global taxes).
But before I go into the details, I always point out one thing: Even with European taxes, you’ll probably end up with more disposable income when you live in Europe than if you stayed in the US.
Besides the dramatically lower cost of healthcare, other life essentials like cellphone service… internet… even groceries… are far less expensive in Europe than in the US.
The cost of living in Portugal is 36% lower than in the US. A basket of common groceries, for example, will cost you between 50% and 70% less. Basic utilities are 41% lower. A mobile plan is 65% less. High-speed broadband is 45% cheaper. And apartment rentals are between 40% and 45% less than in the US.
As a trained economist, I’m often asked a simple question: Why is life so much cheaper in Europe than in the US?
Well… If you’re interested in “the story behind the story”—i.e. the reasons overseas living can be so much cheaper than life in the States—this column is for you!
I’ll give you my take; the reasons I give when I’m asked this question.
First, consider a measure called the Four Firm Concentration Ratio, or CR4. It measures the market share of the four largest companies in an industry. In the United States, the top four firms in telecommunications, airlines, healthcare, agriculture and food processing, and a slew of other sectors, have a combined market share of over 70%. It’s nearly impossible for new competitors to get into those industries, so those four firms can easily charge excessive prices (and pay lower wages).
Europe has similar market concentration in telecommunications, airlines, banking, and energy. Sometimes, market structure prevents lots of small firms from competing, like airlines. But unlike in the US, European firms are prevented by law from exploiting their market dominance to charge excessive prices. That’s why, for example, you pay between 50% and 70% less for mobile and internet service in Europe.
Moreover, European governments underwrite the bulk investment these industries need to operate, like fiber optic cable and gas pipelines. Private companies don’t have to shoulder that burden, allowing them to charge lower prices.
This is a point I often make to my clients: Yes, of course, consider how much in local taxes you’ll pay overseas. But also: Consider what you’ll get in return. Lower energy prices and internet bills are two examples.
A second factor is hidden fees and surcharges. American companies are notorious for tacking on additional costs that aren’t explained up front. Anyone who signs up for a new package with Comcast or AT&T finds that the quoted price isn’t what they will pay. That doesn’t happen in Europe, because laws require full transparency.
The third and perhaps most important factor is that in Europe, essential infrastructure like telecommunications, education, and healthcare are considered public goods. Instead of allowing private companies to dominate this infrastructure for private profit, in Europe, costs are held down by government intervention. For example, thanks to low-cost universal public healthcare, young Europeans don’t need to remain in jobs they don’t want just to have insurance. If they want to try starting a new company, they can do so without worrying about access to healthcare.
The proof is in the pudding. The Geni coefficient, which measures inequality on a scale from zero to one, with one being total inequality, is about 0.43 for the US. For the European Union, it’s about 0.29. Put another way, the US is nearly 50% more unequal than Europe.
This has spillover political effects. As we’ve seen with US elections, fantastically wealthy businesspeople can practically buy the policies they want.
By contrast, in Europe there are strict limits on individual and corporate contributions to political campaigns, and many countries don’t allow corporations to donate at all.
The result is that the US is increasingly a paradise for monopolists…
The irony, of course, is that we’re constantly told by politicians and self-interested lobbying firms that unlike European “socialism,” America is a free-market economy.
Increasingly, ordinary Americans are discovering they prefer the freedoms they find on the other side of the pond.
