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How do the total costs of employment compare? If I employ a programmer in Germany, does it cost me 42% more than in Scandinavia?
by Colman (colman at eurotrib.com) on Tue Jun 21st, 2005 at 01:10:27 PM EST
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Yes and no. You have to turn the question round and ask what return you would get from providing the programming service if you located in Germany compared to say Denmark (there are reasons for this choice by the way)

Without have the Die Zeit figures and an explanation avaiable I will have to give generalised answers. Taking the post at face value, if direct taxes on employemnt and the overhead caused by social provisions in Germany total 42%, what is the comparable figure for Denmark and what is included in the calculation? Or is the German figure 42% greater than the equivalent in Denmark - a rather different statement.

Apart from that you have missed two important factors. While tax on the employer is lower, taxes on the employee are higher to partly make up the funds necessary to pay for the social provisions. Indirect taxes (VAT) are also higher to provide the other part of the equation. The difference between the countries are listed here but if you look up the rates you will see Germans pay VAT at 7% on food and 16% for other goods and services compared to 25% for both in Denmark. The employee therefore pays far more for their living expenses and higher direct taxes from their pay packet. The implication of this is that to attain the same real buying power, the Danish worker would expect to be receive a higher basic rate of pay.

The extra VAT also affects the amount the business would receive from selling its services. For a simple comparison this is often referred to as a "purchase tax" when explaining it to Americans. As alluded to earlier, the tax is paid on all goods and servicess. Not explained is that the amount collected is offset by the amount already paid out. So if in Denmark you buy an item for 100 Euro and sell it for 300 Euro, you pay over 25% of the diffence of 200 Euro, hence "value added".

This is where the returns question comes back into play with your example. Programming is a high value added industry, if only because it is heavily dependent on labour costs. In either country you would have to pay VAT on a very high proportion of the final charge however the rate is much higher in Denamrk. So whereas in Denmark you might expect to hand over say 20% of the  contract charge as VAT, in Germany it would be nearer 12%.

So in summation, as an employer your would hand over more in direct taxes on the wages you pay in Germany but in Denmark you would have to pay your employees more and hand over more in indirect tazes. While you are deciding, you may want to employ someone in a Baltic state or Slovakia where there are still much lower wages (for the moment) and some very highly skilled workers.

by Londonbear on Tue Jun 21st, 2005 at 03:03:57 PM EST
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