A recent report on taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. revenue sources shows that social insurance taxes are an important revenue source for European governments. In 2017 (the most recent data available), social insurance taxes were the second largest tax revenue source in Europe (27 countries covered), at an average of 29.7 percent of total tax revenue. Only consumption taxA consumption tax is typically levied on the purchase of goods or services and is paid directly or indirectly by the consumer in the form of retail sales taxes, excise taxes, tariffs, value-added taxes (VAT), or an income tax where all savings is tax-deductible. es were on average a larger source of tax revenue, at 32.8 percent.
In 2017, Slovakia relied the most on social insurance taxes, at 44.1 percent of total tax revenue. The Czech Republic and Lithuania were next, relying on social insurance taxes for 43 percent and 41.4 percent of their total tax revenue, respectively. In contrast, individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. es represented a low share of total tax revenue in all three of these countries, ranging between 10.3 percent and 13 percent, compared to a European average of 22.9 percent.
Denmark relied the least on social insurance taxes, at 0.1 percent of total tax revenue. This is partially because Denmark does not levy a dedicated social insurance tax to fund its social programs, but instead uses a share of its individual income tax revenue for these programs. Iceland and Ireland had the second and third lowest reliance on social insurance taxes, at 9.3 percent and 17 percent, respectively.
Social insurance taxes, as opposed to individual income taxes, are usually levied on wages at a flat rate to fund specific social programs, such as unemployment insurance, health insurance, and old age insurance. While social insurance taxes and individual income taxes can be seen as two types of taxes, the extent to which countries rely on each tends to correlate negatively. In other words, countries relying less on social insurance tax revenue typically rely more on individual income tax revenue, and vice versa.
Note: This is part of a map series in which we examine tax revenue sources in Europe.
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