Tax Burden in EU

Algirdas Šemeta, the European Commissioner responsible for Taxation and Customs Union, Audit and Anti-Fraud has announced in a speech that there are ten nations in the EU that need to cut the tax burden on labor if they are going to aid the growth of the European Union. They are hindering investment and holding back output of firms across the EU, although he admits that it is not reducing the tax burden alone that will solve the problems of the economic crisis.

This, however, is nothing new since the OECD had already stated back in March that the average tax burden on employment incomes had increased for OECD countries by 0.1% to 35.6% in 2012. Last year saw an increase of the tax burden on labor for 19 of the 34 countries in the OECD. It was only reduced in 14, and remained exactly the same in just 1 country.  The highest tax increases were in the Netherlands, Poland and the Slovak Republic. This was due to increases in tax rates as well as increases in employer social security contributions. Spain and Austria also saw increases in their labor tax burden (due to increases in income tax there). 2011 saw an average increase in the tax burden for OECD countries of 0.5%. However, there was a decline between 2007 and 2010 from 36.1 to 35%.

The figures are revealing key factors in whether or not employers are prepared to hire new people or not. It also reveals something about to what extent people seek employment. With current unemployment figures across the EU higher than in the past, the European Commissioner for Taxation is clearly telling the EU to reduce the tax burden on labor to try to boost growth and encourage hiring. Will they listen to him?

In the EU, Belgium has the highest average tax burden for single, childless workers (56%). The Belgians are way ahead of the others in the rate of taxation on single workers. The Belgians are followed by France (50.2%). Germany has a rate of 49.7%. However, the stark similarity between these last two countries in terms of their tax burden and yet their apparent differences in terms of growth prospects and economic activity or current unemployment rates seems to point to the fact that Commissioner Šemeta’s advice might appear to be good, but it won’t have the effect that he believes it will. Reducing the tax burden on labor may have some effect on hiring and job seekers, but it is not going to solve the problem of the economic recession in a country like France. However, France does have the highest tax burden on labor income in the OECD (43.1%) for single earners (with two children). Greece comes in 2nd position with a rate of 43% and closely followed by Belgium at 41.1%.

The European Commissioner looks like he will have a tough time ahead of him however, as few countries in the EU actually want a coordinated taxation policy. There is a serious rate of distortion between member states of the EU leading to competition between countries.  Harmonization of regulations doesn’t look like it is set to happen in the near future. Each EU member country wants to control their own tax burden in such a way as to allow them some room for manoeuvre in the economic climate that needs to be adapted to in a specific and very individual way. Tax burden in the EU is already higher in comparison with other OECD countries such as the USA. As a percentage of GDP, tax burden in the USA is roughly 25%. In Australia it is 26% and in Japan 28%. Denmark has the highest EU tax burden as a percentage of GDP (48%).

Certainly however, the European Commissioner’s comments will come at a welcome time when we are hearing little else but the tax evasion of the rich and famous, flouting their civic duties of paying tax, Swiss bank accounts and tax haven’s as well as companies that are using either the double Irish or the Dutch or Luxemburg Sandwiches (such as Google).

See our previous article on Google and tax avoidance:

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