Working Package 3: Mapping of Convergence and Divergence
Part 2: Fiscal Systems
Preliminary Remarks
The following short description of the fiscal systems in the relevant PEMINT countries is the
second part of the Working Package 3. As well as the mapping of convergence and divergence in the range of the social security systems this summary is conceived as an exclusively
descriptive comparison of the different fiscal systems. In each country about thirty or more
single taxes exist. So it is impossible to regard every tax in every PEMINT country. So only
the quantitatively most important taxes of the single countries are considered in this summary.
The exact utility and profit of this summary of the incomplete European integration in terms
of the fiscal systems for the PEMINT project still needs to be discussed. This paper just provides a basis that permits a quick overview of the most significant elements of convergence
and divergence between the different national fiscal systems.
However, it should be discussed whether the highly aggregated data material is a useful base
to start a comparison. Due to the national embedding of the national fiscal systems it is necessary to abstract the collected data. But the question should be kept in mind in how far these
aggregated data is relevant and suitable for the analysis and the reflection of the organization.
Furthermore we should take into consideration that the interpretation and the presentation of
such aggregated data might be politically motivated. The way of analysis of the data so might
be lead by special interests and lobbys. Interpretation and analysis of the data may vary according different cognitive interests.
In general the discussion of the fiscal systems in countries of the European Union seems to be
highly important because the significance of taxes in the EU area is comparatively high. The
total tax burden in the EU area is much higher than in most other OECD countries. Defined as
the tax-to-GDP ratio1, it was 40% in 1998.
Taxes-to-GDP ratio in the EU and the PEMINT member states 1999
Germany
1
37,7
Defined as the share of total tax revenues. Including social security contributions, in gross domestic product
UK
Netherlands
Italy
Portugal
Switzerland
EU 15 average
PEMINT average
36,6
40,3
43
34,5
35,1
41,2
37,9
Especially the nordic countries raise the EU average. So the PEMINT average (no nordic
country is a member of the PEMINT project) is more than three percentage points below the
EU 15 average. The Dutch and the Italian Tax-to-GDP ratio is significantly above the
PEMINT average, the portugese, swiss and british ratio below the PEMINT average. The
German ratio and the PEMINT average are approximately congruent. The analysis of highly
aggregated numbers is only of limited meaning, because there are a lot of detailed features in
the single systems that must be considered in order to get an adequate impression of convergence and divergence. So the Taxes-to-GDP ratio is disaggregated and single important taxes
are analysed.
The taxes presented in the mapping are presented as follows.
1) Current taxes on income and wealth (direct taxes)
2) Capital taxes
3) Taxes linked to import and production (indirect taxes)
3.1 VAT and excise duties
The following taxes in the relevant six countries are considered.
Direct Taxes
FRG income tax
corporation tax
UK
I
NL
P
Capital taxes
Succession and gift tax
income tax
Inheritance Tax
corporation tax
Personal income tax
Succession and gift duty
Tax on incomes of legal persons
Personal income tax
Succession duties
Dividend tax
Corporation tax
Tax on personal income
Inheritance tax and gift
VAT and excise duties
Turnover tax-VAT
VAT
VAT
Turnover tax-VAT
VAT
CH
Tax on corporate income
Municipal tax
Income tax
Corporation tax
tax
VAT
1) Current taxes on income and wealth (direct taxes)
1.1)
Income tax
The taxation of labour via the income tax is very important in the whole EU. Taxes in the EU
area impinge very heavily on the labour markets. Labour income is most heavily taxed in
Germany, the Netherlands and Italy while the United Kingdom, Ireland, and Portugal stand
out for taxing labour income at a below average rate.
Share of tax revenue in certain factors of production in gross-national product 1997
Employed
Labour
Germany
UK
Italy
Netherlands
Portugal
EU average
PEMINT
average
23,2
14,5
20,9
23,9
15,4
21,2
19,6
Employed
Labour:
Employee
15
10,8
10,6
20,3
7,8
12,8
12,9
Employed
Labour: Employer
8,2
3,7
10,3
3,6
7,6
8,4
6,7
Share of tax revenue in certain factors of production of total tax revenue 1997
Employed
Labour
Germany
Italy
UK
Netherlands
Portugal
EU average
PEMINT
average
55,5
47,4
39
52,2
41,4
49,9
47,1
Employed
Labour:
Employee
35,9
24
29
44,3
21
30,3
30,8
Employed
Labour: Employer
19,6
23,4
10
7,9
20,4
19,6
16,3
This general trend is also confirmed by a mathematical model. In all countries – except the
UK – there is a trend in higher effective average tax rates of the production factor labour.
Average effective tax rates - using Mendoza et al2. methodology
Per cent
Labour
Germany
Italy
United Kingdom
Netherlands
Portugal
Switzerland
OECD average
G7 average
EU average
PEMINT average
1980-85
38.6
37.7
27.5
48.5
..
31.8
33.1
31.5
38.8
36,8
1986-90
40.6
42.2
25.2
49.3
26.2
32.6
35.4
33.8
41.2
36
1991-97
41.4
47.3
23.7
50.5
29.5
35.5
36.8
35.2
42.8
38
The assessment of the tax burden of the production factor is fraught with methodological
problems and does not take into account the differences in financing social security benefits
that can be financed via contributions or via tax revenues.
The table shows the level of the statutory income tax.
Minmum rate
Germany
UK
Italy
Netherlands
Portugal
Switzerland
19,9%
10%
19,15%
32,25%4
12%
5,47%5
tax-exempt amount (€) Maximum rate Maximum rate starts
at income of (€)
7206
51,5%3
54999
7395
40%
47939
46,15%
69722
52%
46309
40%
49880
8347, 3587
42,05%
393309
A comparison of the minimum and the maximum rates in the PEMINT countries show a significant divergence of the fiscal systems concerning the personal income tax at first sight. The
minimum tax rate of the income tax in the Netherlands is almost 6 times higher than the income tax in Switzerland. Here the impossibility of the separation of the social security sys-
MENDOZA; E.G., A. RAZIN and L.L. TESAR (1994), “Effective rates in macroeconomics: cross-country estimates on factor incomes and consumption”, NBER Working Paper Series, No. 4864, September
3
Including maximum tax rate of 48,5% and solidarity levy of 5,5%.
4
The rate includes both tax and social security contributions
5
0,77% for the state, 4,7% for canton and township
2
tems on the one hand and the fiscal systems on the other hand comes to the fore, because in
the Netherlands the comparatively high minimum tax rate of more than 30% includes also the
social security contributions.
However, the minimum and the maximum rates of the income tax in the relevant countries are
not a suited indicator for the assessment of the effective tax burden.
The next table gives an overview of the effective tax burden of the income tax of employees
in different family status. The effective tax burden is calculated by mathematical models that
include all special features that are linked to the income tax.
Single, no chil- Ranking Married,
two Ranking Married,
two Ranking
dren, average inchildren,
sole
children, average
come
wage earner with
income + 33% of
average income
average income
FRG
20,8
6
- 1,1
1
6,6
4
UK
15,9
4
14,4
5
12,9
5
I
19
5
14,5
6
13,5
6
NL
7,3
2
4,9
3
6
3
P
6,7
1
2,7
2
3
1
CH
10,3
3
5,2
4
5,9
2
The calculation of the effective tax burden shows significant differences in the relevant countries. The tax burden of a single without children and an average income ranges differs about
14 percentage points between Germany and Portugal. In Germany there is even a negative income tax for couples with average income and two children. So the isolated look at the tax
rates are not suited for the comparison of effective burden.
The preceding tables and numbers show that the family status must be integrated in the question of the measurement of the effective tax burden. But it should be noted as well that this
disaggregation concerning the different family status´ is not relevant with regards our frame
of reference. At this point the question is raised if different family status dependent tax burdens are interesting and relevant for the employing organizations we are looking at. We suggest that the different “family burdens” are not interested for employers and that these employers do not even know about this differentiation
Although this kind of mapping should just provide a short taxation-overview the main task of
the PEMINT project should be beared in mind. A central contention of PEMINT is that the
most important variables of the project can best be captured by an organisational analysis. It
is important to keep an eye on the frame of reference of PEMINT. So on the one hand the relevant organisationen (companies, public institutions in health sector etc.) and on the other
hand the potential calculating migants must be be considered. The migrants compare the costs
of their migration with the rendered returns. The organisations compare the marginal productivity of labour of the migrant with the the burden inducted by the employment. The crucial
question that must be considered in this mapping of taxation is: Who is bearing the burden of
the taxation?
However, it must be kept in mind, that the single reflection of the effective tax burden of the
income tax is only little significant, because some countries provide social or economic assistance via social security contribution, rather than via tax expenditures. So the burden of the
social security contributions must be integrated in an analysis of the effective burden in the
relevant countries.
Tax and contributions burden of employees in different family status
Single, no chil- Ranking Married, two
dren, average inchildren, sole
come
wage earner with
average income
FRG
41,3
6
19,4
UK
23,8
3
15,3
I
28,2
4
14,5
NL
36,1
5
24,9
P
17,7
1
8,6
CH
21,9
2
8,6
Ranking Married, two
children, average
income + 33% of
average income
5
27,1
4
14,5
3
20,2
6
27,6
1
10,3
1
11,4
Ranking
5
3
4
6
1
2
The comparison between these two tables exemplifies that the two complexes “taxes” on the
one hand and ”social security contributions” on the other hand cannot bee separated and must
be aggregated to one whole complex of labour costs. The German and the swiss case are good
examples. Although Switzerland belongs to the “top two” in the ranking of the tax and contributions burden, Switzerkland belongs rather to the medium countries concerning the single
tax burden. The opposite can be seen in Germany. In terms of the tax burden of a married
sole-wage earner with two children Germany has the lowest tax burden, but the highest tax
and contributions burden. Moreover, the two tables indicate the necessity of the consideration
of the family status.
1.2)
Corporation Taxes
The second quantitatively very important tax in the range of the direct taxes is the corporation
tax. In the last few years there were a lot of important tax reforms in the area of company taxation. So it might be useful to summarize the most important reforms and to analyze the impact of the corpoartion tax reforms enacted between 1998 and 2001.
Summary of the most important tax reforms since 1998.
Germany
Reduction of the corporation tax rate from 45% to 40% and to 25%
Reduction of decline-balance depreciation on machinery from 30% to 20%
Reduction of straight-line depreciation on buildings from 4% to 3%
Abolition of full imputation system and introduction of a shareholder relief system
UK
Reduction of corporation tax rate from 31% to 30%
Reduction of first year allowance for investment in machinery
Abolition of partial imputation system and introduction of a shareholder relief
system
Italy
No important tax reforms in that period
Netherlands No important tax reforms in that period
Portugal
Reduction of corporation tax rate from 34% to 32%
Dominant trend in the tax reforms:
-
Lowering of the statutory tax rates on profits (i.e. corporation tax, surcharges, other
profit-related taxes).
-
The lowering of the tax rates was combined with a broadening of the tax base, in particular by cutting back the depreciation rules.
-
Change of the corporation tax systems: Trend away from imputation systems towards
shareholder relief systems in order to strengthen international competitiveness
The reforms of the company taxation are very important concerning the systematic of taxation. The following table gives a short summary of corporate tax systems
FRG Shareholder relief system
UK Shareholder relief system
NL Classical System. Profits are fully taxed with the corporate income tax at the level of
corporation6
I
Imputation system. The corporate income profits are fully subject to corporate income
tax (36%) and a tax credit of 58,73% is available for the shareholder
P
Partial imputation system. The corporate income profits are fully subject to corporate
income tax (32%)7. Dividend distributions are not tax-deductible. A tax credit of 60%
6
7
Dividends receiving on shareholdings of 5% or more are taxed at a flat rate of 25%.
A surcharge is levied in many municipalities on the corpoarte income tax rate (max. 10%)
CH
of the underlying corporate income tax is granted on dividends received by individual
shareholders.
classical corporate tax system which results in economic double taxation. Profits are
fully taxed with the corporate income tax at the level of corporation
Concerning the systematic of the company taxation there is mainly divergence. In the six relevant PEMINT countries exist 4 cardinal different company taxation systems. There is an international trend towards a shareholder relief model, but only Germany and the United Kingdom have established that system. The Netherlands and Switzerland still maintain the classical system that accepts the case of double taxation via corporate income tax and personal income tax.
Aggregate Profit Tax Rates
The table shows a ranking of the PEMINT states with respect to the level of the aggregate
statutory profit tax rates. The most important taxes are included, corporation tax and also surcharges on this tax (solidarity levy in Germany), other additional profit taxes (German Gewerbesteuer) and non-profit taxes.
Germany
UK
Italy
Netherlands
Portugal
EU-Average
PEMINT-Average
Aggregate statutory Ranking in the Aggregate statu- Ranking in the
tax rate on profits EU/PEMINT tory tax rate on EU/PEMINT
1998
profits 2001
56,66
15/ 5
39,35
13/4
31
3/ 1
30
5/1
41,25
13/ 4
41,25
15/5
35
7,8,9/ 2
35
7/2
37,40
10/ 3
35,2
9/3
36,44
33,39
40,26
36,16
Similar to the situation in the range of the income tax the effective tax burden of the corporate
income tax cannot be assessed by only looking at the tax rates. The statistical model of the effective marginal tax rates provides a methodological tool to assess the effective tax burden for
companies.
Definition of EMTR:
The EMTR is defined as the difference between the pre-tax real return on a marginal investment and the post-tax return of the supplier of finance divided by the pre-tax real return. The
EMTR has been calculated for the domestic level of the corporation only. Any personal taxes
(income tax etc.) or tax credits have not been taken into account. Moreover, the most relevant
aspects of the tax base of the taxes have been pointed out and compared, such as the general
deprecation rules, the availability of reserves for bad debts/contingent liabilities, the deduction
of pension costs, the regimes for loss compensation and the roll-over relief for capital gains.
The next table gives an overview of the average EMTRs of the Member States in 1998 compared to 2001.
Germany
UK
Italy
Netherlands
Portugal
EU-Average/
PEMINT-Average
1998 EMTR Ranking in the 2001 EMTR Ranking in the EU/
EU/ PEMINT
PEMINT
28,81
14/5
25,2
14/5
20,56
10/3
20,83
13/4
13,74
2/1
13,74
3/1
20,6
12/4
20,67
12/3
19,15
8/2
18,15
6/2
19,91
18,13
20,56
19,72
Germany and Portugal have reduced their EMTR for corporations. No relevant tax changes
can be reported during the period of 1998-2001 for Italy. The Netherlands and the UK have
even increased the EMTR. These increases are negligible.
The tables above show that only in some countries the aggregate statutory tax rates on profits
serve as a good indicator for the effective tax burden. For example, Germany belongs to the
last five in both rankings. In many tax regimes special features exist that lead to a different
order in that ranking. The best example is Italy that has the highest Aggregate statutory tax
rate on profits but the lowest EMTR. This is due to a special feature in taxation in Italy that is
called dual income tax. According to this concept, a deemed return that is allocated to the increase in the equity capital presented in the annual accounts, is taxed at a lower rate. This tax
rate amounts to 23,25% in Italy (instead of 41,25%).
As a consequence of the tax reforms in the majority of the PEMINT countries the PEMINTaverage EMTR declined from 20,56% to 19,72%. This is a reduction of 4,1% in a period of
only four years. However, the EMTR reduction in the PEMINT countries is only half of the
reduction in the EU 15 countries. No PEMINT country increased the EMTR.
There is a trend to reduce the effective marginal tax rate for corporations in the EU and in the
PEMINT countries (except Italy. The Italian EMTR remained constantly on a low base).
The major tax reform took place in Germany. It caused a reduction of the aggregate statutory
profit tax rate of 31% (from 56,66% to 39,35%). The EMTR only dropped from 28,81% to
25,2% (reduction of 13%).
The following table provides an overview of the statutory corporation tax rates and surcharges
in the PEMINT countries but does not show the additional profit taxes, such as the trade taxes
in income (Gewerbesteuer vom Ertrag; average tax rate 17,63%). The table above gives aggregate statutory tax rates on profits that include both the corporation tax rates (and surcharges) and other taxes on income.
Corporation tax
rate for small
companies
Germany
UK
Netherlands
Italy
Portugal
10%
30%
Surcharges on Effective standard corcorporation tax poration tax rate
rates
5.5%
26,38
30%
35%
37%
10%
35,2%
Special corporation tax rate
19% / 27%
Beneath the EMTR there is another statistical method to assess the effective tax burden of
companies in the EU, the method of the effective average tax rates (EATR).
Germany
UK
Italy
Netherlands
Portugal
EU-Average/
PEMINT-Average
2000 EATR in %
35
28,4
29,9
31,2
32,8
29,4
31,46%
Ranking in the EU/ PEMINT
15 / 5
4/1
7/2
9/3
12 / 4
The EMTR results differ from the EATR results. But both methods show that the Aggregate
statutory tax rate on profits and the standard corporation tax rate are not sufficient indicators
to assess the effective tax burden of companies. Despite a relatively low Effective standard
corporation tax rate of 26,38% in Germany the aggregate statutory tax rate on profits remains
comparatively high, in almost the same manner as the effective tax burden. Almost the opposite is the Italian example. Although the aggregate statutory tax rate (41,25%) and the Effective standard corporation tax rate (37%) are relatively high compared to other countries, the
EMTR and the EATR are relatively low. This phenomenon can be explained in the Italian
case with the concept of the dual income tax. But also in other countries there are a lot of special features on the tax regimes that aggravate the mapping of convergence and divergence in
fiscal system. These features often include: investment tax credits, accelerated depreciation allowances for investment in equipment goods and in intangible assets (such as R&D), tax
breaks for employment creation, and tax incentives for deprived areas.
2) Capital Taxes
In all the relevant PEMINT countries the most important capital taxes are inheritance and gift
taxes. The single taxes are labeled as follows
FRG
UK
I
NL
P
Succession and gift tax
Inheritance Tax
Succession and gift duty
Succession duties
Inheritance tax and gift tax
The particular design of the most important tax in the range of the capital taxes is shown in
the next table.
Basis of assessment
Exemptions
FRG
Value of estate received,
after deduction of debts
and expenses
UK
Loss to the
transferor is
broadly the
difference
between the
value of all
the transferors property before
the transfer
and ist value after the
transfer
Certain kinds Certain
of gifts for
transfers
public, alfrom spouslowance of € es, transfers
255646 and to charities,
valuation
political
discount of
parties etc.
40% on acquisition of
I
Total value
and various
share of inheritances
and legacies
NL
Value of all
property received as an
inheritance
and as a gift
from a person residing
in the Netherlands
Inheritances Legacies
and gifts in made in pubdirect line
lic interest
or between
spouses;
gifts for
charities and
welfare services
P
Inheritances and
gifts received by
bodies of public interest and public
utilities. Transfers to
the surviving spouse
or children up to the
limit of € 2500.
Rate
business assets
The rates
range from 7
to 50%. The
scale contains three
classes depending on
the degree of
relationship.
Progressive
rates
No tax payable for the
first
223.000
Pound.
Above a tax
is charged
at a single
rate of 40%
Tax is applied on the
basis of two
scales of
progressive
rates. First
rate (3-27%)
is applied to
the value,
the second
(3-33%) corresponds to
the degree of
relationship
Rate vary
according to
the degree of
relationship.
Maximum
rate for children and
spouses is
27%, for unrelated persons is 68%.
Rate vary according
the degree of relationship and the figure of the donation/inheritance.
(minimum rate: 4%,
maximum rate:
50%)
Concerning the frame of reference of the PEMINT project it must be stated that the capital
taxes in the relevant PEMINT countries probably can be neglected. The PEMINT research
work starts at the demand side of the labour markets, especially organizations and their decision processes concerning recruitment is considered. The summary of the capital taxes in the
PEMINT countries is not directly relevant to the PEMINT tasks but follows the general systematization of fiscal systems in the European Union.
3) Taxes linked to import, consumption and production (indirect taxes)/ VAT
Effective tax rates on consumption in the EU area are, on average, higher than in most other
OECD countries. This not only reflects a higher tax to GDP ratio but also a tax mix relying
quite heavily on consumption taxes. In fact, consumption-based taxes accounted for almost
30 per cent of total tax revenues in the EU area in 1997 -- compared with 19 and 16 per cent
in Japan and the United States, respectively -- with VAT playing a dominant role, accounting
for about 60 per cent of total tax revenues on goods and services in the EU area. All relevant
PEMINT consumption taxes as a whole and VAT as a special kind of a consumption tax play
a very important role of the design of fiscal systems. In the space of the European Union there
are also different intenseness in the consumption taxation. UK and Portugal rely on consumption taxes above average, Germany, Italy and the Netherlands rely on consumption taxes below average.
Share of tax revenue of consumption taxes of gross-national product 1997
Consumption
10,4
12,4
10,6
11,4
13,2
11,4
11,6
Germany
UK
Italy
Netherlands
Portugal
EU average
PEMINT average
Share of tax revenue in consumption taxes of total tax revenue 1997
Con-sumption
25
24
33,2
25
35,5
26,7
28,5
Germany
Italy
UK
Netherlands
Portugal
EU average
PEMINT average
Because of the dominating role of the VAT in the area of the indirect taxes other indirect taxes like duties on mineral oils, duties on spirits or fuel taxes are not considered. Concerning the
frame of reference of the PEMINT project these taxes seemingly are negligible.
The VAT (value added tax) is the quantitative most important tax in the range of the indirect
taxes. It is a general consumption tax which is directly proportional to the price of goods and
services. It is collected fractionally, i.e. in each transaction in the economic chain, and is neutral. It is a consumption tax because it is borne by the final consumer
VAT Rates in the PEMINT countries
Reduced Super Rate
FRG
UK
I
NL
P
CH
4
2,4
Reduced Rate
7
5
10
6
5/12
3,6
Normal Rate
16
17,5
20
17,5
17
7,6
Besides the VAT only common trends concerning the indirect taxes shall be summarized.
Several countries have introduced or raised taxes on energy. In Germany, new taxes on energy consumption implemented in April 1999 have been used to lower pension contribution
rates. Italy launched a green tax reform in 1999 which involves a stepwise implementation of
excise taxes which are both higher and more closely related to the carbon dioxide emissions
produced by each fuel by 2005. The increase in tax revenues is to be recycled through lower
taxes on labour. In the United Kingdom, a new climate change levy on companies for the use
of gas, coal, and electricity came into effect in April 2001. Part of the receipts is recycled to
through a 0.3 percentage point cut in employers’ social security contributions. In the Netherlands, about one third of the cut in personal income taxes in 2001 is expected to be financed
through a VAT hike and green taxes.
References:
MENDOZA; E.G., A. RAZIN and L.L. TESAR, “Effective rates in macroeconomics: crosscountry estimates on factor incomes and consumption”, NBER Working Paper Series,
No. 4864. 1994. September
Directory General for Taxation and Customs Union: Inventory of taxes. Luxembourg 1999
Baker&McKenzie: The Effective Tax Burden of companies in the Member States of the EU.
March 2001.
Bundesministerium für Finanzen: Monatsbericht 10/2001. Berlin 2001.
Journad, Isabelle: Tax Systems in European Union Countries. Economics Department Working Papers. No. 301. 2001. Organisation for Economic Co-operation and Development: