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BackA connection between tax rate and economic growth cannot be established. This is the result of a new study under the heading "Do higher tax ratios result in lower economic growth?" which AK Vienna presented this week in Brussels. The results of the analysis were supported by Univ. Prof. Brigitte Unger and Gerhard Huemer, Director of UEAPME, European Association of Craft, Small and Medium-sized Enterprises. The representative of the Commission, Jean-Pierre de Laet, also acknowledge the results of the study, but sees - even if differentiated - an influence of the tax ratio on economic growth.
Otto Farny, Vanessa Mühlböck: a connection between tax ratio and economic growth cannot be established
In his opening comments, Otto Farny, Head of the Tax Policy Department, Chamber of Labour, Vienna explained the reason for preparing the study: several speakers voiced the opinion during a discussion at the Forum Alpbach it would be a nature of law that a higher tax rate would reduce economic growth. Hence, the Leviathan, the state, is represented as an authority, which would put a break on growth (in contrast to private enterprises).
Vanessa Mühlböck, tax expert at AK Vienna, showed the results of the calculations, which were used to analyse OECD data from 1970 to 2008. What was remarkable, according to Mühlböck, was that the tax ratios calculated by the OECD sometimes significantly deviated from the rates ascertained by the AK study. The reason for this would clearly lie in the fact that the OECD would not take compulsory contributions, for example for pensions, into account if these were administered privately. The opposite was true if a pension system was publically organised. In Switzerland, the tax ratio according to the OECD would only be 29.3 percent, whilst in reality, taking the compulsory contributions for the private pension system into account, it would amount to 38.2 percent. In order to be able to clarify a possible connection between tax ratio and economic growth, the authors of the study carried out a regression analysis. However, the results of the analysis had been insignificant; that means that a negative influence of the tax ratio on economic growth cannot be established. But it was also a significant conclusion of the study, that economic growth would also depend on how public funds were used.
Commission representative De Laet would welcome pro-growth tax reforms
In his opening words, the representative of the European Commission, Jean-Pierre De Laet, commented how topical taxations issues would be for all Member States in view of the budget deficits caused by the crisis. Trying to consolidate budgets by restructuring the revenue side alone, would be unrealistic, said De Laet.
He also touched on the question, what kind of an impact any lowering or increasing of the tax rate could theoretically and empirically have on economic growth; however, he noted subsequently that the issue was less about tax ratios than about the quality of an overall tax system, citing a ranking of "best taxes" for growth and employment. In first place he named wealth taxes, followed by consumer taxes, income taxes and corporate taxes.
In this context, he also mentioned the Europa 2020 Strategy, which emphasised the necessity of pro-growth tax systems. In his opinion, pro-growth tax reforms in the Member States could also take fairness targets into account.
Univ. Prof. Unger: study is too cautious - tax rates could also have a positive impact on the economic performance
The economist Brigitte Unger described the study of AK Wien as being too cautious, maybe even defensive. Taking the central result of the study, one could have gone even further and prove that actually higher tax ratios do not put growth at risk but have a positive impact on the economic performance.
For Unger, the study also produces the result that tax rates are not just a technical factor, but that they also provide information on the distribution in an economy. The problem would be, that different countries had different opinions as to what private and public goods are or should be.
Apart from that, she criticised GDP growth rates as reference value for the influence of tax ratios. It had to be coordinated, which growth would be measured, said Unger. She talked among others of welfare and happiness growth which could replace GDP growth.
Continuing along the same lines, she concluded that decisions on tax ratios or the quality of tax systems could not be made by econometric calculations concerning the respective influence on growth. This was a political issue, which would focus on the question how much inequality we are prepared to accept.
Huemer: falling tax ratios are unrealistic for the coming years
Gerhard Huemer, Director of UEAPME, European Association of Craft, Small and Medium-sized Enterprises UEAPME, said in his contribution that he would welcome the study carried out by AK. The study would show that not the level of taxation was the decisive criterion. From the point of view of UEAPME it would be far more important how the tax revenue was used. The efficiency of public administration and public services was an important factor, said Huemer, who in this context came out in favour of privatising services of general economic interest, however with clear governmental regulation. In general, one had to note that work was taxed too high. The challenge for the future would therefore be the shifting of taxation, for example energy taxation. In general, the expectation of falling tax ratios would be unrealistic for the coming years. From the point of view of small and medium-sized enterprises not the tax race would be the greatest problem, said Huemer, but the existence of 27 different tax systems in the Member States, which would burden SMEs with high costs. The introduction of a uniform Europe-wide tax base would therefore be a first important step.
One of the issues addressed during the following audience discussion, was the current tax race. The representative of the Commission De Laet explained that the Commission would fight against damaging tax competition. However, no political consensus had been reached to date to regulate tax competition through harmonisations. Univ. Prof. Unger commented on this question, that the threat of enterprises to relocate had been sufficient to achieve a tax reduction. But in reality, the mobility of companies would be limited as well trained workers also demand a good public infrastructure, which would be difficult to find in tax havens, said Unger in her closing comment.
Further information:
Study "Do higher taxes result in lower economic growth?“
Presentation by Jean-Pierre De Laet, Commission
In his opening comments, Otto Farny, Head of the Tax Policy Department, Chamber of Labour, Vienna explained the reason for preparing the study: several speakers voiced the opinion during a discussion at the Forum Alpbach it would be a nature of law that a higher tax rate would reduce economic growth. Hence, the Leviathan, the state, is represented as an authority, which would put a break on growth (in contrast to private enterprises).
Vanessa Mühlböck, tax expert at AK Vienna, showed the results of the calculations, which were used to analyse OECD data from 1970 to 2008. What was remarkable, according to Mühlböck, was that the tax ratios calculated by the OECD sometimes significantly deviated from the rates ascertained by the AK study. The reason for this would clearly lie in the fact that the OECD would not take compulsory contributions, for example for pensions, into account if these were administered privately. The opposite was true if a pension system was publically organised. In Switzerland, the tax ratio according to the OECD would only be 29.3 percent, whilst in reality, taking the compulsory contributions for the private pension system into account, it would amount to 38.2 percent. In order to be able to clarify a possible connection between tax ratio and economic growth, the authors of the study carried out a regression analysis. However, the results of the analysis had been insignificant; that means that a negative influence of the tax ratio on economic growth cannot be established. But it was also a significant conclusion of the study, that economic growth would also depend on how public funds were used.
Commission representative De Laet would welcome pro-growth tax reforms
In his opening words, the representative of the European Commission, Jean-Pierre De Laet, commented how topical taxations issues would be for all Member States in view of the budget deficits caused by the crisis. Trying to consolidate budgets by restructuring the revenue side alone, would be unrealistic, said De Laet.
He also touched on the question, what kind of an impact any lowering or increasing of the tax rate could theoretically and empirically have on economic growth; however, he noted subsequently that the issue was less about tax ratios than about the quality of an overall tax system, citing a ranking of "best taxes" for growth and employment. In first place he named wealth taxes, followed by consumer taxes, income taxes and corporate taxes.
In this context, he also mentioned the Europa 2020 Strategy, which emphasised the necessity of pro-growth tax systems. In his opinion, pro-growth tax reforms in the Member States could also take fairness targets into account.
Univ. Prof. Unger: study is too cautious - tax rates could also have a positive impact on the economic performance
The economist Brigitte Unger described the study of AK Wien as being too cautious, maybe even defensive. Taking the central result of the study, one could have gone even further and prove that actually higher tax ratios do not put growth at risk but have a positive impact on the economic performance.
For Unger, the study also produces the result that tax rates are not just a technical factor, but that they also provide information on the distribution in an economy. The problem would be, that different countries had different opinions as to what private and public goods are or should be.
Apart from that, she criticised GDP growth rates as reference value for the influence of tax ratios. It had to be coordinated, which growth would be measured, said Unger. She talked among others of welfare and happiness growth which could replace GDP growth.
Continuing along the same lines, she concluded that decisions on tax ratios or the quality of tax systems could not be made by econometric calculations concerning the respective influence on growth. This was a political issue, which would focus on the question how much inequality we are prepared to accept.
Huemer: falling tax ratios are unrealistic for the coming years
Gerhard Huemer, Director of UEAPME, European Association of Craft, Small and Medium-sized Enterprises UEAPME, said in his contribution that he would welcome the study carried out by AK. The study would show that not the level of taxation was the decisive criterion. From the point of view of UEAPME it would be far more important how the tax revenue was used. The efficiency of public administration and public services was an important factor, said Huemer, who in this context came out in favour of privatising services of general economic interest, however with clear governmental regulation. In general, one had to note that work was taxed too high. The challenge for the future would therefore be the shifting of taxation, for example energy taxation. In general, the expectation of falling tax ratios would be unrealistic for the coming years. From the point of view of small and medium-sized enterprises not the tax race would be the greatest problem, said Huemer, but the existence of 27 different tax systems in the Member States, which would burden SMEs with high costs. The introduction of a uniform Europe-wide tax base would therefore be a first important step.
One of the issues addressed during the following audience discussion, was the current tax race. The representative of the Commission De Laet explained that the Commission would fight against damaging tax competition. However, no political consensus had been reached to date to regulate tax competition through harmonisations. Univ. Prof. Unger commented on this question, that the threat of enterprises to relocate had been sufficient to achieve a tax reduction. But in reality, the mobility of companies would be limited as well trained workers also demand a good public infrastructure, which would be difficult to find in tax havens, said Unger in her closing comment.
Further information:
Study "Do higher taxes result in lower economic growth?“
Presentation by Jean-Pierre De Laet, Commission