In September 2000, the Luxembourg government announced a tax reform that will substantially reduce the tax paid by households from 1 January 2001. As a result, Luxembourg will, it is claimed, have the EU's lowest maximum rate of income tax from 2002 onwards. The trade unions have criticised the measures on the grounds that they will have no impact on the purchasing power of low-income households that pay no tax at all.
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In September 2000, the Luxembourg government announced a tax reform that will substantially reduce the tax paid by households from 1 January 2001. As a result, Luxembourg will, it is claimed, have the EU's lowest maximum rate of income tax from 2002 onwards. The trade unions have criticised the measures on the grounds that they will have no impact on the purchasing power of low-income households that pay no tax at all.
On 1 September 2000, the Luxembourg Prime Minister, Jean-Claude Juncker, announced a tax reform that will come into force on 1 January 2001. He said that it would not be a minor adjustment, but a genuine reform that incorporates a substantial cut in income tax for individuals. Mr Juncker stressed that the cut in income tax as a percentage of household incomes will range from 7.78% to 100%: these reductions should boost Luxembourg's competitiveness in relation to other Member States of the European Union
In the light of reforms that have been recently introduced in Germany and France, and given impending reforms, particularly in Belgium and Portugal, the Luxembourg reform will come into effect a year earlier that originally timetabled. The government believes that the new measures will allow the fruits of economic growth to be shared "adequately".
The measures announced affect only natural persons. Enterprises will have to wait until 2002 before their tax burden falls: their effective tax rate will then fall from its current average of 37.5% to 30%.
The tax reform, including these reductions, has not been presented as a "gift", but as the result of policy pursued by two governments (the present one and its predecessor), and the budgetary policy that has been pursued since the early 1990s. The Prime Minister also emphasised the balanced nature of the various measures, saying that there is no discrimination between the different kinds of tax. He also said that the government will introduce "supporting measures" including heating allowances, ranging from LUF 16,000 to LUF 32,000, for low-income households.
The terms of the tax reform
The reform will cost LUF 25.5 billion, and involves the following elements.
Increase in the minimum tax threshold
The minimum tax threshold, that is to say the annual floor at which taxation commence, will rise from LUF 270,000 to LUF 390,000 for Class 1 taxpayers (unmarried people). For Class 1a and 2 taxpayers (married people and unmarried people with a child), the threshold will rise from LUF 540,000 to LUF 780,000. The tax threshold thus rises by 44%.
A more progressive scheme
Another new feature is a decrease in the number of income tax bands, and a harmonisation of the breadth of the bands used: from 1 January 2001, there will be only 14 bands of LUF 69,000 each. According to the Prime Minister, these measures will promote a more "progressive" scheme.
Reduction in tax levels
The taxation rates applied to the various tax bands will be reduced uniformly, being cut by 2 percentage points compared with current rates from 2001, and by 4 points from 2002. The current maximum rate of 46% will be reduced to 42% in 2001, and to 38% in 2002. The maximum rate will apply to annual income over LUF 1,356,000 in Class 1, and LUF 2,712,000 F in Classes 1a and 2.
According to the Prime Minister, from 2002 onwards Luxembourg should have the lowest maximum income tax rate in the EU.
Other issues
A careful study will be made of other possible measures (eg taxation on the basis of estimated income and tax deductions), and any adjustments will be made after 2002.
The cut in tax receipts arising from the reform is estimated at LUF 10 billion for the 2001 tax year, and LUF 15.5 billion for the 2002 tax year.
Given that there is likely to be an increase of about 2.5% in the statutory minimum wage from 1 January 2001, and that family allowances will also be adjusted, employees paid at the rate of the minimum wage will probably receive a net increase of 4.7% in 2001 and 5.2% in 2002.
Reaction of the trade unions
The Luxembourg Confederation of Independent Trade Unions (Onofhängege Gewerkschafts-Bond Lëtzebuerg, OGB-L) is concerned that tax reductions for private individuals are not accompanied by measures that make it possible to distribute the fruits of economic growth fairly. It argues that fiscal policy should not act as a tool for replacing pay or pensions policy. OGB-L also believes that it would be easy to reduce state revenue by further billions of LUF, as funds are well topped up and the country is currently experiencing an economic boom. Furthermore, for OGB-L there is a need to ask serious questions about the purchasing power of households: this is currently under strain as a result of increased contributions to cover the deficit in sickness funds, higher fuel prices, and accumulated delays in the payment of social benefits.
According to the Luxembourg Confederation of Christian Trade Unions (Lëtzebuerger Chrëschtleche Gewerkschafts-Bond, LCGB), the government is not carrying out a "tax reform" but a "tax cut". While acknowledging that the newly announced measures will benefit individuals in the first instance, LCGB believes that "the more tax reforms there are, the fewer people benefit from them". In particular, this union criticises the fact the new measures will have no impact on the purchasing power of people who already pay no tax and those who pay very little. It believes that the new reform will further widen the gap between rich and poor: "How can one explain to people on low incomes that the government is preparing to present a gift worth LUF 25 billion and that they will not benefit from it?" According to LCGB, Luxembourg is rapidly becoming a two-track society, and that about 100,000 people pay no tax at all. It calls on the government to adopt a "new way of looking at things which will produce an instrument that will in turn ensure that the reforms have an impact on everybody". The "supporting measures" announced by the government (eg the heating allowance) will, says LCGB, be neither sufficient nor satisfactory as the price of gas and/or electricity may well go up as well in the next few months.
Commentary
Tax reforms produce strong reactions in all countries. When taxation falls, it makes sense that the only people to benefit are those who pay tax, unless there is a move towards the introduction of "negative tax". (Marc Feyereisen)
Eurofound recommends citing this publication in the following way.
Eurofound (2000), Tax cuts announced, article.
