Tax reform plans: between employment, incomes and convergence

The Austrian government is committed to tax reform in 1999 but - at the beginning of October 1998 - finds itself at odds with the social partners over how extensive it should be. At the same time, while there is basic agreement that incomes should be taxed less, there is disagreement amongst the social partners over how to compensate for cuts in income tax. European Union tax harmonisation is now an integral part of national-level tax reform plans.

Since the last tax reform in Austria, which took effect from 1994, wage and salary rises have propelled many blue- and white-collar workers (or wage and salary earners respectively) into higher tax brackets. This movement is known in Austria as "cold progression", resulting in a rise from 15.5% to 17.5% of the share of income tax in gross pay. However, the precise amount is unknown and estimates are disputed. There is consensus, though, that these effects should be offset, as they were previously in 1993 and 1988. The reforms are to be agreed in 1999, an election year, to take effect from 1 January 2000. Income tax raised ATS 183 billion in 1998 against ATS 104 billion in 1988.

Reform or adaptation

Economists have been saying that tax changes netting less than ATS 20 billion should not be regarded as a reform. The Federal Ministry of Finance (Bundesministerium für Finanzen, BMF) takes the view that any concessions exceeding ATS 10 billion would result in another austerity budget in 2000 and 2001 because the EU convergence criteria for Economic and Monetary Union (EMU) would still have to be met. "Adventurism" and "populism" were the labels stuck on other suggestions. The BMF calculates that "cold progression" has increased the income tax bill by ATS 7 billion over 1994 and ATS 10 billion over 1989. The 1998 reform of family taxation is going to cost ATS 12 billion per year from 2000 while the National Action Plan on employment (AT9802164F) will cost ATS 10 billion between now and 2002. It is also intended to reduce the budget deficit to between 1.5% and 2% of GDP from the current approximate figure of 2.5%.

The debate is not just about the size of tax relief. It is also about how to compensate for concessions, which is implicitly a debate about changing the system. The social partners diverge most widely on this point. Employers would much rather see spending cuts than a shift of taxation from labour to, say, wealth, profits, productivity or energy. Corporate taxes are lower in Austria than in most other EU countries, and taxes on wealth are the lowest in the OECD. Since the early 1980s, social democrat trade unionists have been proposing the introduction of a tax based on productivity as an alternative to at least a proportion of the current levels of income tax. The desired effects include shifting the tax burden away from smaller companies to larger ones in a hope of freeing the job-generation potential of smaller enterprises. However, economists at the Austrian Institute for Economic Research (Österreichisches Wirtschaftsforschungsinstitut, WIFO), which is governed by the social partners, have been predicting net gains of only 21,000 jobs over the next seven years.

While the productivity tax is contentious, there is also broad agreement that labour is overtaxed. To raise ATS 20 billion by taxing energy, as mooted by the Tax Reform Commission, was rejected by the BMF as "totally unrealistic". Energy could be taxed only following agreement at European level, and this had to be approached with extreme caution. Spending cuts in government administration and in welfare are a standing theme of employer statements and have also found favour in parts of the social democrat caucus in Parliament. Property taxes have also entered briefly into the discussion, but raising them was also rejected by the BMF.

A total reform is being debated but it is certainly not on the cards. "Flat-rate taxation" ideas received much publicity during September 1998. The finance councillors of two provincial governments, both christian democrats, came out in support. This would involve a single-rate income tax of somewhere between 18% and 24% together with generous annual tax concessions for incomes below a certain threshold.

Range of conflicting demands

The Austrian Trade Union Federation (Österreichischer Gewerkschaftsbund, ÖGB) wants a tax reform taking effect on 1 January 2000 and resulting in gains of ATS 20 billion for employees. The result should be a relief of ATS 5,000 per year for all incomes below ATS 42,000 gross per month, that is, for 90% of wage and salary earners. The ÖGB has been suggesting that the tax reform could be financed in part by making sure that taxes due were actually paid. Enterprises currently owe the government about ATS 28.7 billion. The ÖGB has also been a strong force in making sure the tax reform was not postponed until after the 1999 elections.

The Austrian Wage and Salary Earners' Association (Österreichischer Arbeiter- und Angestelltenbund, ÖAAB), the labour organisation of the christian democrat Austrian People's Party (Österreichische Volkspartei, ÖVP), itself the junior partner in the coalition government, has been demanding tax reductions of ATS 15 billion on wages.

The Austrian Chamber of the Economy (Wirtschaftskammer Österreich, WKÖ) has been demanding concessions to business amounting to ATS 3.5 billion.

European harmonisation

The Austrian Presidency of the European Union (July-December 1998) has from the beginning pursued tax harmonisation within the EU. It is felt that the options for reform in Austria are limited by tax levels in other EU countries. The aim is to create a "level playing field" for competition in the EU in the interests of the internal market. Value Added Tax, capital gains tax and the taxation of energy and of business all show wide disparities between the 15 Member States and are prime candidates for harmonisation. Austria regards itself as the only country in the EU not offering tax breaks of one kind or another in a bid to attract investment. Currently a list of trade-distorting taxation in the EU is being drawn up for a meeting of the Economic and Financial Affairs Council of Ministers on 1 December 1998.

For the time being, finance ministers decided at an informal meeting in Vienna on 26 and 27 September 1998 to leave corporate taxes in national hands, but to harmonise permissible tax breaks by 30 June 1999. Capital gains tax is also to be harmonised by then, and minimum energy taxes are to be agreed. Material was presented showing a correlation between the taxation of labour and the rate of unemployment. At a weighted average of almost 43%, taxes on labour in the EU are much higher than in the USA (27.4%) and Japan (27.7%).

Commentary

The social partners so far have avoided direct conflict over the tax reform issue. At the same time they keep issuing statements implicitly contradicting the other side or pitching their demands against those of the others. The point of contention is less the principle of reducing income tax itself but rather how to compensate for reductions in the short and long run. The trade unions favour taxing corporations, wealth and productivity none of which the employers would willingly concede. The trade unions have held back in condemning spending cuts but they are clearly not in favour. They believe this will hurt earners of low and medium incomes and their families. Cutting administrative expenses is unpopular with the Civil Service Trade Union (Gewerkschaft Öffentlicher Dienst, GÖD) and the Local Authority Employees' Trade Union (Gewerkschaft der Gemeindebediensteten, GdG) which together make up more than a quarter of all trade union members in Austria. Spending cuts that might reduce expenditure on infrastructure projects are unpopular with most other trade unions. (August Gächter, IHS)