Reform reduces income tax

Contrary to original pronouncements and to social partner demands, the Austrian government has agreed on a package of tax reductions that arguably helps little, if at all, in bolstering employment and competitiveness. Instead the package, agreed in March 1999, aims to prop up domestic demand. However, attempts to reform the system will continue into 2000.

After some uncertainty, on 23 March 1999 the Austrian government managed to agree a package of tax reductions. Contrary to original pronouncements and social partner demands (AT9809102F), the package of tax reductions seems to be aimed more at supporting domestic demand than at bolstering employment and competitiveness.

The total amount of tax cuts involved is ATS 32.5 billion, or about 4.5% of the current federal budget income (of which roughly one-third is income tax). Of this figure, ATS 12 billion was agreed in January 1999 as a family benefit package, yielding an annual ATS 6,000 in tax concessions and family support per child. This measure was triggered by the relatively rapid decline in the birth rate in the 1990s. Now a further ATS 17 billion has been allocated to finance a reduction in income tax, of which ATS 11 billion benefits people with gross incomes (including one 12th of the two extra months' pay which employees receive as annual bonuses) below ATS 23,000 per month. ATS 4 billion goes to monthly incomes between ATS 23,000 and ATS 47,000. A novelty is a negative income tax for gross incomes below ATS 14,000, which is the level of the trade unions' long-standing minimum income goal. Those earning such incomes will receive ATS 1,500 per year. The changes mean that people with incomes of ATS 15,000 per month will save 26.4% of one month's income each year. The savings decline to 13.8% at ATS 29,000 per month, and rise again thereafter to peak at 14.8% for those with a monthly income of ATS 47,000. All in all, the government says, the average family will gain between ATS 1,000 and ATS 2,000 per month in disposable income.

A further ATS 3.5 billion of tax concessions will be spent on transfers of small and medium-sized enterprises to new owners, support for new entrepreneurs, pension provisions, farmers and further education and training.

All parts of the tax reform will take effect in 2000, provided that parliament passes them in May 1999. It has also been agreed definitely to hold general elections on 3 October 1999, and after these elections further tax reforms will be negotiated between the government, provinces and communities. It is on this round of negotiations that the social partners now pin their hopes. This is because so far their main demand, a reduction in total labour costs (in a bid to bolster employment and competitiveness), has not been met. Neither were any measures included to strengthen capital formation in existing enterprises. Forecasters expect the tax concessions to prop up domestic demand and economic growth in 2000. The European Commission has been critical of the extent of the reform as it fears that Austria may find it harder to meet the EMU convergence criteria.

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