Government presents draft tax reform
In January 2004, the Austrian government presented a draft tax reform to come into effect in 2005. It aims to reduce the tax on corporate profits and to relieve employees’ income tax burden. Employers’ organisations support the proposed significant reduction in corporate profits tax, although many employers would have preferred reductions in non-wage labour costs instead. Trade unions state that the planned tax reform will bring too few benefits for employees and none at all for those who already pay no income tax due to extremely low pay.
In early January 2004, the coalition government of the conservative People’s Party (Österreichische Volkspartei, ÖVP) and the populist Freedom Party (Freiheitliche Partei Österreichs, FPÖ) presented a draft for a comprehensive taxation reform. This reform aims to reduce taxes for both employees and companies and, it is planned, should be enacted by parliament by June 2004. According to Karl-Heinz Grasser, the minister of finance, these measures are devised to reduce the overall rate of taxation (paid by employees and employers) from the current 43% of the GDP to 42.3% from 2005, when the reform should come into effect. Despite the planned cut in tax returns for the state, Mr Grasser calculates the 2005 budgetary deficit at no higher than 1.5% of GDP. The total volume of tax relief due to the draft reform is planned to amount to EUR 2 billion and EUR 3 billion per year.
Reductions in company and employees’ income taxes
The cuts in company taxation will focus on the corporate profits tax. According to Mr Grasser, the current corporate profits tax rate of 34% should be reduced to 25%. Interestingly, this planned rate is even lower than that demanded by the organisations representing employers (which recently called for a reduction to 29%). This measure will burden the state’s budget by an estimated EUR 1.2 billion per year. On the other hand, a cut in non-wage labour costs, another long-standing demand of business, has not been taken into consideration by the government, although their level is particularly high in Austria (AT0310202F). Whereas the reduction in the corporate profits tax will affect only about 20% of Austria’s enterprises (ie both the larger joint-stock companies and limited liability corporations), a reduction in non-wage labour costs would have particularly benefited small and medium-sized enterprises (SMEs).
On the employees’ side, the future income tax rules planned by the government provide for a reduction in the number of tax brackets from the current four to three, at a slightly lower level on average. Moreover, from 2005 onwards any gross income below a threshold of EUR 15,770 per year will be exempt from any income tax, which will mean that a total of about 2.5 million employees and retirees will be exempt from income tax. However, this means only a small extension of the group of tax-exempt people, as about 2.2 million employees and retirees are currently exempt from taxes. The overall tax relief resulting from the planned income tax reform amounts to an estimated EUR 1 billion per year.
Both the Chamber of the Economy (Wirtschaftskammer Österreich, WKÖ) and, more emphatically, the Federation of Austrian Industry (Industriellenvereinigung, IV) have supported the general orientation of the tax reform designed by the government. In particular, the planned significant reduction in the corporate profits tax is approved by the employers’ organisations. They argue that such tax reductions will provide almost equal competitive conditions for Austria’s businesses in international comparison, in particular with respect to the new Member States joining the EU in May 2004 (which are close to Austria geographically), which have already introduced very low company tax rates (AT0209201N). Christoph Leitl, the president of WKÖ, stated that by implementing the tax reform the government will substantially contribute to preventing relocations of companies from Austria to the EU acceding and candidate countries and thus secure jobs in the Austrian labour market.
However, significant parts of business, in particular representatives of the numerically dominant SMEs, have criticised the fact that the ÖVP-FPÖ government withdrew its initial plans to relieve Austrian companies from some of the burden of non-wage labour costs. Most SMEs will not benefit from the reduction in the corporate profits tax since they are not subject to it. Even some representatives of large multinational enterprises, such as Helmut Draxler, the well-known chief executive of RHI, Austria’s leading producer of refractory materials, emphasise that they would have preferred reductions in wage-related levies and taxes (from social insurance contributions to municipal rates) to the planned cut in the corporate profits tax. Mr Draxler stated that his company suffers considerable competitive disadvantages resulting from labour costs in Austria which are higher than in all other countries where it operates. Since the company currently does not manage to yield a profit due to internal restructuring, any reduction of profit taxes would be useless for it.
Reactions of organised labour
The Chamber of Labour (Arbeiterkammer, AK) and the Austrian Trade Union Federation (Österreichischer Gewerkschaftsbund, ÖGB) have strongly criticised the planned tax reform. On the one hand, they argue that the planned reductions in income taxes would be too small and exclusive, since many employees and retirees (such as the abovementioned low-income recipients) would not benefit at all from it. Since the reduction in the tax burden for those actually concerned would amount only to EUR 15 to EUR 20 per month on average, this relief would be completely offset by rising fuel and energy taxes as well as higher health insurance contributions, as introduced by the government in 2003. Those 2.2 million people who would not benefit at all from the tax reform (because they are already tax-exempt under the current regulations) will however be fully affected by the increases in overall levies and taxes. For these people, organised labour demands a significant increase in the so-called 'negative tax'- a benefit (currently EUR 110 per year) to be reimbursed by the state.
On the other hand, AK and ÖGB question the appropriateness of large-scale reductions in company taxes in favour exclusively of large corporations. As both a 1999 study by the University of Maastricht and a 2003 study by AK indicate, the de facto corporate profits tax for Austria’s enterprises amounts to only 18% on average (instead of the nominal rate of 34%). This - in comparison with most other EU Member States - very low de facto rate results from a broad range of possibilities for employers to offset investments, depreciations etc. Moreover, AK and ÖGB state that property tax in Austria (a rate of only 0.6% of GDP) is the lowest in the EU. As a consequence of these low effective tax rates, the pressure on labour is becoming fiercer to finance an increasing part of the public welfare system (which is anyhow threatened by severe cutbacks), according to the representatives of organised labour.
In Austria, the share of corporate profits taxation in the country’s total tax revenue decreased from 27% in 1967 to 14% in 2000 and lies below the EU average. Over the same period, the share of income taxes (ie on wages and salaries) increased from 10% to almost 30%. Apparently, the government is willing to continue this development by introducing the 2005 tax reform as drafted, since this aims to further relieve (larger) corporations from their tax burden while the employees’ net tax relief - if any - will be marginal.
The government’s draft tax reform marks a further step in a downward trend in company taxation which can be observed across all industrialised countries. This trend results from the still increasing mobility of capital and the unwillingness of the Austrian government (among others) to terminate the ongoing competition among countries for the lowest company taxes in order not to 'drive companies away'. In the long run, this ruinous competition will result in a higher tax burden for labour (which may pave the way for reducing employees’ honesty as taxpayers) and in a disastrous cross-national competition for the lowest rate of welfare state expenditures, as some economists keep warning.
The Austrian government has argued that the planned reduction of the corporate profits tax would be an effective incentive for companies to keep their operations in Austria instead of moving them to 'low-tax countries'. However, most experts consider this measure an unspecified subsidy to large corporations rather than an effective incentive for company investments as suggested by the government. (Georg Adam, University of Vienna).