TAXES

Taxation policies in Finland are well-balanced and perform effectively. Adjustments in recent years have made the taxation system less complex and more transparent and at the same time, the tax burden of wage earners and pensioners has been diminishing. While demand for vertical equity is fully satisfied, the same is less true of horizontal equity. By and large, taxation policies are competitive and generate sufficient revenues. As evident also from the low degree of tax evasion as compared to many other countries, taxation policies are approved by the public, which largely regards taxation as a necessary means for securing the continued health of the country’s welfare state.

Taxation policy has successfully continued to promote competitiveness and generation of sufficient public revenues. Regarding equity, governments have followed a policy of equal treatment of tax types, including income earned outside New Zealand but at relatively low rates. Although in 2009 rates for the lowest and the highest income groups fell again, the new National-led government has considerably reduced rates across the board (coming into effect in October 2010) so that tax rates will be lower than in Australia and the United Kingdom, thus reducing the pressure of economic emigration.

Norway imposes a comparatively heavy tax burden on income and consumption. Corporate taxation is in contrast moderate when compared to other countries. The tax code aims to be equitable in the taxation of different types of capital, except that residential capital is taxed at a significantly low rate. In general the tax code is simple and equitable, tax collection is effective, the income tax is moderately progressive and tax compliance is high.
A large share of the tax revenues is spent on personal transfers in the context of the welfare state, which contribute to making Norway a low-inequality society. The government also spends significant resources on infrastructure and the provision of public goods. However, expenditure on infrastructure is characterized by a strong (and arguably excessive) emphasis on remote regions. Central areas such as around the major cities of Oslo and Bergen are allowed to lag comparatively behind. The railway system, including essential services for daily commuting, is dysfunctional, in perpetual crisis and falling into decline.

Swedish tax policy is highly contested – in the political arena in Sweden as well as in the scientific literature. Beyond diverging evaluations, it seems fair to state that by and large the Swedish tax system meets the goals of maintaining equity, competitiveness and sufficient public revenues. It should be noted that total tax revenue as a percentage of GDP is highest in Sweden (and Denmark) compared to other OECD countries.
The current center-right government introduced an earned-income tax credit scheme. Since its time in office, three major tax cuts have been implemented. The redistributive effects of the tax cuts seem to be a growing gap between rich and poor. A study presented by the Ministry of Finance in April 2010 suggests that people with high incomes have benefited more from tax cuts than people with moderate income and that men have gained more than women. Thus, the equity of the tax system appears to have been weakened by the reforms of the center-right government.
There is currently a budget deficit in the Swedish economy. The opposition parties of the left criticize the government for financing tax cuts and generating a budget deficit, thereby threatening the goal of sound public finances. It is extremely difficult to assess to what extent the budget deficit is related to the financial crisis or whether it is on account of tax cuts. But it seems to be the case that the financial crisis is a major explanation. That does not change the fact that tax cuts are financed by international borrowing and that the balance of public budgets is threatened (albeit to a lesser extent than in most other European countries). It remains to be seen if the current government can combine tax cuts in times of economic turmoil with increasing tasks of the welfare state while maintaining the goal of sound public finances.
Corporate taxation rates, which are linked more directly to competitiveness and business innovation, rank clearly below the average of all OECD countries (and are among the lowest in Western Europe). The tax system is frequently criticized by the business community for being bureaucratic and insensitive to business needs, thereby constituting a disincentive to start new businesses.
With the partial exception of the current financial crisis, the tax system delivers sufficient resources to the public sector. Or, more correctly, the public sector adjusts its services to the resources made available through taxes. If the measures of the center-right government to deregulate the framework for start-up business are effective, remains to be seen.

The Swiss tax rate is significantly below the OECD average and tax rates, particularly for business, are moderate. Taxation policies are competitive and generate sufficient public revenues. As a lean state with relatively low levels of public sector employment, the federal and cantonal states have less need for high tax revenue than do more ambitious states. Nonetheless, it is important to note that due to the principle of federalism, tax rates can differ substantially between regions, as individual cantons and local communities have the power to set regional tax levels.

Denmark’s large, expansive welfare state implies a high tax burden. The tax burden relative to GDP is close to 50% and therefore Denmark ranks at the top of welfare spenders among OECD countries. The tax structure in Denmark differs from most countries by having direct income and indirect (VAT) taxation as the predominant taxes, while social security contributions play a modest role.
Large and small tax reforms (1987, 1994, 1998, 2004 and 2009) have been implemented over the years following an international trend of broadening tax bases and reducing marginal tax rates. The latter has in particular been important for labor income taxation. Decreasing income tax rates have, to a great extent, been financed by broadening the tax base, especially by reducing the taxable value of negative capital income (the majority of house owners have negative capital income because of mortgage interest payments) from 48% to 73% in 1986 to approximately 33% in 2010. In 2004 an earned income tax was introduced to strengthen work incentives. Environmental tax has also been increasingly used.
An important issue in policy design is tax competition. This has led to reduction of some excise taxes to reduce “border” trade. Corporate tax rates have also been reduced from 50% in 1986 to currently 25%, although the tax base has been broadened.
In 2009 a new tax reform was approved, which includes a further reduction in the top marginal tax rate (from 63% to 56%), but more importantly, the income limit for which to top tax rate applies was reduced. This implies a significant drop (350,000 persons) in the number of taxpayers who pay the top marginal tax rate. The changes were financed by broadening the tax base, via a reduction in the tax value of deductibles, and further increases in environmental taxes.

Before the collapse in 2008, tax policy was regressive, explicitly designed to favor high-income earners. In the years before the collapse, the tax burden on higher-income companies and individuals was lightened and made heavier for lower-income groups. Corporate income taxes were lowered from 18% to 15% in the spring of 2008. Statistics Iceland reports that the Gini index of inequality and the 20/20 ratio (the ratio of the incomes of the richest fifth of the population to that of the poorest fifth) increased more in Iceland than in other European countries from 2003 to 2006. Indeed, this description applies to the broader period from 1993 to 2008, after which the crash produced a sudden reduction in inequality as capital gains collapsed. Economic history shows that increased inequality is often a precursor of financial crises.
Working in a totally different environment today, the post-crash government has plans to increase the corporate income tax rate. In 2009, the government introduced a new three-bracket tax system for individuals, which took effect in 2010. Taxes for low-income earners have been lowered, while taxes for others have been increased. The government has also increased the tax on capital gains from 10% to 15%. This tax policy seems unlikely to affect competitiveness adversely. Even though the capital gains tax is now higher then before, the corporate tax remains at the same level as in 2008. These changes are intended to reverse the trend toward increasing inequality, bringing Iceland closer to neighboring countries.
Due to the exceedingly tight fiscal position of the government, tax policy is under constant review. In mid-2010, the IMF presented a report suggesting, at the government’s invitation, a variety of progressive and efficiency-enhancing ways by which public revenue could be increased by up to 2% of GDP. It remains to be seen whether the government will choose to raise taxes further along the lines suggested by the IMF, or whether it will stick to its earlier intention to cut public spending drastically. The government has committed itself to increasing total taxes from 38% of GDP in 2009 to 44% in 2014, and to reducing government expenditure from 53% to 41% of GDP over the same period, a tall order.

Two laws of December 19, 2008 increased the attractiveness of Luxembourg: capital duty was abolished from January 1, 2009 and the corporate tax rate was further reduced. “Paying Taxes 2010,” a study by PricewaterhouseCoopers and the World Bank Group, measures the ease of paying taxes across 183 economies worldwide, by assessing both the cost of taxes and the administrative burden of tax compliance. Luxembourg ranks at 15 in the list. The total tax rate as a percentage of commercial profits is 20.9%, far below that of other European countries.
Since 2001, the distribution of the tax burden between households and business changed much to the disadvantage of households, whose share increased from 56% in 2001 to 64% in 2009.
This is nevertheless accepted, because the general tax burden for private income is relatively low. (Income tax rates are progressive with a limit at 38%, but due to significant reduction, the tax burden is low overall. For instance, a couple with two children and an income of +/- €35,000 pays no tax; the fortune tax was abolished in 2006; savings are taxed at a reduced flat rate of 10%; premiums paid into extra-legal pension funds are counterbalanced by tax relief measures; and VAT on the acquisition of real estate is greatly reduced.)
Two innovative measures in recent years deserve to be mentioned. First, the tax benefits of married couples have been expanded to hetero- and homosexual couples living under a “civil solidarity pact” partnership (Pacte civil de solidarité, PACS). Second, child allowance on income tax has been replaced by a tax bonus, so that parents who pay little or no taxes at all can profit from this advantage.
So the criteria of sufficient revenues are not met at an absolute level, but relatively well as compared to other states. The level of competitiveness however is controversial among experts.

Taxation policy in the Netherlands addresses the trade-off between equity and competitiveness reasonably well. There is horizontal equity in that the taxes levied do not discriminate between different societal groups or enterprises. The Netherlands has a progressive system of income taxation. The fact that taxes are dependent on income contributes to vertical equity. In general, income tax rates range between 30% and 52%. There are some tax benefits for high-income earners, such as favorable arrangements on mortgage interest. Personal income taxes are also levied on businesses that are not subject to the corporate tax system. The tax system includes only a limited set of deductibles, of which the one for interest payments on mortgages is most substantial. Furthermore, there are a number of subsidies that depend on taxable income. The most substantial are subsidies for child care, health insurance and renting a house. There is a separate tax for wealth.
Competitiveness may be harmed by the fact that the total of taxes and premiums on mandatory social insurance is relatively high when compared to international standards. The relatively low rates of taxation cannot offset the effect of payments into the social insurance system. In 2010, the Dutch government introduced several measures to help SMEs overcome shortages in working capital and liquidity problems due to increased payment delays on receivables, an increase in inventories and an increase in failures to meet financial obligations, insolvencies and bankruptcies. The Dutch government introduced measures to help SMEs by making, for example, tax rules more entrepreneur-friendly and by expanding a guarantee scheme (the so-called BBMKB scheme). Also, the maximum guarantee of the Guarantee Business Financing scheme was increased from €50 million to €150 million.
Insofar as state-levied taxes cover most government expenses, it can be said that taxation, until the economic crisis, generated sufficient income. This is not the case anymore, since additional measures will be necessary to provide national government with sufficient revenues for its budget.

Slovakia’s tax system was overhauled in 2004. It features a uniform (“flat”) tax rate of 19% for personal income, corporate income and consumption (VAT) respectively. Although the governing coalition parties had initially criticized the new system for its liberal bias and unjust effects, the Fico government left the system largely untouched and confined itself to minor changes, because the system has received much international acclaim and has turned out be quite popular in Slovakia as well. At the same time, the government failed to reduce the ballooning fiscal deficit through its unpopular tax increases, and it did nothing to reduce the high non-wage labor costs incurred by social insurance contributions – which are among the highest in the world.

Tax policy under the New Labour government aimed at fiscal stability, including the use of borrowing exclusively for investment purposes (rather than for current spending) over the economic cycle – the so-called “golden rule” – and locking in the net debt at 40% of GDP. But taxation policy has also been used for achieving goals such as income redistribution, often much more substantively than the public was aware of. The incidence of tax by income deciles is reasonably progressive in terms of vertical equity. Instruments such as tax credits have helped substantially in redistributing income from the top to the bottom quintile.
As economic conditions became more difficult and fiscal policy more lax in the early 2000s, definitions of the economic cycle were adjusted in order to ensure compliance with the golden rule, inviting accusations that the government was fiddling with the numbers for political purposes. Tax loopholes for very wealthy foreigners have also come under criticism.

Although companies complain about tax burdens, internationally comparative data indicate that the tax regime in the UK supports rather than hinders their competitiveness. The financial market crisis triggered a very active tax policy response as part of the government’s mitigation attempts. VAT was cut temporarily to help provide an economic stimulus, while restrictions were imposed for the allowances of high incomes, and a higher rate of income tax of 50% was announced going into effect as of April 2011. A number of other tax increases (alcohol, tobacco, and fuel duties) were also introduced, partially neutralizing the VAT stimulus effect.

In spite of these measures, UK tax policy is struggling to contain the massive government budget deficit that has arisen largely due to increased spending, but also in part because of the sudden decline in tax revenues from the financial sector, which has contributed over £250 billion to government coffers in the form of corporation taxes, income taxes and national insurance contributions since the beginning of the decade. Nevertheless, the UK has a balance between direct and indirect taxation that reconciles competitive and equity objectives, and has generally been able to fund government spending. Tax revenues in 2009 and 2010 fell short of public spending and were affected by the decline in corporate profits. But the higher deficit was a deliberate policy decision. It is too early to say whether the UK system can successfully finance its public spending over the long term. The system does not impose especially high social charges, which has tended to be helpful in boosting employment.

If we consider the changes made to the tax system during the review period alone, then the operation of the system has in fact changed very little. The tax system is broadly successful in achieving goals of competitiveness and sufficient public revenues, but is less successful in achieving equity goals. In recent years, the income tax system has become slightly progressive, and other taxes, such as the GST, are mostly regressive. Tax concessions, such as those granted for capital gains, also tend to favor wealthier persons.

In 2008, the newly elected Labor government established a committee, chaired by Secretary to the Treasury Ken Henry, ”to examine Australia’s tax and transfer system, including state taxes, and make recommendations to position Australia to deal with the demographic, social, economic and environmental challenges of the 21st century.” Described as the most fundamental review of the tax system to be undertaken in Australia in half a century, the final report was delivered to the government in December 2009 and made public, along with the government’s response, on May 2, 2010. The committee made 138 recommendations, many of them involving substantial changes to the tax and transfer system. At the time of this writing, the government has committed to adopting only a small number of these recommendations, but it has not ruled out adopting more in future. Recommendations adopted include the replacement of mining royalties (levied at a fixed rate per unit of product extracted) with an additional 40% tax on profits in excess of the long-term government bond rate; lowering the company tax rate from 30% to 28%; more generous depreciation allowances for small businesses; and simplifying income tax reporting requirements for individual taxpayers.

The government has indicated that further reforms to the tax and transfer system are planned for its second term, should it be re-elected, describing the reforms already adopted as the first steps in a 10-year agenda. The full agenda has not been articulated, but the stated guiding principles are promoting economic prosperity and ensuring this prosperity is fairly distributed.

The most important recent change in tax policy at the federal level in Canada was the cut in the Goods and Services Tax (GST) by two percentage points, from 7% to 5%. This measure contributed to the structural deficit, although it provided a modicum of stimulus to a demand-deficient economy. The decision by the federal government to reduce corporate tax rates and to subsidize the introduction of the Harmonized Sales Tax (HST) in Ontario and British Columbia contributed to a decline in the marginal effective tax rate on investment. This has improved Canada’s competitiveness. Two recent tax measures have had positive equity implications. The first was the introduction of the Working Income Tax Benefit (WITB) for low-income wage-earners. The second was the decision not to reduce the GST tax credit for low-income persons despite the overall reduction in the GST rate.

Chile has a moderately complex tax system. The corporate income tax rate, at 17% , is less than half of the highest marginal personal income tax rate. This implies that high-income wage earners have a high tax burden compared to low-income earners in general, and to high-income non-wage earners in particular. Few exemptions are applied to corporate and income taxes, reflecting a relatively high level of horizontal equity within each income tax category. High-income non-wage earners can legally avoid high income taxes through incorporation. The value-added tax (VAT) is high and flat, with few exemptions, which argues in favor of allocative efficiency and horizontal equity. Certainly there is tax avoidance in Chile, probably at higher levels than the OECD average, due to informality. Yet efforts to ensure tax compliance have been generally successful. Moreover, Chile has probably one of the most efficient computer-based tax payment systems in the world.

The government’s tax and non-tax revenue is sufficient to pay for government expenditure, as it is embedded within a fiscal rule that has allowed a reduction of net government debt to negative levels over the last two decades.

Taxation of labor is very efficient in comparison to other OECD countries, because most social benefit payments are close to being actuarially fair and are borne by both employers and employees. This implies a low share of free-rider losses that cause unemployment or informality. In general terms, Chile’s tax system adds to the country’s competitive position with respect to world trade and investment flows.

However, it is a very different question to ask whether Chile’s tax system and actual revenue collection is sufficient to finance a welfare state equivalent to, say, 50% of GDP. Here, the only reasonable way to assess the issue is to ask whether Chile’s ratio of government expenditure-to-GDP, at its current level of per capita income, is within the empirical cross-country range suggested by Wagner’s law, which predicts that the develoment of an industrial economy will be accompanied by an increased share of public expenditure in GDP. In fact, this question can be answered positively.

The Korean tax system is fairly effective in generating sufficient public revenues without weakening the competitive position of the national economy. Tax instruments are used to nurture FDI, R&D, and human resources development. Its main weakness, however, is equity.
Compared to other OECD countries, the tax burden in Korea is very low. As of 2009, tax revenue was about 20% of GDP (this rises to 27% after the inclusion of social security contributions). Tax revenue has been growing slowly, and is likely to increase farther in the future, as social security contributions have increased relatively fast since the middle of 1990 and will likely continue to do so.
In comparison with other OECD countries, Korea also has a low tax burden on labor income. The average tax wedge (average income tax plus employee and employer social security contributions minus cash transfers, as a percentage of total labor costs) was below the OECD average for all households in 2009.
As of 2009, there were 14 national taxes and 15 local taxes. Local tax represents about 20% of total tax revenue. Direct tax (personal income taxes (PIT) and corporate income taxes (CIT)) revenue share is about 40%; indirect taxes (especially VAT) are responsible for about 55% of national tax revenues. The share of total taxes accounted for by personal income taxes and social security contributions is the lowest among OECD countries, but Korea’s corporate income tax share is among the highest. Distribution of the PIT tax burden in Korea is comparable to that in the United States. CIT payment is fairly concentrated, with about 1,000 companies (0.3% of the total) paying 75% of the country’s total CIT.
Taxes raise revenues adequate to the government’s needs, and do not impede competitiveness. Korea has one of the lowest tax rates in the OECD. Although taxes on business are relatively high compared to personal income taxes, they do not seem to reduce overall competitiveness. The strong reliance on the value added tax gives the tax system an inequitable, regressive nature, and lessens its ability to improve equity.
One of the major reasons for the weak income tax base is relatively high number of self-employed individuals, and the low levels of income tax paid by this group; another is the sizable income-tax deduction for wages and salaries. However, in the last two years, the Lee administration has further weakened the ability of the tax system to achieve equity by reducing progressive income taxes and real-estate taxes paid by the relatively wealthy. Taxes on problematic consumption items such as energy or cigarettes remain relatively low, and the government has so far failed even to discuss an ecological tax reform.

The Czech tax system was overhauled in January 2008. Reforms replaced the previously progressive personal income tax schedule with a single 15% rate levied on an enlarged base. The move to a flat income tax was accompanied by cuts in the statutory corporate income tax rate from 24% in 2007 to 20% in 2009, and an increase in the concessionary VAT rate applied to many goods and services from 5% to 9%. The reforms were largely revenue-neutral. They reduced the tax burden on companies and the better-off, but did little to reduce the high non-wage labor costs associated with large social security contributions (Hrdlicka et al. 2010). For the broad majority of the population, the high overall tax wedge thus remained unchanged. In the wake of the economic crisis, calls from the political right for further cuts in corporate income tax rates grew louder. However, the Fischer government did not agree on tax reform, so no major measures were adopted.

The 2008 reform of corporate taxes lowered the formerly very high effective tax burden faced by German companies to a level more in line with Western European standards. The revenue situation was improved by increasing the relative weight of indirect taxes, especially the value-added tax (increased from 16% to 19% in 2007). Before the crisis, the state’s revenue situation had substantially improved, leading almost to a balanced government budget in the year 2008.
However, several shortcomings remain. Due to high social security contributions, the German tax system puts an exceptionally high burden on average earners, who are confronted with substantial labor-supply disincentives and incentives to shift their work into the shadow economy. Furthermore, the German tax system has remained both highly complex and non-transparent. The business tax and inheritance tax reforms launched by the grand coalition in 2008 and partly revised by the new government in December 2009 certainly had some positive effects for medium-sized businesses. However, they have also led to significant complications in terms of tax law.
Following a decision of the Federal Constitutional Court, the grand coalition issued a tax-relief law focused on individuals, which came into effect in January 2010. It mainly allows for higher tax deductibles for public health insurance and long-term care insurance contributions, and also includes some temporary business tax reductions. Combined with the three economic stimulus packages, these measures were considered necessary to tackle the consequences of the economic crisis. On the other hand, temporary tax relief cannot replace essential reforms to improve the structure of the tax system.
There have also been intensive discussions on the question of raising environmental taxes. Germany has certainly made significant progress in recent years in restraining environmentally harmful behavior. However, in terms of revenues from environmental taxes, Germany still ranks in the lower middle range of OECD countries, with annual revenues of slightly less than 2.5% of GDP.
In addition, the German government has sought to reduce practices such as cross-border shifting of company profits though accounting gimmicks. Overall, German tax policy has been largely consistent in recent years. The promise of tax cuts – prominently offered by the liberal FDP party in the last general election campaign – was unable to be met in the current conditions without risking budgetary sustainability.

The Bajnai government combined the massive fiscal adjustment with a tax reform, partly prepared and announced by its predecessor. This reform aimed primarily at shifting the tax burden from direct to indirect taxes in order to reduce Hungary’s high non-wage labor costs. In July 2009, the standard VAT rate was raised from 20% to 25%. The resulting tax increase was partly compensated by a reduction in social security contributions from 29% to 26%, the introduction of a reduced VAT rate of 18% on some basic foodstuff, and a decline in personal income tax rates from 18% and 36% to 17% und 32%, phased in as of January 2010. Amendments to the corporate income tax, which were enacted in January 2010 only, were more limited. On the one hand, the solidarity tax on corporate income was cancelled. On the other, the standard rate was increased from 16% to 19%.

There is no social consensus in Ireland as to what constitutes an equitable distribution of the burden of taxation across different social groups. This is a recurrent item for discussion between the “social partners.”
Irish tax policies have failed to generate sufficient revenue to provide the level of public goods aspired to by the Irish people and their elected representatives. Indeed, during the current crisis, the structure of Irish taxation has been seen to be inadequate to finance the current level of spending for services such as health in particular, but also education, environmental protection and physical infrastructure. This is due to the collapse of tax revenue since 2007 and the emergence of a budget deficit equal to 12% of GDP, despite emergency increases in income levies, cuts in public service pay and reductions in the provision of public services.
Ireland has long relied on a low corporate tax rate as an instrument to attract foreign direct investment. The philosophy of generating tax revenue from a low tax rate on a large number of firms, rather than a high tax rate on a smaller number of firms, has been vindicated over time and is broadly supported.
The equity of the tax system, especially as it operated during the years of the boom, is now widely questioned. The bursting of the property bubble has led to severe criticism of the plethora of tax breaks (many related to property development) that reduced the tax burden on the very wealthy, who could afford to avail themselves of these advantages. Data from the Revenue Commissioners released in 2009 showed that about one in five of those earning between €250,000 and €500,000 paid less than 5% of their income in taxes in 2007. However, the introduction of a minimum tax rate in 2007 resulted in an increase in the average income tax rate paid by the highest income groups. Local taxes on private houses were abolished in 1978, a measure now seen as increasing the bias of the tax system in favor of the wealthy, but no consensus has emerged as to what form a new tax on property should take.
A Commission on Taxation was established in February 2008. It published its report in 2009, recommending, among many other measures, a broadening of the base of the tax system, the reintroduction of a tax on private residences, the abolition of many special tax relief and allowance provisions, and strict rules concerning the minimum tax payable by high income earners. The 2010 budget removed many of the remaining tax breaks and incentives that served as loopholes favoring the wealthy. However, apart from the imposition of a minor tax on second homes, no progress has yet been made on the introduction of a broad-based tax on private residences.

Tax reform featured prominently in the electoral manifesto of the PO in the 2005 and 2007 campaigns. After taking office, the Tusk government implemented two of its predecessor’s campaign promises, a further reduction in social security contributions and an increase in income tax credits for children (Morawski/ Myck 2008). Further progress with tax reform has been limited because of quarrels within the governing coalition and the economic crisis. In 2009, the Tusk government reduced the personal income tax rates from 19%, 30% and 40% to a respective 18% and 32% percent. But it postponed the introduction of a flat income tax due to fierce opposition by the Polish People’s Party (PSL), the PO’s coalition partner, even though the PO had advocated this very tax in the past. Since the beginning of the economic crisis, Finance Minister Rostowski has warned against premature tax cuts and has touted tax increases, in particular an increase in VAT.

In the last two years, decisions concerning tax policy have been strongly influenced by the economic crisis, with continuous changes overlapping or replacing one other. Arguably, the reform process has not been driven by a consistent underlying logic, but has rather followed an erratic and pendulum-like path.

Emergency stimulus measures were adopted shortly after the elections in May 2008, featuring several tax deductions and benefits, including an income tax rebate of €400 for every taxpayer, rapid refunds associated with investment in a permanent residence, and the elimination of the Property Increment Tax. However, if the priority at the time was to fuel short-term liquidity for families and businesses, curbing the public deficit became the government’s sacrosanct goal just a year later. To that aim, more fundamental changes in the structure of the tax system will be set into motion over 2010 and 2011, designed to raise an extra €11 billion per year. Small and medium-sized companies will profit from a tax cut of 5%, intended to help stimulate the economy. Moreover, the abolition of the €400 tax rebate can in some senses be welcomed: Given its universal application, critics argued from the beginning that it would not ultimately benefit people in actual need. The increases approved for the VAT (from 6% to 8% for the reduced rate, and from 16% to 18% for the general rate) and for taxes on saving accounts (19% for savings up to €6,000, and 21% for sums over that amount) seem much more controversial: The VAT will negatively affect the already diminished rate of private consumption, and consequently might not result in substantial additional revenues. It we take into consideration that 61% of bank account holders have savings under €21,000, small savers are expected to become the big losers in this increased tax on savings.
Although fiscal pressure in Spain remains significantly lower than in Scandinavian welfare economies, Spanish taxation policies do not appropriately discriminate between groups with different economic capacity. And the fiscal reform summarized above seems to reinforce the deficiencies of the system in terms of inequity: It will not be the wealthier sector of the population, but medium- and low-income workers who will be penalized with comparatively higher tax wedges. Finally, measures to tackle tax evasion have to be strengthened.

The Austrian tax system focuses on wage taxes. In 2009, about €21 billion have been raised from wage taxes, compared to €4.1 billion from corporate taxes. Property taxes and other forms of taxation play a quantitatively minor role. In addition, social security contributions play an important role as they make up around one third of overall revenues. This imbalance attracts foreign capital but punishes labor and the individual taxpayer.
The statutory corporate tax rate is slightly below the OECD average. Furthermore, “group taxation,” which allows multinationals to deduct losses incurred by foreign subsidiaries or even participations has led to a significant shortfall in corporate tax income due to the financial crisis.
The financial crisis has sparked discussion over a re-introduction of property taxes and other changes, such as an increase in VAT or the recently implemented increase in petroleum taxes, which was justified in terms of environmental protection policy. Increasing the taxation of labor appears to be generally understood as undesirable. The Austrian tax system suffers from profound imbalances which effectively punish physical persons and labor.

While the Belgian public deficit had been contained for several years – the debt-to-GDP ratio fell from 109% in 1996 to 89% in 2005 – fiscal soundness has lost ground in recent years. The global economic crisis, as with many countries, worsened the trend, and the country’s debt-to-GDP ratio is again reaching 100%. The government took steps to address this and is expecting to return to a 3% deficit by 2012 and a surplus as of 2015 – if economic conditions allow. What’s more, the Belgian external balance is generally positive. Broadly speaking, one should conclude that the country’s taxation policy generates sufficient public revenue.
Regarding equity, the country’s taxation policy performs less well, since Belgium’s tax base is relatively narrow (it primarily focuses on labor income and largely ignores capital income). This implies that two people earning the same income may contemplate exceedingly different effective tax rates, depending on their income source. The same holds, to a lesser extent, for companies. Companies benefit from different exemptions depending on their legal status. These wedges hamper competitiveness. Labor costs are too high and too many firms prefer to offshore or look for tax havens abroad, while many small businesses tend to rely partly on informal (illegal) labor in some sectors (e.g., construction or catering), so as to avoid full taxation on labor.
Yet, if we focus on personal incomes that are actually taxed, direct taxes are fairly progressive and therefore vertically equitable.

Taxes and social contributions amount to 47.3% of French GDP, one of the highest levels within the OECD, but public spending is even higher (52.5% of GDP in 2008). These are the consequences of extraordinarily generous political and budgetary commitments taken without any consideration of the country’s actual fiscal capacity.
To alleviate part of the financial pressure, the central government has en masse transferred public investments to local and regional governments as well as social expenditures without, however, compensating properly for these additional costs. Local governments have chosen to increase taxation sometimes by double-digits; in any case such a jump has been much higher than inflation rates. This factor, combined with a narrow income tax base and a wide range of fiscal niches and exemptions, makes the French fiscal system opaque, confusing and not very equitable. The entire system needs overhaul but the political cost would be such that most governments have preferred a policy of constant and somewhat incoherent adjustments rather than well-thought out reform to span over a number of years. The tax measures of the Fillon government instituted the following principles in 2007: cuts to income, inheritance and wealth taxes; plus a general clause that limits individual tax contributions to 50% of income. Specific measures (reduction of VAT paid by restaurants; tax reductions for individuals pursuing artisan professions) and the scheduled abolishment of the local business tax (which will need financial compensation for local governments) add to the impression that tax policy continues to follow short-term political, or clientelistic, aims.

Generally speaking, Japan has a modern tax system that allows its corporate sector to thrive, and which is reasonably fair. For instance, the tax wedge on labor income is one of the lowest among OECD countries, and thus encourages employment and growth. However, an increasing number of issues dealing with business competitiveness and revenue sufficiency emerged during the reporting period. Several equity issues have also persisted from the past. During the period under review, few concrete steps were taken to correct these deficiencies, despite several calls for a general tax reform, and despite plans to upgrade the social welfare system that appear to make the government’s revenue base less sustainable.
However, it must be acknowledged that the global financial crisis has made it extremely difficult to pass any significant tax increases, or even tax decreases aimed at enhancing equity or improving growth incentives. The 2010 tax reform program proposed by the new DPJ-led government, which passed the upper house in March 2010, concentrates on a number of technical issues for the business community but includes no major structural changes. For instance, tax haven rules are relaxed to allow for easier international supply-chain planning. The DPJ had also pledged during the 2009 electoral campaign to reduce the tax rate for small and medium-sized enterprises (SMEs) from 18% to 11%. However, this raises equity issues and allocative concerns, as many SMEs seem structurally uncompetitive.

During the election campaign, candidate Obama promised to reverse the Bush income tax cuts and reintroduce tax brackets of 36% and 39.6% as well as an increase in the capital gains tax for households with an income of more than $250,000, which would have increased vertical equity. Other proposed measures included reversing the abolition of the estate tax and tax deductions for social security contributions. But political pressures prevented the inclusion of these changes, as the administration wanted to pass the stimulus bill with the support of Republicans. The Obama administration is committed to greater tax equity, but with the Republicans being able to sustain a filibuster, any return to Clinton-era income tax rates is currently unlikely. This constellation blocked any attempts to restore greater equity to the tax system. The Make-Work-Pay tax credit in the stimulus package did help lower income households. The argument has been that it was important to stabilize the economy, before consolidation would have to set in. Tax revenues are clearly not sufficient to ensure that public services are financed in the long term. The gap between public revenues and expenditures remains a major challenge. In the fiscal year 2009, the gap between revenues and outlays is $1.4 trillion or 9.8% of GDP. The focus on the recession has prevented the pursuit of systematic tax reform and fiscal sustainability. The administration and the Congress have temporarily extended the Bush tax cuts during a period of fiscal stimulus and massively reduced the Alternative Minimum Tax, without indicating how to pay for it. What the U.S. system is lacking is an effective consumption or turnover tax such as a value-added-tax on the federal level. Many experts see the introduction of such a tax as inevitable, but there is little political support for it. Hopes of the administration that a cap-and-trade climate change regime would generate additional income have been dashed, as most pending legislation allocates almost all emission allowances for free, and passage of a final bill remains uncertain.

The Italian tax system has been characterized on the one hand by the need to sustain the burden of rising public expenditures, which governments have proved unable to reduce, while continuing to repay very high levels of public debt accumulated over the past decades; and on the other hand by its inability to significantly reduce the very high levels of tax evasion or the size of the black economy. As a result of this situation, levels of fiscal pressure have increased over the years, and the tax burden has become far from equitable. The fiscal pressure is very high on those households or companies that do regularly pay taxes, and is on the contrary very low for all those who want to and can evade taxation (for instance many enterprises, and large shares of independent workers and professionals). This results in significant competitive distortions acting to the advantage of the noncompliant earners.
One of the first measures of the current government was to eliminate a local tax on houses (ICI), but this has not affected the level of fiscal pressure, which has continued to rise. The government was forced to shelve a more significant reform of the tax system, envisioned as part of its incoming program, due to the more pressing concerns associated with the economic crisis and the need to ensure the sustainability of the public debt.
Overall, the system is able to generate sufficient public revenues but does not ensure satisfactory levels of equity and competitiveness. The level of fiscal pressure is not balanced by the quality and effectiveness of the public services provided for citizens and enterprises.

Tax receipts dropped substantially in 2009 with the economic recession. In the period between January and August 2009, overall receipts fell by 9.6%, helping generate the substantial public deficit. In addition, tax policy falls well short of the goal of equity. There continues to be widespread tax avoidance in the realm of personal income tax, especially on the part of self-employed professionals. This places tax burden mostly on employees. At the corporate level too, vertical equity continues to be lacking, with studies indicating that the effective tax rate is often lower for more profitable companies. The insufficient revenue from corporate and personal income taxes leads to a greater dependence on indirect taxation to sustain public expenditure. Indeed, looking at the first eight months of 2009, almost 60% of tax revenue was derived from indirect taxation. Moreover, value-added tax (VAT) revenues were higher than personal income tax and corporate tax receipts combined. While a small reduction in VAT– from the EU’s maximum permissible level of 21% to 20% – took place in July 2008, this was insufficient to alleviate the considerable negative impact of indirect taxation in terms of vertical equity. Moreover, rumors of a return to 21% VAT were strong in late April 2010. In early 2010, in an attempt to control the spiraling budget deficit (see Budgetary Policy below), the government announced a new upper tax bracket of 45% on households earning over €150,000 per year, introduced taxation on stock market gains, and reduced existing tax exemptions. Overall, however, tax policy appears to be reactive to budget needs (and often late in reacting) and has not tackled the crucial tax evasion issue.

Following the full implementation of Law No. 5018 on Public Financial Management and Control in 2006, the scope of the central government budget expanded considerably. As a result, the central government budget became the most important policy tool in Turkey.
Turkey’s tax collecting system does not work well. Turkey collects only 25% of its income through taxes. Aside from Mexico, Turkey has the lowest ratio of tax collection-to-GDP in the OECD.
Turkey’s tax collection system fails to meet considerations either of horizontal or vertical equity. Some 65% of tax revenue accrues from indirect taxes, and Turkey widely uses additional indirect taxes such as the “luxury consumption tax” and the “communication tax.” In Europe, as contrast, direct taxes account for roughly 65% of tax revenue. As a corollary, the poorest fifth of the society in Turkey carries a tax burden twice as high as the wealthiest fifth. In the period under investigation, the government tackled these deeply entrenched issues with an array of strategies.
With the start of the financial crisis, Turkey introduced several changes in tax policies. In November 2008 and March 2009, two tax amnesties were announced, granting penalty-free reporting of previously unreported income and assets, along with exceptionally low taxation rates. Bank remittance was made obligatory for the payment of real estate rents in order to ensure more comprehensive oversight, and a multilayered campaign was started to convince real estate owners to pay the rental tax. As a result of the new tax amnesty law, real and legal persons having funds and other valuable assets abroad as of October 1, 2008, were allowed to bring these assets and funds to Turkey by paying a 2% tax.
Additionally, the government has worked to amend the penal code to allow for the jailing of tax evaders and has intensified the education of tax officers. As a result, tax revenues proportionally increased in 2010 compared to 2009. However, no step has yet been taken to fight the structural distortion of the Turkish tax system mentioned above.

The single greatest weakness of the Mexican economy is the cultural reluctance of most Mexicans to pay taxes. The result is that the public sector is short of the resources necessary to tackle the challenge of social fragmentation effectively. If it were not for Mexico’s oil export income, the country’s position would be even worse. Calderón was able to legislate what looked like a major tax reform in 2007, but at least initially this has not brought about much of an improvement in tax collection. The recession started in 2008, and has made the issue even more difficult. A large part of the problem is that the indirect tax base is relatively narrow, with a large informal economy and many exemptions from VAT. These exemptions encourage corruption, which can involve businesses misstating the sources of their sales in order to make it look as though more turnover is exempt from taxation than is actually the case. Another problem is that the vast majority of taxes are collected by the federal government while states and municipal governments do most of the spending; subnational units’ fiscal autonomy thus remains weak. Admittedly this spending is largely controlled, but it remains the case that state governments have every incentive to lobby the central government for more money rather than seeking to raise more revenues directly. Effective control of public spending has so far prevented the development of macroeconomic imbalances, but over time the demand of a growing population for enhanced health and education spending will put the budget under more pressure. On the competitiveness issue, it can at least be said that non-oil tax revenues are not oppressively high, and that they do not present a barrier to enterprise. Indeed, most scholars of fiscal policy not belonging to the neoliberal school would regard tax rates as unrealistically low.

The tax collection system – like the wider budget management framework – displays endemic problems associated with poor institutional capacity. With respect to taxation, the biggest and most-well known issue in Greece is tax evasion. This is rampant, producing an unfair and inefficient outcome: Every year, wage and salary earners pay (on average and per person) more taxes than any category of the self-employed, including lawyers, physicians, engineers and businessmen. Tax evasion is particularly pronounced among the liberal professions, but also in small and medium-sized enterprises (restaurants, bars, garage, plumbing and other services).
Tax authorities are unable or unwilling to track the exact sources and assess the size of the income of self-employed tax payers. Tax evasion also flourishes because of widespread corruption on the part of tax authorities, and the very slow or very lenient reaction of ministerial authorities in punishing civil servants implicated in cases of corruption. It thus comes as no surprise that the black economy is estimated to amount to about a third of the total economy.
Before 2009, the Simitis and Karamanlis governments attempted to tackle these problems, for instance by requiring various categories of self-employed tax payers to pay taxes on the basis of incomes estimated by the authorities rather than on what had been declared by the citizens themselves. In 2009 – 2010, the Papandreou government extended such measures to other occupational categories (such as taxi drivers and owners of petrol stations). The Papandreou government also imposed additional taxes on real property.
In other words, there is neither vertical nor horizontal equity. Competitiveness is not supported by the taxation system. The final result is very wide discrepancy between public revenues and expenditures. By 2010, issues of poor institutional capacity loomed large as a cause of Greece’s fiscal crisis and its need for foreign loans.