PEMINT-Team Germany, PH Freiburg
Working Package 3: Mapping of Convergence and Divergence
Part 2: Fiscal Systems
Preliminary Remarks
The following short description of the fiscal systems in the relevant PEMINT countries is the second part of the Working Package 3. As well as the mapping of convergence and divergence in the range of the social security systems this summary is conceived as an exclusively descriptive comparison of the different fiscal systems. In each country about thirty or more single taxes exist. So it is impossible to regard every tax in every PEMINT country. So only the quantitatively most important taxes of the single countries are considered in this summary. The exact utility and profit of this summary of the incomplete European integration in terms of the fiscal systems for the PEMINT project still needs to be discussed. This paper just provides a basis that permits a quick overview of the most significant elements of convergence and divergence between the different national fiscal systems.
However, it should be discussed whether the highly aggregated data material is a useful base to start a comparison. Due to the national embedding of the national fiscal systems it is necessary to abstract the collected data. But the question should be kept in mind in how far these aggregated data is relevant and suitable for the analysis and the reflection of the organisation. Furthermore we should take into consideration that the interpretation and the presentation of such aggregated data might be politically motivated. The way of analysis of the data so might be lead by special interests and lobbies. Interpretation and analysis of the data may vary according different cognitive interests.
In general the discussion of the fiscal systems in countries of the European Union seems to be highly important because the significance of taxes in the EU area is comparatively high. The total tax burden in the EU area is much higher than in most other OECD countries. Defined as the tax-to-GDP ratio[1], it was 40% in 1998.
Taxes-to-GDP ratio in the EU and the PEMINT member states 1999
Germany / 37,7UK / 36,6
Netherlands / 40,3
Italy / 43
Portugal / 34,5
Switzerland / 35,1
EU 15 average / 41,2
PEMINT average / 37,9
Especially the nordic countries raise the EU average. So the PEMINT average (no nordic country is a member of the PEMINT project) is more than three percentage points below the EU 15 average. The Dutch and the Italian Tax-to-GDP ratio is significantly above the PEMINT average, the Portugese, Swiss and British ratio below the PEMINT average. The German ratio and the PEMINT average are approximately congruent. The analysis of highly aggregated numbers is only of limited meaning, because there are a lot of detailed features in the single systems that must be considered in order to get an adequate impression of convergence and divergence. So the Taxes-to-GDP ratio is disaggregated and single important taxes are analysed.
The taxes shown in the mapping are presented as follows.
1) Current taxes on income and wealth (direct taxes)
2) Capital taxes
3) Taxes linked to import and production (indirect taxes)
3.1 VAT and excise duties
The following taxes in the relevant six countries are considered.
Direct Taxes / Capital taxes / VAT and excise dutiesFRG / income tax
corporation tax / Succession and gift tax / Turnover tax-VAT
UK / income tax
corporation tax / Inheritance Tax / VAT
I / Personal income tax
Tax on incomes of legal persons / Succession and gift duty / VAT
NL / Personal income tax
Dividend tax
Corporation tax / Succession duties / Turnover tax-VAT
P / Tax on personal income
Tax on corporate income
Municipal tax / Inheritance tax and gift tax / VAT
CH / Income tax
Corporation tax / VAT
1) Current taxes on income and wealth (direct taxes)
1.1) Income tax
The taxation of labour via the income tax is very important in the whole EU. Taxes in the EU area impinge very heavily on the labour markets. Labour income is most heavily taxed in Germany, the Netherlands and Italy while the United Kingdom, Ireland, and Portugal stand out for taxing labour income at a below average rate.
Share of tax revenue in certain factors of production in gross-national product 1997
Employed Labour / Employed Labour: Employee / Employed Labour: EmployerGermany / 23,2 / 15 / 8,2
UK / 14,5 / 10,8 / 3,7
Italy / 20,9 / 10,6 / 10,3
Netherlands / 23,9 / 20,3 / 3,6
Portugal / 15,4 / 7,8 / 7,6
EU average / 21,2 / 12,8 / 8,4
PEMINT average / 19,6 / 12,9 / 6,7
Share of tax revenue in certain factors of production of total tax revenue 1997
Employed Labour / Employed Labour: Employee / Employed Labour: EmployerGermany / 55,5 / 35,9 / 19,6
Italy / 47,4 / 24 / 23,4
UK / 39 / 29 / 10
Netherlands / 52,2 / 44,3 / 7,9
Portugal / 41,4 / 21 / 20,4
EU average / 49,9 / 30,3 / 19,6
PEMINT average / 47,1 / 30,8 / 16,3
This general trend is also confirmed by a mathematical model. In all countries – except the UK – there is a trend in higher effective average tax rates of the production factor labour.
Average effective tax rates - using Mendoza et al[2]. methodology
Per cent
Labour1980-85 / 1986-90 / 1991-97
Germany / 38.6 / 40.6 / 41.4
Italy / 37.7 / 42.2 / 47.3
United Kingdom / 27.5 / 25.2 / 23.7
Netherlands / 48.5 / 49.3 / 50.5
Portugal / .. / 26.2 / 29.5
Switzerland / 31.8 / 32.6 / 35.5
OECD average / 33.1 / 35.4 / 36.8
G7 average / 31.5 / 33.8 / 35.2
EU average / 38.8 / 41.2 / 42.8
PEMINT average / 36,8 / 36 / 38
The assessment of the tax burden of the production factor is fraught with methodological problems and does not take into account the differences in financing social security benefits that can be financed via contributions or via tax revenues.
The table shows the level of the statutory income tax.
Minmum rate / tax-exempt amount (€) / Maximum rate / Maximum rate starts at income of (€)Germany / 19,9% / 7206 / 51,5%[3] / 54999
UK / 10% / 7395 / 40% / 47939
Italy / 19,15% / - / 46,15% / 69722
Netherlands / 32,25%[4] / - / 52% / 46309
Portugal / 12% / - / 40% / 49880
Switzerland / 5,47%[5] / 8347, 3587 / 42,05% / 393309
A comparison of the minimum and the maximum rates in the PEMINT countries shows a significant divergence of the fiscal systems concerning the personal income tax at first sight. The minimum tax rate of the income tax in the Netherlands is almost 6 times higher than the income tax in Switzerland. Here the impossibility of the separation of the social security systems on the one hand and the fiscal systems on the other hand comes to the fore, because in the Netherlands the comparatively high minimum tax rate of more than 30% includes also the social security contributions.
However, the minimum and the maximum rates of the income tax in the relevant countries are not a suited indicator for the assessment of the effective tax burden.
The next table gives an overview of the effective tax burden of the income tax of employees in different family status. The effective tax burden is calculated by mathematical models that include all special features that are linked to the income tax.
Single, no children, average income / Ranking / Married, two children, sole wage earner with average income / Ranking / Married, two children, average income + 33% of average income / RankingFRG / 20,8 / 6 / - 1,1 / 1 / 6,6 / 4
UK / 15,9 / 4 / 14,4 / 5 / 12,9 / 5
I / 19 / 5 / 14,5 / 6 / 13,5 / 6
NL / 7,3 / 2 / 4,9 / 3 / 6 / 3
P / 6,7 / 1 / 2,7 / 2 / 3 / 1
CH / 10,3 / 3 / 5,2 / 4 / 5,9 / 2
The calculation of the effective tax burden shows significant differences in the relevant countries. The tax burden of a single without children and an average income ranges differs about 14 percentage points between Germany and Portugal. In Germany there is even a negative income tax for couples with average income and two children. So the isolated look at the tax rates are not suited for the comparison of effective burden.
The preceding tables and numbers show that the family status must be integrated in the question of the measurement of the effective tax burden. But it should be noted as well that this disaggregating concerning the different family status´ is not relevant concerning our frame of reference. At this point the question is raised if different family status dependent tax burdens are interesting and relevant for the employing organizations we are looking at. We suggest that the different “family burdens” are not interesting for employers and that these employers do not even know about this differentiation
Although this kind of mapping should just provide a short taxation-overview the main task of the PEMINT project should be beared in mind. A central contention of PEMINT is that the most important variables of the project can best be captured by an organisational analysis. It is important to keep an eye on the frame of reference of PEMINT. So on the one hand the relevant organisationen (companies, public institutions in health sector etc.) and on the other hand the potential calculating migrants must be be considered. The migrants compare the costs of their migration with the rendered returns. The organisations compare the marginal productivity of labour of the migrant with the the burden inducted by the employment. The crucial question that must be considered in this mapping of taxation is: Who is bearing the burden of the taxation?
However, it must be kept in mind, that the single reflection of the effective tax burden of the income tax is only little significant, because some countries provide social or economic assistance via social security contribution, rather than via tax expenditures. So the burden of the social security contributions must be integrated in an analysis of the effective burden in the relevant countries.
Tax and contributions burden of employees in different family status
Single, no children, average income / Ranking / Married, two children, sole wage earner with average income / Ranking / Married, two children, average income + 33% of average income / RankingFRG / 41,3 / 6 / 19,4 / 5 / 27,1 / 5
UK / 23,8 / 3 / 15,3 / 4 / 14,5 / 3
I / 28,2 / 4 / 14,5 / 3 / 20,2 / 4
NL / 36,1 / 5 / 24,9 / 6 / 27,6 / 6
P / 17,7 / 1 / 8,6 / 1 / 10,3 / 1
CH / 21,9 / 2 / 8,6 / 1 / 11,4 / 2
The comparison between these two tables exemplifies that the two complexes “taxes” on the one hand and ”social security contributions” on the other hand cannot be separated and must be aggregated to one whole complex of labour costs. The German and the swiss case are good examples. Although Switzerland belongs to the “top two” in the ranking of the tax and contributions burden, Switzerland belongs rather to the medium countries concerning the single tax burden. The opposite can be seen in Germany. In terms of the tax burden of a married sole-wage earner with two children Germany has the lowest tax burden, but the highest tax and contributions burden. Moreover, the two tables indicate the necessity of the consideration of the family status.
1.2) Corporation Taxes
The second quantitatively very important tax in the range of the direct taxes is the corporation tax. In the last few years there were a lot of important tax reforms in the area of company taxation. So it might be useful to summarize the most important reforms and to analyze the impact of the corpoartion tax reforms enacted between 1998 and 2001.
Summary of the most important tax reforms since 1998.
Germany / Reduction of the corporation tax rate from 45% to 40% and to 25%Reduction of decline-balance depreciation on machinery from 30% to 20%
Reduction of straight-line depreciation on buildings from 4% to 3%
Abolition of full imputation system and introduction of a shareholder relief system
UK / Reduction of corporation tax rate from 31% to 30%
Reduction of first year allowance for investment in machinery
Abolition of partial imputation system and introduction of a shareholder relief system
Italy / No important tax reforms in that period
Netherlands / No important tax reforms in that period
Portugal / Reduction of corporation tax rate from 34% to 32%
Dominant trend in the tax reforms:
- Lowering of the statutory tax rates on profits (i.e. corporation tax, surcharges, other profit-related taxes).
- The lowering of the tax rates was combined with a broadening of the tax base, in particular by cutting back the depreciation rules.
- Change of the corporation tax systems: Trend away from imputation systems towards shareholder relief systems in order to strengthen international competitiveness
The reforms of the company taxation are very important concerning the systematic of taxation. The following table gives a short summary of corporate tax systems
FRG / Shareholder relief systemUK / Shareholder relief system
NL / Classical System. Profits are fully taxed with the corporate income tax at the level of corporation[6]
I / Imputation system. The corporate income profits are fully subject to corporate income tax (36%) and a tax credit of 58,73% is available for the shareholder
P / Partial imputation system. The corporate income profits are fully subject to corporate income tax (32%)[7]. Dividend distributions are not tax-deductible. A tax credit of 60% of the underlying corporate income tax is granted on dividends received by individual shareholders.
CH / classical corporate tax system which results in economic double taxation. Profits are fully taxed with the corporate income tax at the level of corporation
Concerning the systematic of the company taxation there is mainly divergence. In the six relevant PEMINT countries exist 4 cardinal different company taxation systems. There is an international trend towards a shareholder relief model, but only Germany and the United Kingdom have established that system. The Netherlands and Switzerland still maintain the classical system that accepts the case of double taxation via corporate income tax and personal income tax.