If Austria Wants to Compete Internationally, It Needs to Improve Its Tax System

by Daniel Bunn

While President Van der Bellen seems intent on making a controversial digital services tax the focus of Austria’s current presidency of the European Union, there are tax problems in Austria that demand more attention. In recent years, many countries–both inside and outside the EU–have modernized their tax systems to boost their economies and attract more investment. Make no mistake, there is a tax competition going on among countries, and Austria must do better.

In late October, the Tax Foundation, a U.S-based think tank, released its 2018 International Tax Competitiveness Index, which provides comparative measurements of OECD countries’ tax policies, including corporate, individual, consumption, and property taxes as well as the tax treatment of profits earned internationally. A country’s ranking on the Index is determined by two factors: neutrality, or the extent to which the tax system minimizes economic distortions, and competitiveness, determined by comparing marginal tax rates among countries.

According to the Index, the Austrian tax system is in tenth place among the 35 OECD countries. At first glance, that ranking–which puts the country in the top third overall–may not seem so bad. However, a closer look at the data within the Index reveals some glaring problems with Austria’s tax system.

To begin, Austria’s corporate tax rate is higher than average. That’s problematic if it wants to compete with the rest of the industrialized world. The system also makes it very difficult for businesses to recover the costs of investments. This is another disincentive for companies to invest or expand in Austria.

For individuals working in Austria, the tax system is even more burdensome. To demonstrate, in 2017, the average cost of employing a single childless worker in Austria was almost 59,000 euros. That average worker paid about 6,600 euros, or about 11 percent of the total labor costs, in personal income taxes. Around 14 percent of the total costs–roughly 8,200 euros–went to the employee’s social security contributions. On top of that, roughly 13,000 euros–more than 22 percent of the total average labor costs–represented the employer social security contributions and payroll taxes. Added together, all of this means that nearly one-half–over 47 percent–of the average cost of employing a worker in Austria goes to paying taxes. The workers take home the other half.

Long story short, for Austria’s businesses, the tax system increases the cost of capital more than the average among OECD countries, while the individual tax system–which includes the social security programs–dramatically increases the cost of labor. Combined, these two factors put significant strains on the nation’s economy and its ability to compete internationally.

We see this when looking at long-term economic trends. Average economic growth in Austria has been on a relatively steady decline since the mid-1990s. Workers in the country are continually putting in more hours with less output than in previous eras. The capital productivity–or the amount of growth produced for every euro of private capital–is among the lowest in all of Europe.

In some areas, Austria’s tax laws are very competitive. Its international tax system, for example, is praised for being pro-growth, and this is generally reflected in the Index. In addition, Austria does not impose unnecessary taxes on accumulated wealth or estates. And, the VAT system, with few exemptions or complicated rules, is simple and effective, which partially makes up for the extremely high rates.

But, make no mistake, Austria is in danger of falling behind the rest of the world. The question ultimately becomes: What can be done to reverse these trends?

First, corporate tax rates need to be lowered. The corporate tax is the most harmful tax on economic growth and capital investment, and Austria’s is too high. Second, the business tax system needs to be updated to allow companies to more quickly recover their capital costs. And, third, the cost of labor needs to be reduced—make it less burdensome for an employer to hire a worker and let workers take home a greater share of the overall labor costs. This means both lowering rates at the individual level and taking a candid look at the way taxes are used to pay for the social security system.

There is no doubt that some of these changes may be difficult. They may require that the government reconsiders its priorities. But, if Austria wants to compete in the global economy of the 21st century, it needs a 21st century tax system. As of right now, that is not what Austria has. 

Daniel Bunn is Director of Global Projects at the Tax Foundation.