Personal Income Taxation in Austria

ISSN 2443-8030 (online) Personal Income Taxation in Austria: What do the Reform Measures Mean for the Budget, Labour Market Incentives and Income Distribution? Viginta Ivaškaitė-Tamošiūnė, Alexander Leodolter and Marie-Luise Schmitz ECONOMIC BRIEF 030 | JULY 2017 EUROPEAN ECONOMY Economic and EUROPEAN Financial Affairs ECONOMY European Economy Economic Briefs are written by the staff of the European Commission’s Directorate-General for Economic and Financial Affairs to inform discussion on economic policy and to stimulate debate. The views expressed in this document are solely those of the author(s) and do not necessarily represent the official views of the European Commission. Authorised for publication by Servaas Deroose, Deputy Director-General for Economic and Financial Affairs. 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Luxembourg: Publications Office of the European Union, 2017 KC-BE-17-030-EN-N (online) KC-BE-17-030-EN-C (print) ISBN 978-92-79-64854-0 (online) ISBN 978-92-79-64855-7 (print) doi:10.2765/597941 (online) doi:10.2765/65612 (print) © European Union, 2017 Reproduction is authorised provided the source is acknowledged. For any use or reproduction of photos or other material that is not under the EU copyright, permission must be sought directly from the copyright holders. European Commission Directorate-General for Economic and Financial Affairs Personal Income Taxation in Austria What do the Reform Measures Mean for the Budget, Labour Market Incentives and Income Distribution? By Viginta Ivaškaitė-Tamošiūnė, Alexander Leodolter and Marie-Luise Schmitz Summary In Austria, a comprehensive tax reform came into force on 1 January 2016. The stated aim of the tax reform was to noticeably reduce personal income taxation. The reform package included an increase in the number of brackets in the personal income tax system from four to seven, an increase in the amounts of several allowances and tax credits, and an increased reimbursement of social security contributions for low-income earners. A simulation with EUROMOD, a microsimulation model encoding the tax-benefit systems of all EU Member States in a harmonised way, estimates the impact of the changes in personal income taxation that were a major part of the reform and thereby covers almost the whole tax relief part of the reform package. It addresses the effect of the reform measures on the government budget, labour market incentives (implicit tax rate) and income distribution. It does not consider behavioural changes and therefore does not include second-round effects. Given all this, the simulations suggest a revenue loss of EUR 4.8 billion for the year 2015, which equals 15.8% of personal income tax revenue or 1.4% of GDP, due to the change in personal income tax. The impact on mean equivalised disposable income of households is positive for all income deciles. It is increasing across all deciles as an absolute value and increasing up to the eighth decile as a percentage of the baseline income. The reform significantly decreases the implicit tax rate in all income deciles, particularly in the first five deciles. It is only marginally less redistributive and the risk of poverty slightly decreases. Acknowledgements: We are grateful to Per Eckefeldt, Tsvetan Tsalinski and Anne van Bruggen for their valuable comments on this brief. Contact: Viginta Ivaškaitė-Tamošiūnė, European Commission, Joint Research Centre (Seville, Spain), [email protected], Alexander Leodolter, European Commission, Directorate-General for Economic and Financial Affairs, [email protected]; Marie- Luise Schmitz, European Commission, Joint Research Centre (Seville, Spain), marie- [email protected]. EUROPEAN ECONOMY Economic Brief 030 European Economy Economic Briefs Issue 030 | July 2017 Austria's high tax burden on labour that is provided to all employees income independently of the length of their actual commute. Both were non-refundable tax Austria has a relatively high tax burden on credits. The reform integrated the employees' labour. In 2015, the revenue from labour tax credit into the traffic tax credit and taxation as a percentage of GDP was the increased the respective amount to EUR second highest in the EU at 24.8% with the 400/year (art. 33 sec. 5 number 1 ITL 2016). EU average at 19.3% and the euro area average at 21.0%.1 Austria's implicit tax rate Increased refund of social security on labour2 amounted to 43.1% in the same contributions (SSC) and extension to year, the 3rd highest in the EU and well above pensioners: The reform increased the the EU average of 35.9% and the euro area reimbursement of social security average of 38.6%. It has been recommended contributions (Negativsteuer) for employees for countries with high labour taxes to move with a negative tax liability. Before the the tax burden from labour to more growth- reform, only 10% of certain work-related friendly sources of revenue e.g., consumption, expenses (Werbungskosten) including in recurrent property and environmental taxes particular the social security contributions up (Arnold 2008; Johansson et al. 2008; Arnold to a limit of EUR 110/year were reimbursed, et al. 2011; Roeger and In't Veld, 2010; in case the employee's tax liability after the European Commission 2015a, European deduction of the traffic tax credit and the Commission 2015b, OECD 2010; Wöhlbier, employees' tax credit was negative. Now, Astarita and Mourre 2016). 50% of expenses paid by the employee up to a limit of EUR 400/year are reimbursed, if the Description of the tax reform 2016 tax liability of the employee is negative after the deduction of the traffic tax credit (art. 33 Austria's comprehensive tax reform became sec. 8, number 2 ITL 2016). effective as of 1 January 2016. The stated aim The reform also makes pensioners eligible for of the reform was to noticeably reduce the tax the reimbursement. If their tax liability is non- burden on wages and personal income. The positive, and they are eligible for the tax changes are listed in Table 1 and described in credit for pensioners, 50% of SSC up to a the following: limit of EUR 110/year are reimbursed (art. 33, sec. 8, number 3 ITL 2016). Personal income tax schedule: The new personal income tax schedule is the Child tax allowance: The child tax allowance centrepiece of the reform. The number of (Kinderfreibetrag) was also increased as part brackets was increased from four to seven of the reform. It is granted to parents who are resulting in a slower and more gradual entitled to the child tax credit progression. The top income tax rate is (Kinderabsetzbetrag) for more than six planned to be a temporary measure until 2020 months in a year (art. 106, sec. 1 and art. (art. 33, sec. 1 Income Tax Law (ITL) for 106a, sec. 1 ITL 2016). 2016). Maximum contribution base for the social Integration of employees' tax credit into security system: The maximum contribution traffic tax credit and increased amount: base for social insurance contributions is Before the reform, all employees subject to increased every year in the course of a income tax received the employees' tax credit statutory adjustment. For 2016, it was (Arbeitnehmerabsetzbetrag) as well as the increased by another 90 € on top of the traffic tax credit (Verkehrsabsetzbetrag). The statutory annual adjustment as a financing latter is a lump-sum compensation for measure for the tax reform (art. 108, sec. 3 of commuting expenses between work and home the General Law on Social Security).3 2 European Economy Economic Briefs Issue 030 | July 2017 Table 1. Simulated measures of the tax reform 2016 for Austria Baseline scenario Reform scenario Personal income tax schedule Annual taxable income, € Marginal tax rate, % Annual taxable income, € Marginal tax rate, % 0 – 11000 0 0 – 11000 0 11000 – 25000 36.5 11000 – 18000 25 25000 – 60000 43.2 18000 – 31000 35 > 60000 50 31000 – 60000 42 60000 – 90000 48 90000 – 1000000 50 > 1000000 55 Integration of employees' tax credit into traffic tax credit and increased amount Employee tax credit 54 € p.a. abolished Traffic tax credit 291 € p.a. 400 € p.a. Increased reimbursement of social security contributions and extension to pensioners Employees 10% of SSC up to 110 € p.a. 50% of SSC up to 400 € p.a. Pensioners - 50% of SSC, up to 110 € p.a. Child tax allowance Claimed by one 220 € / per child 440 € / per child parent Claimed by both 132 € /per child per parent 300 € /per child per parent parents Maximum contribution base for the social security system 4650 € 4740 € All these measures were part of a simulation with the microsimulation model EUROMOD. Further measures that could not be addressed Budgetary and distributional impact: by the simulation due to data limitations simulation results concern special regulations regarding the traffic tax credit and the refund of SSC for To analyse the budgetary and distributional commuters, i.e. for employees eligible to the impact of the reform, the measures listed in so called traffic allowance (Pendlerpauschale, Table 1 were encoded into the not to be confused with the traffic tax credit) microsimulation model EUROMOD and a as well as the extension of the SSC refund to simulation was performed.

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