Brief analysis 5: Increase prosperity through major tax reform

Last week, the National Council passed the first stage of the tax reform announced in May 2019. "Reducing the tax burden on labor is a step in the right direction for more growth, prosperity and employment in Austria. This first step should be followed by others, as the tax burden on labor and companies is still very high by international standards. On average, employees only receive a good half of what companies pay for their work," says Tobias Thomas, Director of the economic research institute EcoAustria.

"Regardless of who wins the National Council elections, it would be good for Austria as a business location if further measures were taken to reduce the tax burden after the elections," says Thomas. A simulation by EcoAustria using the PuMA macro model ("Public policy Model for Austria") shows the effects of the tax reform announced in May 2019. "With the tax reform announced in May, real net incomes would already be around 3 percent higher in 2025 than without the reform. Employment would increase by around 50,000 people. This would be associated with a 0.5 percentage point reduction in the unemployment rate, and low-skilled workers in particular would benefit," explains Thomas. Stronger growth would also increase tax revenues, meaning that the reform would be 40-50% self-financing. The rest would be financed through more efficient public spending.

"However, a one-off reduction in the tax rate is not enough. Without further reforms, the tax burden will rise again," says Thomas. The reasons for this are cold progression and rising public expenditure in the areas of healthcare, care and pensions due to demographic trends. "Further structural reforms such as the complete abolition of cold progression and linking the retirement age to life expectancy are necessary," says Thomas.