Policy Note 16: Value-added tax – a shot that backfires

Austria has a high tax ratio by international standards. In 2016, this amounted to 43.4% of GDP. "The high tax burden is a heavy burden for Austria in international competition," says Tobias Thomas, Director of the economic research institute EcoAustria. In addition to the amount, the structure of taxes also plays an important role in economic development. In this context, a shift in the financing of social security from non-wage labor costs to a value-added tax is being proposed in the political debate. This should not only be levied on wages and salaries, but also on profits, interest on borrowed capital, etc. In addition to the distribution of the financing burden for social security, it is hoped that the value-added tax will make work cheaper compared to capital, so that impulses for more employment can be realized.

"The argument only looks at one side of the coin and neglects the fact that the value-added tax acts as a brake on investment and productivity," says Thomas. "If all relevant effects are taken into account, the revenue-neutral introduction of a value-added tax in favor of reducing non-wage labor costs not only leads to a relative reduction in the labor factor, but also to significant losses in investment and lower productivity," says Thomas. "The consequences are weaker GDP growth, losses in private household consumption and, in the medium to long term, no significant effects on employment and unemployment despite the favorable treatment of labor. From an economic and social policy perspective, the value-added tax turns out to be a shot that backfires," explains Thomas. Without positive effects on the labor market and at the same time negative effects on investment, growth and consumption, the measure should therefore be rejected from an economic point of view, concludes an EcoAustria policy note published today.