Policy Note 19: More growth and employment by reducing the tax ratio

The high tax rate in Austria of 43.4% restricts private household consumption and deprives companies of funds for investment. "A noticeable reduction in the tax rate would act like a growth turbo for Austria. Investments, employment and private household consumption would increase significantly and unemployment would fall noticeably," says Tobias Thomas, Director of the economic research institute EcoAustria.

For the simulation using EcoAustria's PuMA general equilibrium model, income tax, corporation tax and non-wage labor costs were gradually reduced to a total tax rate of 40% by 2022 in line with their current revenue. By then, investments would be 3.6% higher and gross domestic product 1.7% higher than would be the case without the tax cut. Net wages would increase by 5.2% and private consumption by 4.0%. The unemployment rate would fall by 0.6 percentage points.

The growth effects of such a reform would have positive repercussions on public finances, which would finance around 40-50% of the tax reduction themselves. The remaining volume would have to come from existing efficiency potential in public spending. Should it be possible to leverage further potential, this would be available for budget consolidation, according to the conclusion of an EcoAustria Policy Note published today.