Policy Note 29: Achieving more employment and prosperity through tax reform

Austria has a high tax burden by international standards. At 42.4 percent of GDP in 2017, the tax rate was significantly higher than the EU average of 40.2 percent. "The high tax burden restricts companies' investments and employees' ability to consume," says Tobias Thomas, Director of the economic research institute EcoAustria. "Reducing corporation tax and relieving the burden on labor would achieve more growth, employment and higher net wages," says Thomas.

A recent analysis by EcoAustria using the PuMA macro model shows that a reduction in corporation tax to 19% would increase gross domestic product by 0.7% in the long term compared to without the reform. Investments increase particularly strongly by 2% in the first year after the reform. This is also associated with an increase in net wages and employment. In relation to today's net income, the average increase in the long term corresponds to around 260 euros per year. Employment will increase by around 10,000 employees. "The higher economic output and higher private consumption will result in fiscal returns that will self-finance part of the corporate tax reform. In the medium term, the self-financing ratio is around 40 percent, rising to 55 percent in the long term," says Thomas.

"Due to the high burden on the labor factor, a comprehensive tax reform should, in addition to a reduction in corporate tax, also provide for relief for the labor factor in particular," says Thomas. With a comparable reform volume, a reduction in income tax has the most positive effect on employment, private consumption and the development of real net wages. The reduction in non-wage labor costs, in turn, achieves the strongest growth, particularly in the employment of low-skilled workers. In order to correctly assess the financing requirements of the reform, the degree of self-financing of the reform should be taken into account, according to the conclusion of an EcoAustria policy note published today.