Reduction of the second and third income tax brackets – brief analysis to assess the economic and fiscal effects

The implementation of the second stage of the tax reform has considerable economic effects. The simulation with the PuMA macro model shows that the reduction in the tax burden will increase gross domestic product by just under 0.6% by 2035 compared to without the reform measure. This means that if the tax reform is implemented, GDP will be around EUR 2.4 billion higher this year (based on the forecast GDP for 2022) than if this tax reform were not implemented. Additional cumulative growth of 0.5% can be expected by the end of the legislative period.

This is also associated with a strong upturn in the labor market. Employment will be 0.4% or 17,000 people higher than without the tax reform and the unemployment rate according to the EU definition will be 0.2 percentage points (or 8,200 people) lower. The tax relief is reflected in the disposable income of private households. Net hourly wages will increase by around 1.2% and real private consumption will also rise by 1.2%.

The stronger economic prosperity resulting from the reform package will also increase tax revenues, meaning that the reform will be more than 50 percent self-financing. Accordingly, a total of around EUR 1.1 billion is required to finance the net relief of EUR 2.3 billion. There is considerable potential for efficiency in public spending in Austria, both in an international comparison and in a comparison between the federal states. As this could be leveraged without worsening public services for citizens, the planned reform can be financed without jeopardizing the soundness of public finances.

Against this backdrop, the reform will reduce the burden on private households and companies, thereby stimulating the labor market and boosting disposable income within the Austrian economy.