Segundo Grado

latter being to a large extent explained by the level of per capita income (Graph 11) (1_{). High-income Member}

States tend to spend more per capita than low-income ones, especially on welfare programmes: 65 % of the differences within the EU in transfers to households are related to differences in GDP per capita.

A further distinction of the euro area compared with its main trading partners is the structure of tax revenues. In the euro area, social security contributions accounted for 38 % of total tax receipts in 1999, with indirect and direct taxes representing 32 % and 30 %, respectively. The high share of social security contributions in the EU contrasts

73

2.1. Tax burden

The tax burden in the euro area, defined as the ratio of government tax receipts to GDP, is very high by inter- national standards. In 1999, it was 43 % of GDP, some 14 and 16 percentage points higher than in the US and Japan, respectively. The overall tax burden differs, how- ever, significantly across Member States: it is relatively high in the Nordic countries, Belgium, France and Austria, whereas it is relatively low in Spain, Portugal, Ireland, Greece and the UK.

Differences in the tax burdens across Member States are mostly due to the weight of the public sector in the econ- omy. There is a close relation between tax receipts and government expenditures as a percentage of GDP, the

GDP per capita in 1 000 PPPs

T

axes per capita in 1 000 PPPs

DK EL E L P IRL S UK 10 15 20 25 30 35 40 4 6 8 10 12 14 16 18 y = 0.4584x — 0.5944 R2 = 0.7896

Graph 11: Taxes and GDP per capita in 1999

Source: Commission services.

(1_{) The same kind of relationship is found when considering other}

with the US where direct taxes are the most important component of tax revenues. These differences in the tax structures between the US and the euro area are closely related to the comprehensiveness of public welfare sys- tems which in the latter are mainly financed via social security contributions.

Although the structure of tax revenues is broadly similar across Member States, there are some notable differences: in Denmark and to a lesser extent also in Ireland and the UK, the contribution of social charges to tax receipts is low by EU standards (1_).

2.2. Effective tax rates on production

factors and consumption

It is not possible to obtain a full picture of where the tax burden actually falls by looking solely at the structure of

social security contributions, direct taxes and indirect taxes. For example, direct taxes consist of income and property taxes paid by individuals and corporations: hence the burden falls on both labour and capital. To sep- arate the incidence of the tax burden falling on each fac- tor (labour, capital and consumption), it is necessary to look at so-called ‘effective’ tax rates. Effective tax rates on labour, capital and consumption are obtained by relat- ing the broad categories of tax revenues to the corre- sponding tax bases: labour income (gross wage), capital income (gross operating surplus) and consumption expenditure. The method used to calculate effective tax rates is explained in Box 12.

In the euro area, the effective tax rate on labour amounts to 40 % of the wage bill, with 70 % of this accounted for by non-wage labour costs (social security contributions and other payroll taxes) and 30 % for personal income taxes (Table 21). In contrast, the effective tax rate on labour is just 24 % in the US, with non-wage labour costs representing only 12 % of the average gross wage.

74

P u b l i c f i n a n c e s i n E M U - 2 0 0 0

(1_{) In Denmark, the share of social security contributions in govern-}

ment receipts is negligible as most welfare spending is financed out of general taxation. Consequently, the contribution of direct taxes to the total tax burden is high compared with the EU average.

Table 21

Effective tax rates, 1999 (*)

Non-wage Personal income Labour effective Capital effective Consumption effective labour costs tax rate tax rate tax rate tax rate

B 26.5 24.9 44.8 23.7 20.5 D 31.8 17.8 44.0 15.9 17.9 E 21.9 10.2 29.9 18.5 17.7 F 32.1 15.2 42.4 22.6 24.5 IRL 12.2 13.7 24.2 20.8 24.8 I 23.1 16.5 35.8 26.2 22.9 L 20.9 12.8 31.0 34.0 25.7 NL 28.3 12.0 36.9 25.1 19.5 A 26.2 19.5 40.6 18.8 23.4 P 19.9 9.8 27.8 24.6 22.7 FIN 23.6 25.9 43.3 24.1 24.5 EUR-11 28.1 16.2 39.8 20.9 20.9 DK 5.64 1.2 44.5 28.0 30.5 EL 22.9 8.3 29.3 19.5 20.0 S 25.4 34.7 51.3 27.9 28.0 UK 11.9 15.1 25.2 35.1 18.2 EU-15 24.8 17.0 37.6 23.6 20.8 US 11.6 13.9 23.9 22.7 9.3 JP 16.5 4.6 20.3 18.7 13.6

(*) Calculated on the basis of the 2000 spring forecast of the Commission services. Source: Commission services and OECD.

75 P a r t I V

F o c u s o n t a x a t i o n

‘Effective’ tax rates are used to analyse the sources of changes in tax systems (Mendoza et al., 1994). On an annual basis, the European Commission (1998a) publishes so-called ‘implicit’ tax rates for employed labour, other production factors and consumption. They are now avail- able until 1997 for all EU Member States (European Commission, 1999b).

The effective tax rate indicators analysed in this report are obtained by adapting the concepts of implicit taxation to the analytical needs and data availability of DG ECFIN. While conceptually equivalent, effective tax indicators allow one to compute the tax burdens on labour, capital and consumption for EU and other OECD countries in correspondence with the regular Commission’s spring and autumn forecasts. The available data cover the last three decades (from 1970 to 2001). A detailed explanation of the ECFIN databank on effective taxation can be found in Martinez-Mongay (2000). The OECD has also developed a similar databank (OECD, 1999b).

The indicators used here can be summarised as follows:

Effective tax rate of labour. There are two sources of tax

revenue on labour income. First, social security contribu- tions and other payroll taxes (also called non-wage labour costs) are levied on wages; the effective rate of non-wage labour costs is the ratio of total social security contributions (including those paid by the self-employed) to total labour costs. The rate includes social security contributions paid by employers and employees. Second, personal income taxes are levied on remaining income. Taxes on personal

income are further decomposed into the personal income tax attributable to labour income, and the personal income tax attributable to capital income. The effective tax rate of labour is the ratio of the sum of non-wage labour costs and the personal labour income taxes to gross wages.

Effective tax rates on capital. Taxes on capital income

include personal income taxes attributable to capital income, taxes on corporate income and property taxes. A proxy for the tax base is the adjusted gross operating surplus (1_).

Effective tax rate on consumption. The effective tax rate

on consumption can be calculated as the ratio of indirect tax revenues to the value of final (private and public) con- sumption, excluding wages paid by general government. Such an indicator conceptually coincides with the ‘implicit’ tax rate on consumption.

Box 12: Effective tax indicators

(1_{) It is worth noting that both the European Commission}

(1999b) and the OECD (see Carey and Tchilinguirian, 2000) use the net operating surplus as the tax base of capital. A con- sequence of using the net operating surplus instead of the gross operating surplus is that the effective or implicit tax rates on capital income increase significantly, by more than 10 percentage points. A further consequence is that the rates are much more volatile, since capital consumption experi- ences large cyclical swings. However, similar conclusions can be drawn from both approaches as regards the evolution over time (see Chapter 3 below) and cross-country differ- ences. Since the analysis in this chapter is concerned with long-run features and comparisons across countries rather than levels, the gross operating surplus is preferred here as it is more reliable in these respects.

Within the euro area, the effective tax rate on labour is significantly below average in Ireland and to a lesser extent in Portugal and Spain. It is also relatively low in the UK and Greece. The highest tax rates in the euro area are recorded in Belgium, Germany and Finland and, out- side the euro area, in Denmark and Sweden.

The effective tax rate on capital income is similar in the euro area and the US, amounting to some 21–23 % of the gross operating surplus of the economy; in Japan it is around 19 %. In the euro area, the lowest effective tax rate on capital is recorded in Germany (16 %) and the highest in Luxembourg (34 %) (1_).

Indirect taxes account for 21 % of the prices paid by con- sumers in the euro area whereas the figure is only 9 % in the US and 14 % for Japan. In general, the common VAT system in the EU has resulted in lower differences between consumption tax rates within the euro area than internationally. However, despite VAT harmonisation, there are still marked differences in the effective tax rates on final consumption across Member States. Such diver- gences are largely due to differences in normal and reduced VAT rates, excise duties, as well as in energy and environmental taxes.

As shown in Graph 12, tax revenues from labour income in the euro area account for approximately half of total tax revenues, similar to the US and Japan. However, in Belgium, Germany and Austria, which all are high-tax (1_{) Note that such a high effective tax rate of capital in Luxembourg}

refers to domestic capital income and contrasts with the special fiscal treatment of capital income of non-residents.

countries, the share of tax revenues from labour is noticeably larger than in the euro area as a whole. In low- tax countries like Ireland and the UK, as well as some low-income countries like Portugal and Greece, the share of tax revenues from labour income tends to be smaller than on average.

In the US, tax receipts from capital income represent 25 % of the total tax revenue, while the figure is only 15 % in the euro area. In Ireland, Luxembourg (1_{) and the UK,}

the share of tax revenue from capital income is close to that of the US, while the share of capital income is par- ticularly small in Germany and Austria.

Consumption tax revenues account for one third of total tax revenues in the euro area and Japan, but only one quarter in the US. Tax receipts from consumption are particularly important in Greece, Ireland, Portugal and the UK, where the share of labour taxes is the lowest in the EU. Consumption taxes play a considerably lesser role in Belgium, Germany and the Netherlands.

76

(1_{) See footnote above on the fiscal treatment of non-resident capital}

income in Luxembourg. P u b l i c f i n a n c e s i n E M U - 2 0 0 0 0 % 20 % 40 % 60 % 80 % 100 %

B D E F IRL I L NL A P FIN EUR-11 DK EL S UK EU-15 US JP Labour Capital Consumption

Graph 12: The structure of tax revenues in 1999 (% of tax burdens)

3. Factors shaping tax systems in