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Impact of taxation policy reforms on social systems
Péter Pataky
MSZOSZ president
01. September 2008
European trends and recommendations I
• 3 tendencies/ factors which giuded the taxation reforms of EU countries during last decade:
– Lowering taxes on labour
– Taxation competition resulting from globalisation
– Simplification of taxation systems
=> Lowering taxation levels, widening taxation basis
European trends and recommendations II
• Lissabon goals => promoting employment => lowering taxataion burden on labour income
• Globalisation => increasing capital movement => lowerng taxation on enterprises
Complicated taxation systems => simplification => by reducing prefernces tax base is being increased
Recommendation of the European Union
• Reducing taxes on labour income and on corporate profit
• Increase taxes on consumption
• Increase importance of green taxes
Recommendation of World Bank
• Widening of taxation basis is more important than tax rates
• Reducing and improving taxation related administration/ bureocracy
• Credible, long-term reform
Recommdeations for Hungary
• Stimulation of employment by reducing taxes on labour
• Increasing proportion of taxation on capital
Reforms in Eastern Europe
• Emphasis on introduction of flat tax systems
• Motivations:
– Lower marginal tax rate => increasing labour supply => increasing tax base
– Lower marginal tax rate => less stimulation for tax evasion => ameliorating of tax payment
– More simple taxation system => reducing administration costs of taxation
• Drawback:
– Increases disparity!
Reforms realised
Outcomes of reforms
• Few empirical analysis
• Reforms improved tax morality in case it was accompanied by simplification of tax-administration – it did not have significant impact on revenues
• No great changes in tax payment in those income groups, where marginal tax rate dropped significantly (where increase of job offer was expected)
• At groups without change of marginal tax rate (poorer stratas) tax payment rose significantly
Lessons of reforms
• The level of inland revenue can be maintained only through closing the „back-stairs” of the income tax system; if it is managed to radically reduce tax allowances and exceptions
• Increase of income tax base and higher level of readiness for income tax return can be expected only if reforms cover social security system
• Flat tax reforms significantly change incentives => change in behaviour of economic actors => such reforms are worthy ONLY in stable fiscal situation
• Decrease of tax obligation of higher incomes, tax payment of lower incomes increase => Increase of income differences and of poverty
Reforms in Western Europe
• In the EU 15 poverty indicators are good and as consequences of reforms economic efficiency was succesfully improved
• Justice (decrease of poverty)
vs.
• Efficiency (sustainability)
• In terms of poverty reduction the scandinavian and the conservative models deliver well – but only the scandinavian model prooved to be sustainable = effective!
Some conrete examples I• Denmark: Stimulating unqualified for work and the fiscal
discipline
– Compensation of low income families and those of special position resulting from tax increase or introduction of new tax forms – compensating in all cases!
– Compensation mostly through social or pension system (due to nature of taxation system)
• Sweden: fall of tax evasion
– Significant compensation, especially through occupancy subsidy and increase of family allowance
– Lowered the progressivity of income absorption
– Subsidization system to compensate negative effects of redistribution
Some conrete examples II• Netherlands: incentive for work
– The package decreased the tax burden by 0,8 % of the GDP
– Income of employees has not increased despite higher demand – this did not stimulate employment
• Finland: stimulating investment
– Those with capital income were subject to lower marginal tax rate on their lalbour income – accordingly part of their income was declared as capital income.
– Increase of capital income proportion compared to taxable income Increased savings willingness
Summary
• Im most cases the goal was to widen the tax basis and decrease tax rates
• From Hungarian perspective relevant are the
- Danish example of strict fiscal frames of the reforms,
- Swedish solution of levelling decreasing progressivity of taxation system through subsidy system
• Improvement of competitiveness and employment can be achieved by abolition of numerous benefits and exceptions, by (partial) taxation of subsidies, by lowering of taxes on labour