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News : EU Economy Last Updated: Apr 24, 2009 - 5:31:05 PM


Taxation in EU: Rise in overall tax burden in the EU27 to 39.6% of GDP in 2005: Stamp duty and capital taxes have pushed Irish burden up since 2001
By Finfacts Team
Jun 26, 2007 - 1:43:00 PM

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The European Union's logo in the Irish language, to mark the golden jubilee of the signing of the Treaty of Rome
In 2005, the overall tax ratio1 (i.e. the total amount of taxes and social security contributions) in the EU272 stood at 39.6% of GDP, up from 39.2% in 2004. The EU27 tax ratio is nearly the same as in 1995 (39.7%); nevertheless, the ratio is lower than the peak of 41.0% in 1999.

The downtrend which had started in 1999 in most countries stopped in 2005. In 2005 the overall tax ratio in the Eurozone 2 (EA13) was 39.9%, up from 39.6% in 2004. Since 1995 taxes in the Eurozone have followed a similar trend to the EU27, although at a slightly higher level.


EU tax levels remain generally high in comparison with the rest of the world, with the EU27 tax ratio exceeding those of the USA and of Japan by some 13 percentage points. However, the tax burden varies significantly between Member States, ranging in 2005 from less than 30% in Romania (28.0%), Lithuania (28.9%), Slovakia (29.3%) and Latvia (29.4%) to more than 50% in Sweden (51.3%) and Denmark (50.3%).

In the past decade significant changes in tax ratios have taken place in several Member States. The largest falls were recorded in Slovakia, where the overall tax burden dropped from 39.6% in 1995 to 29.3% in 2005, and Estonia (from 37.9% to 30.9%). The highest increases were observed in Cyprus (from 26.7% to 35.6%) and Malta (from 27.3% to 35.3%).

This information comes from the publication Taxation trends in the European Union: Data for the EU Member States and Norway3 issued by Eurostat, the Statistical Office of the European Union and the Commission's Directorate-General for Taxation and Customs Union. This publication compiles tax indicators in a harmonised framework based on the European System of Accounts (ESA 95), allowing accurate comparison of the tax systems and tax policies between EU Member States.


This year's issue features a more detailed analysis of consumption taxation (breakdown of consumption taxes into their components: VAT, energy, alcohol and tobacco duties, and other taxes) and for the first time covers Bulgaria and Romania, which joined the EU on 1 January 2007.

Tax burden on labour broadly stable at a high level, while increasing on consumption and capital

For the EU27 as a whole, the average implicit tax rate (ITR) on labour4 (including social contributions), the preferred indicator for the average tax burden, amounted to 35.2% in 2005. The decline registered since the turn of the century stopped in 2005, despite a wide consensus on the desirability of reducing labour taxes. However, the tax burden is still lower than its maximum of 36.5% in 2000. Among the Member States, in 2005 this rate ranged from 22.1% in Malta, 24.6% in Cyprus, 25.5% in the United Kingdom and 25.6% in Ireland to 46.4% in Sweden, 43.1% in Italy, 42.8% in Belgium and 42.1% in France. In the new Member States Bulgaria and Romania, the rate amounted to 34.2% and 26.7% respectively. Despite the presence of a number of low taxing countries, taxation on labour is, on average, much higher in the EU than in the other main industrialised economies.

In contrast to the ITR on labour, the average implicit tax rate on consumption4 in the EU27 has been on the increase; it rose from 20.5% in 2001 to 22.1% in 2005. Consumption was most taxed in Denmark (33.7%), Sweden (28.1%) and Finland (27.6%), while the lowest implicit rates were registered in Spain (16.3%), Lithuania (16.5%) and Italy (16.9%). In Bulgaria and Romania the ITRs amounted to 24.6% and 18.5% respectively.

The average implicit tax rate on capital4 in the EU27 stood at 27.3% in 2005, up from 25.3% in 2004. There is considerable disparity in this ratio: among the Member States for which 2005 data is available, the highest implicit tax rates on capital were recorded in Denmark (46.5%), Ireland (41.4%) and France (38.9%), and the lowest in Estonia (8.1%) and Lithuania (11.4%), while Latvia registered 7.8% in 2004.

Labour taxes remain the largest source of tax revenue, representing around half of total tax receipts in the EU27. Taxes on capital accounted for approximately 22% of total tax receipts, and consumption taxes 28%.

IRELAND

The report says that total tax to GDP ratio in Ireland (30.8 %, EU-27 37.4 %) is the fifth lowest in the Union, after Romania, Lithuania, Slovakia and Latvia. It is also, by a margin of 3.6 points of GDP, the lowest of the Euro-area.

The tax structure by tax type (indirect 44 %, direct 40 % and social security contributions 15 %) differs considerably from the structure typical for the EU-27 as a whole (39 %, 31 % and 30 %) and is comparable with the United Kingdom and Malta. The structure of Ireland's indirect taxes is nevertheless similar to the EU-27 average with VAT providing 56 % of total indirect taxes (EU-27 49 %) and excise duties providing 25.4 % (EU-27 19.9 %).

The greater significance of indirect taxes in the total tax take counterbalances the generally light overall tax burden in Ireland such that the proportions of GDP absorbed are comparable (VAT and excise duties absorb 7.7 % and 3.2 % of GDP against an EU-27 average of 8.0 % and 3.3 %, respectively). Direct taxes absorb almost the same amount (12.4 %) of GDP as the average for the Union (12.0 %) but the revenues rely to a greater extent on corporate tax (3.4 % of GDP, EU-27 3.1 %) and on capital gains tax than elsewhere. Social security contributions absorb a mere 4.8 % of GDP (EU-27 11.2 %).

Ireland is one of the most centralised states in Europe with local government having few responsibilities and commensurate resources (2.2 % of tax revenues). With the social security fund receiving just 12.5 % of tax revenues (EU-27 28.9 %), the vast majority (over 84 %) of tax revenue accrues to central government, a ratio superseded only by Malta and the United Kingdom.

Since 1995, Ireland has reduced the total tax burden across the board falling 2.3 % from 33.1 % of GDP. In the last three years, however, the total tax ratio has bounced back over the level of 2001 in large part due to a surge in capital gains tax and stamp duties. Within indirect taxes, excise duties fell substantially as a proportion of GDP over the period (from 4.9 % to 3.2 %) primarily because revenues, while doubling in monetary terms over the period, failed to keep pace with the growth in the general economy.

In 2002-2005, however, indirect revenues were buoyed by more than one percentage point of GDP as stamp duty revenues increased by one hundred and thirty three percent under the influence of the continuing property boom. Direct taxes have fallen over the period 1995 to 2005 by 1.2 % of GDP. Within this a contrast must be drawn between the startling reduction in personal income tax (from 10.3 % to 7.3 % of GDP), as a result of the lowering of rates and expansion of allowances and credits, and the significant rises in corporate income tax (from 2.7 to 3.4 of GDP) and capital gains tax (from 0.1 to 1.2 %), as a consequence of robust economic growth and despite substantial reductions in the rates.

As GDP includes the output of the multinational sector, which is very significant in Ireland (92% of Irish exports are made by foreign-owned firms), it is more useful to use Gross National Product - the total value of final goods and services produced in a country plus income from Irish capital held abroad set-off against transfers of net earnings of multinationals - in effect net income outflows from Ireland . This was particularly relevant in 1995 compared with recent years when income from large Irish investments abroad, in particular in the commercial property sector, has narrowed the gap. In Other EU countries, there is only a marginal difference between GDP and GNP.

 

1995

2005

GDP

€53,147m

€161,163m

GNP

€46,994m

€135,914m

Tax as % GNP

36.7%

36.2%

Source: CSO

We can see from the table that the Irish tax burden has changed little since 1995.

While personal taxes have fallen, indirect or stealth taxes have risen.

In addition, as many Irish taxpayers see a necessity to pay private health insurance because of the perceived poor quality of the public health service, the cost is equivalent to a tax but is not included in the taxation figures.

Family health insurance premiums of say  €2,000 net of the tax credit for a family  earning €60,000 gross, costs 3.3% of income.

Tax revenue and implicit tax rates* by type of economic activity


 
Tax revenue,
% of GDP
Implicit tax rate on:
Consumption
Labour
Capital
1995
2004
2005
1995
2004
2005
1995
2004
2005
1995
2004
2005
EU27**
39.7
39.2
39.6
21.5
21.6
22.1
35.8
35.1
35.2
24.2
25.3
27.3
EA13**
39.9
39.6
39.9
20.9
21.6
21.8
36.0
36.2
36.8
23.4
28.4
30.4
BE
43.8
45.0
45.5
20.6
22.0
22.2
43.8
43.0
42.8
25.3
33.9
34.5
BG
:
35.3
35.9
:
23.7
24.6
:
36.3
34.2
:
:
:
CZ
36.2
36.8
36.3
22.1
22.0
22.1
40.5
41.7
41.3
26.4
25.4
23.2
DK
48.8
49.3
50.3
30.5
33.3
33.7
40.1
37.4
37.3
30.0
46.2
46.5
DE
39.8
38.8
38.8
18.8
18.2
18.1
39.4
39.1
38.7
22.4
21.9
23.3
EE
37.9
31.4
30.9
20.6
20.5
23.8
39.2
35.2
33.1
24.7
8.9
8.1
IE
33.1
30.5
30.8
24.9
26.5
27.2
29.7
26.1
25.6
25.9
39.1
41.4
EL
32.6
34.3
34.4
17.6
17.6
17.0
34.1
37.9
38.0
11.8
15.4
:
ES
32.7
34.5
35.6
14.6
16.1
16.3
28.9
29.3
30.1
20.3
33.5
36.0
FR
42.7
43.1
44.0
21.5
20.2
20.2
41.2
41.4
42.1
31.2
36.9
38.9
IT
40.1
40.7
40.6
17.4
16.9
16.9
37.8
43.1
43.1
25.9
29.5
29.0
CY
26.7
33.5
35.6
12.1
19.4
19.3
23.1
22.8
24.6
:
:
:
LV
33.2
28.5
29.4
19.3
18.5
20.4
39.2
36.7
36.2
:
7.8
:
LT
28.6
28.3
28.9
17.7
16.0
16.5
34.5
36.0
35.9
15.1
10.8
11.4
LU
37.1
37.9
38.2
21.1
24.7
24.3
29.3
29.0
29.5
:
:
:
HU
41.6
38.6
38.5
30.9
27.7
26.5
42.6
39.9
40.5
:
:
:
MT
27.3
34.2
35.3
15.4
17.4
19.2
19.0
21.4
22.1
:
:
:
NL
40.2
37.7
38.2
23.2
24.9
25.4
34.4
30.6
30.7
21.2
22.1
21.2
AT
41.3
42.8
42.0
20.3
21.5
21.3
38.7
40.9
40.9
25.6
25.5
23.1
PL
37.1
32.6
34.2
21.3
18.7
19.8
35.9
34.7
35.5
21.5
20.7
22.2
PT
31.9
34.2
35.3
19.1
20.0
:
28.1
29.5
:
18.8
:
:
RO
:
27.3
28.0
:
16.8
18.5
:
28.1
26.7
:
:
:
SI
40.2
39.6
40.5
25.1
24.8
24.5
38.9
38.1
38.5
:
:
:
SK
39.6
29.7
29.3
27.1
21.5
21.9
39.5
35.7
33.7
33.5
16.0
14.4
FI
45.7
43.4
43.9
27.6
27.7
27.6
44.3
42.0
42.0
28.5
26.1
26.7
SE
49.0
50.5
51.3
27.9
27.6
28.1
48.4
46.4
46.4
17.5
:
:
UK
35.6
35.9
37.0
20.1
19.1
18.7
25.8
24.9
25.5
33.3
35.3
37.6
NO
41.9
43.8
44.3
30.2
26.4
27.1
37.8
39.1
39.4
:
:
:

Source: European Commission Services.

* Implicit tax rates (ITR) measure the effective average tax burden on different types of economic income or activities, i.e. on labour, consumption and capital. ITR express aggregate tax revenues as a percentage of the potential tax base for each field (see footnote 4).

** EU27 and EA13 overall tax ratios are computed on the basis of a GDP-weighted average. For all other indicators the aggregates are calculated as arithmetic averages of the Member States for which the respective annual data are available.

: data not available

Environmental tax revenues declined to lowest level in ten years

Despite intense public interest in environmental issues, environmental tax revenues have been declining since 1999; their 2005 level, 2.6% of GDP, is the lowest in ten years. This drop is due to lower energy taxation, as revenues from the other environmental taxes have remained stable.

Environmental tax revenue, % of GDP


 
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
Environmental taxes
EU27*
2.8
2.8
2.8
2.8
2.9
2.8
2.7
2.7
2.7
2.7
2.6
EA13*
2.7
2.7
2.7
2.7
2.8
2.7
2.6
2.6
2.7
2.6
2.6
Energy taxes
EU27*
2.1
2.1
2.1
2.1
2.2
2.1
2.0
2.0
2.1
2.0
1.9
EA13*
2.1
2.1
2.1
2.0
2.1
2.0
2.0
2.0
2.0
1.9
1.9

* GDP-weighted averages.

Top personal and corporate income tax rates on average lower in the new Member States

The top personal income tax rate differs substantially within the EU: the highest top rates5 on 2006 personal income are found in Denmark (59.0%), Sweden (56.6%), the Netherlands (52.0%) and Finland (50.9%), and the lowest in Romania (16.0%), Slovakia (19.0%), Estonia (23.0%) and Bulgaria (24.0%).

As for corporate income tax, the highest adjusted top statutory tax rates6 are recorded in Germany (38.7%), Italy (37.3%), Malta (35.0%) and France (34.4%), and the lowest in Bulgaria and Cyprus (both 10.0%), Ireland (12.5%) and Latvia (15.0%).

Over recent years top rates have shown a clear downward trend in the whole of the EU, particularly in the corporate area but also in the realm of personal taxation. On average, the new Member States display markedly lower top rates.

Top statutory personal income tax rate on 2006 income, %

RO
SK
EE
BG
LV
LT
CY
CZ
MT
HU
EU27*
LU
IT
EL
FR
16.0
19.0
23.0
24.0
25.0
27.0
30.0
32.0
35.0
36.0
38.7
39.0
39.0
40.0
40.0
PL
UK
DE
IE
PT
EA13*
ES
BE
AT
SI
FI
NL
SE
DK
40.0
40.0
42.0
42.0
42.0
44.8
45.0
50.0
50.0
50.0
50.9
52.0
56.6
59.0

Source: European Commission Services.

* Arithmetic average.

Adjusted top statutory tax rate* on corporate income in 2007, %

BG
CY
IE
LV
RO
LT
HU
PL
SK
EE
SI
CZ
EU27**
EL
AT
10.0
10.0
12.5
15.0
16.0
18.0
18.6
19.0
19.0
22.0
23.0
24.0
24.5
25.0
25.0
NL
FI
PT
DK
SE
EA13**
LU
UK
ES
BE
FR
MT
IT
DE
25.5
26.0
26.5
28.0
28.0
28.5
29.6
30.0
32.5
34.0
34.4
35.0
37.3
38.7

Source: European Commission Services.

* Adjusted top statutory tax rate on corporate income takes into account corporate income tax (CIT) and, if they exist, surcharges, local taxes, or even additional taxes levied on tax bases that are similar but often not identical to the CIT. In order to take these features into account, the simple CIT rate has been adjusted for comparison purposes.

** Arithmetic average.
 

  1. The tax-to-GDP ratio measures the overall tax burden as the total amount of taxes and compulsory actual social security contributions as a percentage of GDP. This indicator is widely used to measure the overall tax burden but includes the taxes that are raised on social transfers. Because social transfer recipients often receive directly a net pay, they do not feel the burden of paying taxes. This definition differs slightly from the one used in the Statistics in Focus, Economy and Finance, 31/2007, "Tax revenue in the EU: Increases for the first time since 1999, to 40.9% of GDP" (see News Release 41/2007, 20 March 2007), which includes the voluntary and imputed social contributions. The difference between the two measures amounts to around 1�% of GDP for the EU and Eurozone
     aggregates.
  2. EU27: Belgium (BE), Bulgaria (BG), the Czech Republic (CZ), Denmark (DK), Germany (DE), Estonia (EE), Ireland (IE), Greece (EL), Spain (ES), France (FR), Italy (IT), Cyprus (CY), Latvia (LV), Lithuania (LT), Luxembourg (LU), Hungary (HU), Malta (MT), the Netherlands (NL), Austria (AT), Poland (PL), Portugal (PT), Romania (RO), Slovenia (SI), Slovakia (SK), Finland (FI), Sweden (SE) and the United Kingdom (UK). Eurozone
     (EA13): Belgium, Germany, Ireland, Greece, Spain, France, Italy, Luxembourg, the Netherlands, Austria, Portugal, Slovenia and Finland.
  3. Taxation trends in the European Union: 1995-2005
  1. Implicit tax rates (ITR) measure the effective average tax burden on different types of economic income or activities, i.e. on labour, consumption and capital. ITR express aggregate tax revenues as a percentage of the potential tax base for each field.

The ITR on labour is the ratio between taxes and social contributions paid on earned income and the cost of labour. The numerator includes all direct and indirect taxes and employees' and employers' social contributions levied on employed labour income, while the denominator amounts to the total compensation of employees working in the economic territory increased by taxes on wage bill and payroll. It is calculated for employed labour only (so excluding the tax burden falling on social transfers, including pensions). The average may conceal important variations in the tax burden across the income distribution.

The ITR on consumption is the ratio between the revenue from consumption taxes and the final consumption expenditure of households on the economic territory.

The ITR on capital includes, in the numerator, the taxes levied on the income earned from savings and investments by households and corporations and taxes related to stocks of capital stemming from savings and investment in previous periods. The denominator of the capital ITR is a proxy of the world-wide capital and business income of Member States' residents for domestic tax purposes. Trends in the capital ITR reflect a wide range of factors and it should be interpreted with caution.

All ITRs for the EU and the Eurozone
 are calculated as arithmetic averages.

  1. The top statutory personal income tax rate reflects the tax rate for the highest income bracket without surcharges. For Denmark, Finland and Sweden the municipal income tax is also included.
  2. The adjusted top statutory tax rate on corporate income takes into account corporate income tax (CIT) and, if they exist, surcharges, local taxes, or even additional taxes levied on tax bases that are similar but often not identical to the CIT. In order to take these features into account, the simple CIT rate has been adjusted for comparison purposes.

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