Today I am going to give you some information about taxation system in EU today and how it was before the European union.
Moreover, you can learn how you can calculate your salary at the end of reading my article if you are working in Czech Republic.
First of all, before starting bombarding you with too much information, I would like to give some info about origination of European union. First step was taken toward European Union when 6 countries including Italy, Germany and France decided to form a group based on a mutual economic interest in 1957. This cooperation later had become official by including 28 countries and establishing Maastricht treaty in 1993 where euro and European union were created officially.
Even though free movement of people, capital, goods and services pushed member states to have an integrated tax system, today in EU, we could say that indirect tax system has been harmonized at great extension while direct tax system remained almost sole responsibility of each member states. In EU, taxes are more likely to depend on social security contributions (taxes on labour and their contribution ) rather consumption taxes in comparison with OECD countries, and tax rates in EU is higher than in OECD countries, as a percentage of GDP.
Even though harmonization of tax systems is still in discussion, today tax system in European member states still differs a lot from each other, one of the ground reasons is that 1970's most European countries were high fiscal pressure countries because they were paying tax at 33% rate of its' GDP while others had a low fiscal pressure. At that time, there were no other countries except Japan and USA, which were paying such high tax.
It is possible to classify the tax rate of 1970's as below.
1. High tax rate- high fiscal pressure- Nordic countries ( Sweden, Norway, Finland, Denmark, Iceland)
2. High tax rate- high fiscal pressure- Rhine countries (Switzerland, Liechenstein, Austria, Germany, France, Netherlands)
3. Mid tax rate- mid to low fiscal pressure- Anglo Saxon countries ( United Kingdom, United States, Canada, New Zealand, Australia, Ireland)
4. Low tax rate - low fiscal pressure -Middle eastern countries (Western Asia, all of Egypt and Turkey)
During tax reform of 1980's, tax rate in European countries, specifically rhine countries increased even more while in other countries showed no significant change. Since then, even though few reforms have been introduced in 1990's and 2000's, it is almost safe to say that pressure on labour tax and income tax has raised even more in Rhine countries, in European countries on average.
Here, while I was reading this information, I thought that maybe this much high tax base has become a good solid ground for social benefits and better social services being provided by government today, which is becoming resource for all the public benefits to mass population. Of course, this is not the only reason. There are too many other reasons to mention about. It is very obvious that social benefit in EU today is way much better than Mongolia. I know there are downsides and advantages to social benefits. But in my eyes, good social service is out of discussion in Mongolia because it doesn't exist at this moment, and we need at least basic one. Ever since I came here, I had been observing everything and comparing it inside me, by having a little of bit jealousy.
Anyways, back to the topic:
Today, in Europe current tax mix is approximately as below on average:
- Taxes on goods and services - 30 %
- Social security contributions -28,4 %
- Personal income taxes- 25,6%
- Corporate income tax- 9,2 %
- Property taxes -5%
You could observe that more than half of tax base has consisted of labour tax, higher than any OECD country. Let's have a look at the harmonization of taxes in EU. Here are some examples:
1. Majority of EU member states adopted flat rate tax system. But differences in rate differs a lot. Even though corporate income tax easily distort internal market of EU by affecting employment and investment decisions, countries have been implementing different tax rates depending on what of kind policy they needed, such as protectionist policy or supportive policy.
2. Family status is taken into account in the selected countries in three major ways:
-through the application of a tax schedule that varies according to family status. In this respect the tax unit is the individual in Italy, the Netherlands and the UK, while it is the family in France, Germany, Ireland and (by option) in Spain;
- by providing tax credits and allowances related to marital status and the presence of dependent children. For instance, a tax credit is provided for children in Germany, Italy, the Netherlands and the UK;
- by supplying cash transfers or benefit outside the tax system (e.g. cash transfers for dependent children).
Taxation in CEE (Central European countries)
1990's most central European countries had centrally planned economies where unemployment didn't exist while industries and enterprises are state owned and are obligated to absorb any employee who's seeking employment and coming to their industry or enterprise, and individuals had this obligation to consume what's given and had no option to save money and choose products and services. This system as everybody knows, had worked out fine for a while, even attracted some western countries, even Mongolia too. But restricted personal freedom and restricted political liberty had leaded to too much dissatisfaction that claimed on change and transformation where democracy crawled in. This system transformation brought a tax reform align with it obviously. In centrally planned economy, taxes were directly collected from state enterprises and there was no such law for tax turnover. Everything was planned based on demand and supply of the state. If there were to be excessive tax turnover, it would have been paid to citizen in form of some material supplies such as children's clothes, floor etc... maybe tax administrator's job was very easy.
But today, after a huge economic and system transformation, tax administrator has to work for every cent ...The reforms introduced by the New EU countries had to cope with economies in which prices and wages are free to fluctuate, private sector activities become important, there are no controls on the output of enterprises, so that their incomes are not known and payments can be made in various forms and no longer through just one ‘monobank’. This new situation would demand both new tax systems and new tax administrations. Furthermore, these had to be adjusted over the years to conform with the changes in the structure of the economy. It would not be imprudent to say that the tax systems of these countries have come a long way and that from now on they will need more fine tuning than radical surgery.
Particularities of modern CEE tax systems:
The closeness of their current tax burdens - in fact these tax burdens are all close to 40 percent of GDP, having come down from higher levels. A tax burden of 40 percent of GDP may be close to, or even lower than, the European average but it is very high considering these countries’ still low per capita incomes. From an international statistical perspective, the tax burden of these countries could be expected to be somewhat lower. Thus, a question that needs to be raised is whether the current tax levels are sustainable over time. It would be reasonable to speculate that they are likely to fall as the transformation of these economies continues. This fall would require a reduction in public spending. In spite of their high tax levels, all of these countries, with the exception of Estonia, have developed high budgetary deficits, which have been growing in recent years. This implies that these countries have not succeeded yet in reducing the role of the state to a level that can be financed through ordinary tax revenue. The state is still expected to do too much despite various reforms aimed at reducing its role and responsibilities. This aspect could become a problem that would extend beyond the need to meet the Maastricht criteria. The fiscal gap must be closed by reducing public spending rather than by increasing the high level of taxation.
The extent to which labor income is taxed. This is partly due to the large payments for social security contributions, which in some of these countries, such as the Czech Republic, are among the highest in the world.
This heavy burden on labor income must be reduced if the development of growing underground activities is to be prevented. This growth of underground economic activities is already under way in several of these countries and is likely to accelerate with the passing of time.
The almost uniform move towards fiscal decentralization. Undoubtedly this is a political reaction against the powerful central governments of the past. Once the communist regimes were replaced, the citizens of these countries were anxious to have more ‘voice’ and more control over decisions that affected their lives. However, regardless of its political merit, this process of decentralization is likely to constrain future tax reform and to affect negatively future macroeconomic developments. Experience from around the world indicates that it is often more difficult to reduce fiscal deficits in a fiscally decentralized environment.
The growing use of environmental taxes in these countries. The centrally planned past had left these countries with major environmental problems that affected health and life expectancies. Many in these countries have low life expectancy, perhaps due to the quality of the environment. Thus, the attempt to reduce this problem through the use of tax instruments is one that deserves praise.
After labor income, consumption is the other tax base that carries much of the tax burden. All these countries have introduced value added taxes, which with some adjustments will conform with the requirements of the European Union. However, there are still too many excises and other small taxes. Some of these will have to disappear in future years. Property taxes are still playing a marginal role. This is not surprising since, until twenty five years ago, there was no or little private property. However, in future years, it would be preferable to give a growing importance to this tax base, especially for financing the local governments, while reducing the reliance on revenue sharing arrangements that transfer to the local governments parts of the revenue from personal income taxes and corporate income taxes.
TO BE CONTINUED, I FEEL SLEEPY FOR NOW.
