Institute for Research in Economic and Fiscal issues

IREF Europe - Institute for Research in Economic and Fiscal issues

Fiscal competition
and economic freedom


Taxation in Austria compared to other European tax systems

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Taxation in Europe - Yearbook 2013

Austria

Austria today faces a double challenge: to consolidate the country’s fiscal position through effective fiscal and structural policies aimed at reducing the budget deficit and lowering the public debt to GDP ratio. In 2012, Austria managed to narrow its public deficit below 3 percent according to European Union’s Maastricht criteria. In 2012 the public deficit was 2.5% and is estimated to fall to 2.2% in 2013, below the European criteria. State debt is set to peak at 74.7% of GDP in 2012 and 75.4 in 2013, above the EU norm of 60%. Regarding taxation, most of the taxes rates remained unchanged with the exception of flight tax; however tax increases should be expected within 2013 due to the Austrian Consolidation Program 2012-2016. With that program the Austrian federal government is setting the course for a structural and sustainable consolidation of the federal budget, aiming to balance the budget in 2016 and reducing the public debt to 71% of GDP in 2016.

A budget deficit lower than expected

The government had projected a budget deficit of 3.1% but eventually the country ran a deficit of only 2.5%, below government’s forecast and below the EU target. A 4.4% increase of total government revenues (€6.4 bn) played a significant role for this achievement, while total government expenditure showed a similar increase of 4.4% (€6.8 bn). According to the statistics department, 91% of State incomes came from taxes and social contribution in 2012 totaling €136.9 bn. In comparison with 2011 this revenues from taxes and social contributions show an increase of 4.7% or €6.1 bn. To be more specific, revenues from taxes on production income amounted to €44.8 bn in 2012, the current taxes on income, wealth etc. were at €41.1 bn and social contributions reaches €50.8 bn. As far as revenues are concerned, the largest annual increases were observed in taxes on capital transfers 18.38%, in taxes on income and wealth 5.2% and in social contributions 4.3%.

National revenues and expenditure grew both at the same level at around 4.2 %. Revenues increased from €144.48 bn to €150.84 bn, expenditures grew from €151.59 bn to €158.57 bn, which makes a deficit of €7.73 bn representing 2.5 % of GDP. Most of the expenditures went in social protection almost 41% or €64.7 bn, in public health 15.3% or €23.7 bn, and in general public services 13.2% or €20.5 bn. Comparing 2011 expenditures with 2012, the intention of government to reduce spending is far from evident, as far as the public expenditures have grown. However, for 2013 the Austrian federal government is pursuing its strategy of implementing "structural consolidation and reforms."

Tax Policy

Austria is one of the countries with high tax burdens. The number of taxes and their rates have been largely left unchanged from the previous years. Austria’s overall tax burden amounts to 43% of the total domestic income in 2012 slightly higher than the 42.8% of 2011. Most of the taxes remained at their previous levels except the flight tax and the imposition of a capital gain tax of 25%. Due to the Austrian Consolidation Program 2012-2016, however, further tax increases are expected to take place in 2013.

Income tax

All ordinarily residents in Austria are subject to a 25% tax on their worldwide income. The 13th and 14th salaries below €2,100 are tax-free. In general, all kinds of income are taxed at the same rate. There are some tax exemptions and lower tax rates available for interest rates and other kinds of income for the foreigners and the non-Austrian companies. For income over €11,000 the marginal tax rate is 36.5% per year. The marginal rate of 43.21% concerns an income of €25,000 and more. Finally, for income over €60,000 the imposed tax rate is 50%.

Value Added Tax

The standard VAT rate remained at 20%. Food, agricultural products, rents, tourism and entertainment are tax at the lower rate of 10%.

Fuel Tax

The tax rate for the fuel consumption is €397 per 1,000 litres. The increase of the fuel tax rate from January 2011 on led to a decreased fuel consumption by tourists in Austria who probably fill their tanks in the neighbouring countries at a lower price, except for Italy. The transport department of the Austrian Economic Chambers (WKÖ) warned the government against any plan to further increase fuel tax in Austria. From 1st July 2012 the price for off-road activities, also, has been increased.

Corporate Income Tax

In Austria, companies are subject to corporate income tax on their entire income and their profits at a standard tax rate of 25%. This contrasts with personal income that is taxed, as explained above, at a progressive tax rate from 0 up to 50%.

Capital Gains Tax

The Capital Gains Tax in Austria is 25%. On 1 April 2012 the new Austrian withholding tax and capital gains tax regime came into effect. Generally, the new taxation became effective for profits derived from the sale of shares / investment fund units purchased from 1 January 2011 and for the sale of bonds and derivatives purchased as of 1 April 2012.

Bank Tax

The bank tax has remained the same. The bank levy depends on the total amount of the bank’s assets. When the later exceed the amount of €1 bn, they are taxed at a rate of 0.04% and once total assets pass the threshold of €20 bn a higher tax rate of 0.08% applies. The expected €500 mil. tax revenues that levy generates have not been poured to a bank rescue fund but to the general budget.

Flight Tax

From 1 January of 2013 the flight tax rates for short and medium-haul routes have been reduced. In 2013, the passengers pay €7 instead of €8 in 2012 for continental flights and €15 instead of €20 for medium-haul routes. The tax for international flights remains at €35. The high level of the international tax flight penalizes the whole Austrian economy by making the country an expensive touristic destination for the foreign visitors. The reduced incoming traffic[1] has a negative impact on the tourism industry, damaging every sector from hotels to museums. In addition, some regional airports in Austria have been affected by the drops in passengers. Consequently, the high international flight tax undermines the tourism industry’s stability and exposes it to unnecessary risks.

Tobacco Tax

The tobacco taxation remains at a high level during 2013 putting an average packet of cigarettes at around €4.3. Cigarettes in Austria became more expensive since 2012 in order to push smokers to reduce or quit smoking. This taxation policy did not meet its goal[2] but it turned smokers towards other, more economic ways, of smoking or forced them to cut on other consumptions in order to maintain their cigarette consumption at its previous level.

Looking for new taxes to balance the budget

Taking strong measures and doing reforms doesn’t seem to be where the Austrian federal government is at its best. Instead, the government is permanently and desperately looking for new taxes that would generate more revenues. Within the new consolidation program, revenue increasing measures consist in social contributions, taxation of realized capital gains from the sale of real estate, closing tax loopholes related to VAT and two sizeable one-off measures (tax agreement with Switzerland, frontloaded taxation of certain pension fund benefits). From the above measures the government expects to gather some €9 bn, the largest part of those extra revenues (table 1) coming from tax on income from real estate and property sales (almost 22.6% or €2 bn), followed by VAT - closure of tax loopholes which will account for 20.3% of the revenues (€1.8 bn) to which must be added 12.6% (€1.15 bn) from withholding tax on capital gains in Switzerland.

The Austrian Social Democrats (SPO) has suggested the reintroduction of inheritance and gift taxation, the People’s Party (OVP) disagreed with a comeback of the measure which was abolished four years ago, however SPO is still looking for the opportunity to make it happen. Moreover, the current government is looking for a mandatory contribution of the state’s richest residents with wages more than €168,000.

Table 1: Finding new sources of revenues (million €)
Measures to increase State revenues20122013201420152016Sum
2012-2016
Taxing income from real estate
and property sales
10 350 450 500 750 2060
Group taxation
restriction on deduction of foreign losses
0 50 75 75 75 275
VAT - closure of tax loopholes 40 370 480 480 480 1850
Solidarity fee on high incomes 110 110 110 110 440
Financial transaction tax 500 500 500 1500
Withholding tax on capital gains
in Switzerland
1000 50 50 50 1150
Cut in premium on housing savings scheme
and private pension provision
70 100 100 100 370
Extension of corporate income tax duty 30 40 50 50 50 220
Special contribution to stability levy 128 128 128 128 128 640
Ex-ante income tax
on private pension insurance
890 -75 -75 -75 -75 590
Total 1098 2043 1868 1918 2168 9095
Source: OENB, STATISTIK Austria

Budgetary Policy: 2013 Budget

The main goal of 2013 Austria’s budget is to push forward a strategy of "structural consolidation and reforms". Structural reforms are indeed necessary in the areas of pensions, healthcare policy, public administration, public funding as well as on the labour market. This is a precondition to meet Maastricht criteria keeping its deficit below 3% and, at the 2016 horizon, to achieve a balanced budget. For 2013 public deficit is expected at 2.1% of GDP, while debt ratio will rise slightly, mainly due to the additional measures being taken in the context of the European governments’ debt crisis. Public debt will peak at 75.4% of GDP, but from 2014 onwards it will start to gradually fall again. Public expenditure is estimated to fall by 1% to 51% of GDP, down from 51.7% in 2012, while total revenues is expected to raise slightly from 48.7% of GDP in 2012 to 48.9% in 2013. The Austrian Federal government will try to balance the budget, focusing more, as we saw, on new taxes. As a result, the tax ratio will rise in 2013 to 43% of GDP, up from 42.7% in 2012. The 2013 budget has been prepared in the larger context of the stabilization and growth package decided in spring 2012; a package that imposes structural reforms to be implemented from 2013 onwards.

Budgetary policy: The Austrian Consolidation Program 2012-2016

Early 2012 the Austrian federal government passed a second package of fiscal consolidation measures in order to correct its deficit, to put it on a sustainable basis by 2013 at the latest, and to achieve a structurally almost balanced budget by 2017. That comprehensive consolidation package amounts to a total volume of €26.5 bn : €19.9 bn contributed by the federal government, €1.4 bn by the social insurance system, and €5.2 bn by states and municipalities. The federal government should hence attempt to balance the budget partly with revenue-increasing measures and partly from spending-restraint measures.

On the expenditure side, the package includes reforms in the areas of pensions, health care, subsidies, and public administration. As a matter of fact, the program relies more on expenditure cut (¾ of the package) than on revenue increases (the remaining ¼). Looking more closely at the measures on the expenditure side that touch on public administration one finds a pay freeze in 2012, moderate pay increases in 2014, hiring freeze (with an exemption for educational, police and judiciary services), cutting of running costs and merger of administrative entities. Some €2 bn should be saved through those reforms.

Table 2: Cutting on expense (million €)
Measures on the expenditure side20122013201420152016Sum
2012-2016
Pension and unemployment
insurance system
11 919 1483 2059 2491 6963
Public companies/subsidies 291 438 573 1061 1124 3487
Administration and public services law 55 391 536 772 790 2544
Health care 19 0 0 0 0 19
Interest expenditure
(due to lower net lending)
12 122 272 486 742 1634
State and local governments 85 -68 594 791 1278 2681
Social security funds 60 144 256 392 520 1372
Total 533 1945 3715 5560 6945 18699
Source: OENB, STATISTIK Austria

Another €7.3 bn will come from reforming pension and unemployment insurance system. The details of that part of the package are: moderate increases for pensions in 2013 and 2014, measures to increase factual retirement age (for instance by increasing the eligibility criteria for early retirements), measures to reduce disability pensions, no early retirement below the age of 50, measures to re-integrate employable people into the job market, stricter rules for allowances for part-time workers before retirement and increase of social insurance contributions.

Regarding health care (with a total contribution of €3.4 bn to the package) the main reforms will impact on the compulsory social insurance system and the hospital sector. Finally, reforming public companies will include cutting on costs (both infrastructure and operational costs) at the Austrian Federal Railway and a decrease of early retirement in that same company.

Conclusion

In 2012 Austria managed to narrow its public deficit below 3% according to European Union’s Maastricht criteria. State debt is set to peak at 75.4% of GDP in 2013. However, a necessary precondition for economic growth, for new jobs, and for social stability is to balance its budget and bring down its public debt below 60%. There is no doubt that the Austrian Consolidation Program 2012-2016 is a positive step in that direction to the extent that ¾ of the effort is on expenditure, including cuts in payroll (in particular, a public-sector wage freeze in 2013), smaller pension increases in 2013 and 2014 (adjustment factor reduced by 1 percentage point and 0.8 percentage point respectively), together with measures to raise the effective retirement age, as well as reductions in various government grants (subsidies for Federal Railways of Austria). This explains that according to the Heritage foundation freedom index, Austria is 1.5 points better than last year due to improved scores for government spending, business freedom, and investment freedom.

However, there is much doubt regarding Austria tax policy and the imposition of new taxes, such as the capital gains tax and the flight tax which will make the country an expensive touristic destination for foreign visitors. Moreover, the willingness of SPO to reintroduce inheritance and gift taxation will raise further tax burden in Austria, which is already one of the highest in Europe.

Tsesi Alsian-Marios and Lorena Unaza
Austrian Economics Center, Vienna

This is part of :

Taxation in Europe - Yearbook 2013
The yearly report on the evolution of European tax systems

A short presentation of IREF ’Yearbook on Taxation in Europe’ Series
Among the many ways to understand the climate of opinion and the culture of a country, looking at its fiscal system is one of the most rewarding. Sure, fiscal systems almost always rhyme with complexity; each system bearing the (...)


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