Foundation series

EU tax trends: analysis of recent EU reforms

In recent years, EU countries have undertaken a series of tax reforms aimed at maintaining tax revenue levels while supporting investment and economic growth. In general, tax reforms have focused on reducing personal and corporate income tax rates while increasing environmental or wealth taxes. However, as summarized here, not all tax reforms are created equal. Poorly designed fiscal policy and tax hikes could undermine economic recovery.

The European Commission recently published the fiscal policy guidelines for 2023 as EU countries recover from the economic impact of the pandemic. The Commission’s Winter 2022 forecast (made before Russia’s invasion of Ukraine) predicted gross domestic product (GDP) growth of 4% for EU member states in 2022 and growth in GDP of 2.8% for 2023. With these economic forecasts, the European Commission recommends low-debt countries to focus more on investments for the green and digital transition, while high-debt countries should focus on fiscal stability and debt reduction.

Individual tax reforms in the EU

AustriaBudget 2022 reduced the personal income tax rate from 35% to 30% for the second tax bracket effective July 2022. In 2021, the personal income tax rate on the first tax bracket was also lowered from 25% to 20%. However, another cut from 42% to 40% for the third tax bracket has been pushed back a year to mid-2023.

In 2021, the Czech Republic reintroduces progressive income taxation with two tax brackets and a maximum rate of 23% on income above CZK 1 million (US$44,679); this amount was increased to CZK 1.8 million ($80,421) in 2022. Previously, a flat tax of 15% was applied.

Greece suspended the solidarity surcharge in 2020. However, in 2022 the surcharge is only suspended for workers in the private sector.

Latvia reduce the top tax rate from 31.4% to 31% in 2021. The top rate applies to income above EUR 78,100 ($86,129).

In 2021, Norway reduces the income tax rate by 0.2 percentage points for the first and second tax brackets. In 2022, it increased the income tax rate by 0.2 percentage points for the third and fourth tax brackets and a fifth tax bracket was added for income above NOK 2 million ( $2.28 million) which are subject to an additional marginal tax rate of 17.4%. flat rate tax of 22%. Therefore, in 2022, the top tax rate has increased from 38.2 to 39.4%. In addition, Norway continued to adjust income tax brackets to inflation.

Norway also increased the adjustment factor applied to stock and dividend gains from 1.44% to 1.6% in 2022, lowering the effective capital gains tax rate from 31.7% to 35, 2%.

Poland approved a tax reform plan, the so-called “Polish Deal”, in 2022. The reform increased the income tax threshold from 8,000 PLN ($1,885) to 30,000 PLN ($7,074 ) while the health insurance contribution is no longer tax deductible from personal income. Instead, tax relief is offered to taxpayers with annual incomes between PLN 68,410 ($16,132) and PLN 133,692 ($31,527).

In 2021, Spain increased income tax by 2 percentage points for those with an annual income above EUR 300,000 ($331,485). This pushed the highest statutory tax rate to 54% in the Valencian Community. The last time the Spanish central government adjusted personal income tax brackets for inflation was in 2008.

Additionally, the tax on capital gains over EUR 200,000 ($220,566) was increased by 3 percentage points to 26%.

Corporate tax reforms in the EU

In 2024, Austria will reduce corporation tax from 25% to 23%. The government is also considering raising the profit tax exemption threshold up to 30,000 euros ($33,085) from 13% to 15%.

France lowered the standard statutory corporate tax rate in 2022 to 25.83% currently (including the 3.3% social surtax).

The Netherlands abandoned the originally planned reduction in the corporate tax rate to 21.7% and, in exchange, the statutory corporate tax rate was increased to 25.8% in 2022. However, at the same time, the top tax bracket has been increased from EUR 245,000 ($270,193) in 2021 to EUR 345,000 ($380,476) in 2022.

Poland, trying to emulate Estonia, passed a new tax rule in 2021 that allows companies with income below PLN 100 million ($24 million) to be taxed only on their income when distributed to shareholders. Limiting the reform only to businesses below the revenue threshold could lead some businesses to misreport their revenue to stay below the threshold. In 2022, the “Polish Deal”, an overhaul of the tax system, came into effect. Many measures focus on tax relief for research and development (R&D), such as the simultaneous application of R&D and patent box tax relief or a 200% deduction for certain R&D expenses. In addition, a corporation tax of at least 10% has been approved, applied when a company’s net income is less than 1% of total revenue, excluding capital gains.

Spain approved a new minimum corporate tax rate of 15% for 2022, applied to large companies with annual turnover exceeding 20 million euros (22 million US dollars), while banks and energy companies must pay a minimum of 18%. Large multinational companies headquartered in Spain will also face higher taxes, as in 2021 the government reduced tax exemptions from 100% to 95% for dividends and capital gains from foreign subsidiaries. ‘foreigner.

In 2021, Sweden reduce corporation tax from the current 21.4% to 20.6%.

Wealth tax reform in the EU

Norway and Spain are among the few countries in the world that still have a net wealth levy. In 2021, Spain changed the wealth tax which is collected and administered by regional governments. The wealth tax rate on wealth above 10.7 million euros ($11.8 million) – the highest wealth bracket – has been increased by 1 percentage point, from 2 .5% to 3.5%. In 2022, Norway increased the net wealth tax rate from 0.85% to 0.95% for net wealth above NOK 1.7 million ($0.19 million); it was NOK 1.5 million ($0.17 million) in 2021. In addition, for net wealth above NOK 20 million ($2.3 million), the tax rate is 1 .1%.

These ISF reforms have the potential to exacerbate the distortions created by this tax. Given that wealth taxes generate little revenue and have the potential to discourage entrepreneurship, stifle innovation and impact long-term growth, perhaps Spain and Norway should completely repeal the tax.

Environmental tax reforms in the EU

In the case of Austriato offset income and corporate tax relief and to comply with the European Union’s green transition agenda, Austria will start taxing CO2 emissions to 30 EUR ($33) per ton from July 2022, and gradually increase it to 55 EUR ($61) per ton by 2025. The government is also considering a series of measures to compensate for the additional burden for taxpayers caused by carbon pricing, including an investment allocation of up to 350 million euros ($385 million) to improve businesses’ energy efficiency and help them become more environmentally friendly.

Norwaythe company’s 2022 budget proposal was to increase CO taxes2 emissions that are not part of the European Union Emissions Trading System by 28% to NOK 2,000 ($228.53) per metric ton in 2030. However, in 2022, CO2 the emission tax on diesel and fuel oil has already been increased by nearly 30% and set at NOK 2,005 ($229.11) per metric ton, above the 2030 target. To offset the burden imposed on taxpayers by carbon pricing, the government has proposed a general travel deduction of NOK 1.65 ($0.19) per kilometre. Nevertheless, in 2021, after discounting credits and subsidies, oil and gas tax revenues almost tripled compared to 2020, due to high gas prices in the second half of the year.

EU tax reforms for economic growth

Reducing personal income tax has the potential to increase workers’ disposable income, increase consumption and potentially contribute to economic growth. In addition, personal income tax parameters must be indexed to inflation. Otherwise, higher levels of inflation may artificially increase individual tax burdens. The delay in implementing these tax cuts will delay the growth and labor market effects that these tax reforms should have.

Although the shift from income taxation to carbon taxation can have a positive impact on employment, relying too heavily on carbon taxation at a time when energy and fuel costs are at one of their highest levels could jeopardize the economic recovery.

Instead, countries could consider moving to full charges to increase private investment and move to a permanent, neutral corporate tax. As governments move towards fiscal stability, policymakers should focus on consumption taxes and make them more efficient and neutral by broadening the tax base, lowering the tax rate and eliminating unnecessary tax exemptions . Countries may also want to put in place compensation measures for the poorest households.

Policy makers need to ensure that their tax systems are geared towards investment, jobs and long-term economic growth.