27 August 2004 • The Tax Reform 2004-05 – Measures and Macroeconomic Effects • Fritz Breuss, Serguei Kaniovski, Margit SchratzenstallerThe tax reform 2004-05 includes tax cuts within income taxation (Euro –2.2 billion) and corporate taxation (Euro –1.1 billion) as well as increases of several excise taxes (Euro +232 million). It is realised in two steps: the first tax reform package, taking effect in 2004, was adopted by the Austrian Parliament in June 2003 and reduces the tax burden by almost Euro 0.5 billion. The measures of the second package, which are worth about Euro 2.5 billion, were adopted in May 2004 and will mostly be implemented in 2005. The total volume of the tax reform 2004-05 reaches about Euro 3 billion (1.2 percent of GDP) from 2007 on. The tax reform is an important element within the government's long-term strategy to bring the tax ratio down to 40 percent of GDP. According to the current Austrian Stability Programme, the tax reform will decrease the tax ratio from 43.2 percent in 2003 to 41.9 percent of GDP in 2007. The corporate tax cut as well as the introduction of a modern group taxation will increase Austria's locational attractiveness. The reform of the tax scale accounts for the lion's share of the wage and income tax cuts. Within the first step of the tax reform 2004, the standard tax credit was increased from a maximum of 887 Euro to a maximum of 1,264 Euro. From 2005 on, the standard tax credit will be integrated into the income tax scale. The tax scale, which up to now is represented as a marginal tax rate scale, will be depicted as an average tax rate scale and will be reduced to four tax brackets. The reform eases the tax burden for all taxpayers. The income tax scale is made more systematic and transparent by the reform of 2005: marginal tax rates are increasing gradually with taxable income; formal and effective marginal tax rates will be identical. At the same time, the changes in the tax scale result in steeper tax progression. The income tax reform 2004 also introduces the preferential tax treatment of retained profits of sole proprietorships and partnerships: retained profits leading to an increase of own equity are taxed at half the average income tax rate (up to a maximum of 100,000 Euro). Within the second income tax reform phase, several special measures are implemented, which already take effect in 2004: surcharges to the tax credit for sole earners and lone parents are granted, and the commuting tax allowances are raised. The largest part of the corporate tax cut is the result of the decrease of the corporate tax rate from 34 percent to 25 percent in 2005. Moreover, a very liberal group taxation is implemented, which allows companies to offset inter-company profits and losses (including losses incurred by foreign affiliates) and which will considerably promote Austria's attractiveness as a headquarter location. With the first step of the tax reform 2004, tax rates on mineral oil and natural gas were raised and a coal tax was introduced. In 2005, the tax rate on diesel oil used for agricultural purposes will be cut significantly. The tax on sparkling wine will be abolished and the beer tax will be slightly reduced. According to simulations done with the WIFO macromodel, a short-term increase of 0.3 percent and a medium-term increase of 0.4 percent of real GDP can be expected, as the tax reform strengthens disposable incomes of private households and decreases user costs of capital for corporations. The increase of domestic consumption boosts employment by 4,300 persons, the unemployment rate falls by 0.1 percentage points in the medium term. The tax cuts will lead to a temporary increase of the budget deficit of up to 1.2 percentage points. The degree of self-financing is estimated at 11 percent to 15 percent. Vienna, 26 August 2004.
For further information, please refer to Fritz Breuss, Serguei Kaniovski or Margit Schratzenstaller, phone (1) 798 26 01, ext. 204, E-Mail-addresses Fritz.Breuss@wifo.ac.at, Serguei.Kaniovski@wifo.ac.at, Margit.Schratzenstaller@wifo.ac.at
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