To what extent do existing tax institutions and procedures support or hinder adequate tax revenue flows?
The tax system is fully aligned with the goals of ensuring adequate tax revenues.
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9
Finland
In Finland, the state and municipalities have the power to levy taxes. The Evangelical Lutheran Church and the Orthodox Church are allowed to collect their membership fees through regular taxation. Taxation policies are largely effective. Taxes are generally high in Finland because the country has comprehensive healthcare and social security systems, and operates a costly education system that does not charge tuition. In general, the public has a favorable attitude toward high levels of taxation. In a recent poll, 96% of respondents agreed that taxation is an important means of maintaining the welfare state, and 79% agreed that they paid their taxes willingly.
The taxation policy of Petteri Orpo’s government is designed to enhance household spending capacity, create stronger incentives for workforce participation and contribute to the overall improvement of economic conditions. This policy aims to promote employment and self-employment while fostering a supportive environment for domestic ownership (Ministry of Finance n.d.). The government is committed to refraining from implementing discretionary measures that would raise the overall tax rate, emphasizing a strategy that encourages economic growth and individual financial empowerment. In short, the government strongly addresses possible disincentives in the tax system that may discourage individuals from seeking employment and companies from making investments.
Administrative capacities in Finland are sufficient to collect the taxes levied, and tax evasion is effectively prosecuted. Finland performs well regarding structural balance and redistributional effects. While overall taxation policies generate steady government revenue, they are insufficient to prevent state and municipal budget deficits.
The taxation policy of Petteri Orpo’s government is designed to enhance household spending capacity, create stronger incentives for workforce participation and contribute to the overall improvement of economic conditions. This policy aims to promote employment and self-employment while fostering a supportive environment for domestic ownership (Ministry of Finance n.d.). The government is committed to refraining from implementing discretionary measures that would raise the overall tax rate, emphasizing a strategy that encourages economic growth and individual financial empowerment. In short, the government strongly addresses possible disincentives in the tax system that may discourage individuals from seeking employment and companies from making investments.
Administrative capacities in Finland are sufficient to collect the taxes levied, and tax evasion is effectively prosecuted. Finland performs well regarding structural balance and redistributional effects. While overall taxation policies generate steady government revenue, they are insufficient to prevent state and municipal budget deficits.
Citations:
Ministry of Finance. n.d. “Fiscal Policy.” https://vm.fi/en/fiscal-policy
Ministry of Finance. n.d. “Fiscal Policy.” https://vm.fi/en/fiscal-policy
Norway
Taxes on income from work, payroll, and consumption (VAT) are generally high in Norway but are relatively similar to the OECD average. However, taxes on properties, financial assets, and company profits are modest.
A distinguishing trait of the Norwegian economy is that taxes on income and consumption constitute only half of the total public sector revenue. The other half comes from taxes on the extraction of natural resources (oil, gas) and from rent on global financial investments through the Government Pension Fund Global. Consequently, the traditional primary objective of a tax system – funding public expenditures – is relatively less important in Norway. Regarding macroeconomic policy governance, the state can vary its incomes and expenditures independently of domestic taxation levels. Therefore, issues related to incentive structures, economic behavior, and the rational use of resources are relatively more important in the design of the taxation system.
The collection of taxes is highly automated, as are tax declarations for employees. Tax evasion is considered a minor problem, and in general, the population accepts a high level of taxes. However, tax avoidance receives increasing attention both in the media and in national administration. The OAG reported in 2023 that the reporting of and control over wealth abroad, taxable in Norway, is suboptimal, resulting in substantial lost tax income.
A distinguishing trait of the Norwegian economy is that taxes on income and consumption constitute only half of the total public sector revenue. The other half comes from taxes on the extraction of natural resources (oil, gas) and from rent on global financial investments through the Government Pension Fund Global. Consequently, the traditional primary objective of a tax system – funding public expenditures – is relatively less important in Norway. Regarding macroeconomic policy governance, the state can vary its incomes and expenditures independently of domestic taxation levels. Therefore, issues related to incentive structures, economic behavior, and the rational use of resources are relatively more important in the design of the taxation system.
The collection of taxes is highly automated, as are tax declarations for employees. Tax evasion is considered a minor problem, and in general, the population accepts a high level of taxes. However, tax avoidance receives increasing attention both in the media and in national administration. The OAG reported in 2023 that the reporting of and control over wealth abroad, taxable in Norway, is suboptimal, resulting in substantial lost tax income.
Citations:
Norges Bank Investment Management. n.d. “About the Fund.” https://www.nbim.no/en/the-fund/about-the-fund/
OECD. 2024. Taxing Wages 2024: Tax and Gender through the Lens of the Second Earner. Paris: OECD Publishing. https://doi.org/10.1787/dbcbac85-en
Office of the Auditor General of Norway. 2023. Skatteetatens arbeid med å avdekke norske skattepliktiges inntekter og formuer i utlandet samt kryptovaluta. Dokument 3:3 (2023−2024). https://www.riksrevisjonen.no/rapporter-mappe/no-2023-2024/skatteetatens-arbeid-med-a-avdekke-norske-skattepliktiges-inntekter-og-formuer-i-utlandet-samt-kryptovaluta
Norges Bank Investment Management. n.d. “About the Fund.” https://www.nbim.no/en/the-fund/about-the-fund/
OECD. 2024. Taxing Wages 2024: Tax and Gender through the Lens of the Second Earner. Paris: OECD Publishing. https://doi.org/10.1787/dbcbac85-en
Office of the Auditor General of Norway. 2023. Skatteetatens arbeid med å avdekke norske skattepliktiges inntekter og formuer i utlandet samt kryptovaluta. Dokument 3:3 (2023−2024). https://www.riksrevisjonen.no/rapporter-mappe/no-2023-2024/skatteetatens-arbeid-med-a-avdekke-norske-skattepliktiges-inntekter-og-formuer-i-utlandet-samt-kryptovaluta
Sweden
Tax policy is no longer a major impediment to the competitiveness of Swedish businesses. The administrative capacity for levying and collecting taxes is very high, with efficient, digitalized services. The agencies handling tax issues are the Swedish Tax Agency and the Swedish Economic Crime Authority.
Current levels of business taxation are low from a comparative perspective. There are innovation incentives in the form of R&D grants and regional and tax incentives for international businesses relocating to Sweden (Business Sweden, 2022). In 2024, tax revenues are projected to balance the budgets of municipalities as well as reduce any deficits at the national level (Konjunkturinstitutet, 2023).
Current levels of business taxation are low from a comparative perspective. There are innovation incentives in the form of R&D grants and regional and tax incentives for international businesses relocating to Sweden (Business Sweden, 2022). In 2024, tax revenues are projected to balance the budgets of municipalities as well as reduce any deficits at the national level (Konjunkturinstitutet, 2023).
Citations:
Business Sweden. 2022. “Incentives Guide 2022: For Companies Looking to Invest in Sweden.” https://www.business-sweden.com/globalassets/services/learning-center/establishment-guides/incentives-guide-2022.-pdf
Konjunkturinstitutet. 2023. “Konjunkturläget: December 2023.” https://www.konj.se/download/18.e8ef5d618c8082c058119f2/1706692715038/Konjunkturlaget-December-2023.pdf
Business Sweden. 2022. “Incentives Guide 2022: For Companies Looking to Invest in Sweden.” https://www.business-sweden.com/globalassets/services/learning-center/establishment-guides/incentives-guide-2022.-pdf
Konjunkturinstitutet. 2023. “Konjunkturläget: December 2023.” https://www.konj.se/download/18.e8ef5d618c8082c058119f2/1706692715038/Konjunkturlaget-December-2023.pdf
Switzerland
The Swiss tax ratio is significantly below the OECD average, and tax rates are moderate particularly for businesses, with a moderately progressive income tax. Hence, from a liberal point of view and in comparative perspective, there are few disincentives in the tax system that may discourage individuals from seeking employment or companies from making investments. One exception may be the tax for married couples (see below).
The overall public revenues ratio (federation, cantons, municipalities) is around 29% of GDP (2021). The federation receives 36% of all public revenues, the cantons 24% and the municipalities 15%. Social insurance programs – which are regulated on the level of the federation – receive 24% of total public revenue (FFA 2022). Public debt is very low, at 16% of GDP (FFA 2023a).
It is important to note that due to the principle of federalism, tax rates can differ substantially between regions, as individual cantons and local communities have the power to set regional tax levels. For example, the tax load for a couple (one bread earner, CHF 100,000 gross income, no children) varied by a factor of 3.5 between the cantonal capital with the lowest tax rate (Zug) and that with the highest tax rate (Neuchâtel) in 2018 (FTA 2023). Therefore, any information on Swiss tax policy should be accompanied by information on which government – municipal, cantonal or federal – is in charge. In the following, we focus on the federal level.
Switzerland’s apparently low levels of government revenue as a percent of GDP can be attributed in part to the way in which the statistics are calculated. Contributions to the occupational pension system (the so-called second pillar) and the health insurance program – which are non-state organizations – are excluded from government revenue calculations. The share of government revenue as a percent of GDP would be about 10 percentage points higher if contributions to these two programs were included. This would bring Switzerland closer to the euro zone average – but even then the Swiss figure would be significantly lower.
Tax policy does not impede competitiveness. Switzerland ranks at the top of competitiveness indexes, and given its low level of taxation, is highly attractive for corporate and personal taxpayers both domestically and internationally. Tax policy has contributed to a balance between revenues and expenditures.
The country’s tax policy has come under scrutiny from the OECD and European Union for treating domestic and some international firms differently at the cantonal level. These international firms have their regional headquarters in Switzerland – employing more than 150,000 people and contributing substantially to tax revenue – but do most of their business abroad.
In response to the scrutiny, the federal government introduced a contentious corporate-taxation reform policy. In the end, in 2017, a quid pro quo was agreed to. To win the support of politicians on the political left, contributions to the first pillar of the pension system (AHV) have been increased by the same amount as taxes are reduced for firms. These additional resources for the AHV are generated through increased contributions from the federal state as well as from increased social security contributions from employers and workers. This compensation deal was accepted by popular vote in May 2019.
Another recent tax reform, prompted by international political pressure from the OECD, involves minimal taxes for large, internationally active corporate groups. These are now supposed to pay at least 15% tax on their profits. These taxes were agreed to in a popular vote in June 2023, and became effective on 1 January 2024.
Given that other countries have lagged behind in the implementation of this OECD standard, Swiss businesses sought to delay the date of implementation, but did not succeed (NZZ 10 November 2023).
Another major tax issue with constitutional implications involves tax rates for married couples, which under certain circumstances may be higher than those paid by unmarried couples. A measure that would have implemented reform on this issue failed by a narrow margin in a 2017 popular vote, possibly as a result of erroneous information provided by the federal government regarding the number of persons affected. An April 2019 ruling by the Federal Supreme Court abrogated the outcome of the 2017 referendum. This marked the first time in Switzerland’s history that a popular vote had been annulled by the Federal Supreme Court. The Federal Council planned to submit a new bill on this issue in March 2024 (FDF 2023b).
The overall public revenues ratio (federation, cantons, municipalities) is around 29% of GDP (2021). The federation receives 36% of all public revenues, the cantons 24% and the municipalities 15%. Social insurance programs – which are regulated on the level of the federation – receive 24% of total public revenue (FFA 2022). Public debt is very low, at 16% of GDP (FFA 2023a).
It is important to note that due to the principle of federalism, tax rates can differ substantially between regions, as individual cantons and local communities have the power to set regional tax levels. For example, the tax load for a couple (one bread earner, CHF 100,000 gross income, no children) varied by a factor of 3.5 between the cantonal capital with the lowest tax rate (Zug) and that with the highest tax rate (Neuchâtel) in 2018 (FTA 2023). Therefore, any information on Swiss tax policy should be accompanied by information on which government – municipal, cantonal or federal – is in charge. In the following, we focus on the federal level.
Switzerland’s apparently low levels of government revenue as a percent of GDP can be attributed in part to the way in which the statistics are calculated. Contributions to the occupational pension system (the so-called second pillar) and the health insurance program – which are non-state organizations – are excluded from government revenue calculations. The share of government revenue as a percent of GDP would be about 10 percentage points higher if contributions to these two programs were included. This would bring Switzerland closer to the euro zone average – but even then the Swiss figure would be significantly lower.
Tax policy does not impede competitiveness. Switzerland ranks at the top of competitiveness indexes, and given its low level of taxation, is highly attractive for corporate and personal taxpayers both domestically and internationally. Tax policy has contributed to a balance between revenues and expenditures.
The country’s tax policy has come under scrutiny from the OECD and European Union for treating domestic and some international firms differently at the cantonal level. These international firms have their regional headquarters in Switzerland – employing more than 150,000 people and contributing substantially to tax revenue – but do most of their business abroad.
In response to the scrutiny, the federal government introduced a contentious corporate-taxation reform policy. In the end, in 2017, a quid pro quo was agreed to. To win the support of politicians on the political left, contributions to the first pillar of the pension system (AHV) have been increased by the same amount as taxes are reduced for firms. These additional resources for the AHV are generated through increased contributions from the federal state as well as from increased social security contributions from employers and workers. This compensation deal was accepted by popular vote in May 2019.
Another recent tax reform, prompted by international political pressure from the OECD, involves minimal taxes for large, internationally active corporate groups. These are now supposed to pay at least 15% tax on their profits. These taxes were agreed to in a popular vote in June 2023, and became effective on 1 January 2024.
Given that other countries have lagged behind in the implementation of this OECD standard, Swiss businesses sought to delay the date of implementation, but did not succeed (NZZ 10 November 2023).
Another major tax issue with constitutional implications involves tax rates for married couples, which under certain circumstances may be higher than those paid by unmarried couples. A measure that would have implemented reform on this issue failed by a narrow margin in a 2017 popular vote, possibly as a result of erroneous information provided by the federal government regarding the number of persons affected. An April 2019 ruling by the Federal Supreme Court abrogated the outcome of the 2017 referendum. This marked the first time in Switzerland’s history that a popular vote had been annulled by the Federal Supreme Court. The Federal Council planned to submit a new bill on this issue in March 2024 (FDF 2023b).
Citations:
FFA (Federal Finance Administration; Eidgenössische Finanzverwaltung). 2022. Taschenstatistik. Öffentliche Finanzen 2022. Bern: FFA.
FFA (Federal Finance Administration; Eidgenössische Finanzverwaltung). 2023. “Federal Debt.” https://www.efd.admin.ch/efd/en/home/fiscal-policy/federal-debt.html
FFA (Federal Finance Administration; Eidgenössische Finanzverwaltung). 2023b. “https://www.estv.admin.ch/estv/de/home/die-estv/steuerpolitik/parlamentsgeschaefte/2-15.html”
FTA (Federal Tax Administration, Eidgenössisches Steuerverwaltung) 2023. “Tax burden in Switzerland.” https://www.estv.admin.ch/estv/en/home/fta/tax-statistics/tax-burden-switzerland.html
NZZ. 2023. “Setzt nun ausgerechnet die Schweiz die Mindeststeuer am schnellsten um und gibt damit einen Wettbewerbsvorteil preis?” Neue Zürcher Zeitung, November 10.
FFA (Federal Finance Administration; Eidgenössische Finanzverwaltung). 2022. Taschenstatistik. Öffentliche Finanzen 2022. Bern: FFA.
FFA (Federal Finance Administration; Eidgenössische Finanzverwaltung). 2023. “Federal Debt.” https://www.efd.admin.ch/efd/en/home/fiscal-policy/federal-debt.html
FFA (Federal Finance Administration; Eidgenössische Finanzverwaltung). 2023b. “https://www.estv.admin.ch/estv/de/home/die-estv/steuerpolitik/parlamentsgeschaefte/2-15.html”
FTA (Federal Tax Administration, Eidgenössisches Steuerverwaltung) 2023. “Tax burden in Switzerland.” https://www.estv.admin.ch/estv/en/home/fta/tax-statistics/tax-burden-switzerland.html
NZZ. 2023. “Setzt nun ausgerechnet die Schweiz die Mindeststeuer am schnellsten um und gibt damit einen Wettbewerbsvorteil preis?” Neue Zürcher Zeitung, November 10.
The tax system is largely aligned with the goals of ensuring adequate tax revenues.
8
Canada
Tax policy in Canada is sophisticated and serves many purposes. The tax code is a mammoth document with numerous additions and changes over the years, which have increased its complexity. This complexity affects measures such as equity and complicates audits and the work of tax courts (Gillespie 1979).
Canada has lowered statutory corporate tax rates in recent decades to encourage investment. Rates are now comparable to OECD averages. Individual tax brackets and earned income tax credits provide higher take-home pay for low- to middle-income levels to reward work. However, high marginal effective tax rates still exist for higher-income ranges, which serve to disincentivize work and advancement. Tax complexity related to income splitting and dividends can also discourage small business investment (PBO).
However, among G7 members, Canada has the “lowest marginal effective tax rate on new business investment” (Canada 2023, 70).
The introduction of online tax filing and automation has improved the system’s efficiency. However, continued underfunding for auditors and investigators enables slippage. An estimated $25 billion per year is lost due to tax noncompliance. Fewer than half of tax evasion court cases result in convictions. Faulty procedures and overburdened prosecutors undermine enforcement.
Aggressive “tax schemes” often go unpenalized, which incentivizes this behavior (CBC 2015).
Canada has lowered statutory corporate tax rates in recent decades to encourage investment. Rates are now comparable to OECD averages. Individual tax brackets and earned income tax credits provide higher take-home pay for low- to middle-income levels to reward work. However, high marginal effective tax rates still exist for higher-income ranges, which serve to disincentivize work and advancement. Tax complexity related to income splitting and dividends can also discourage small business investment (PBO).
However, among G7 members, Canada has the “lowest marginal effective tax rate on new business investment” (Canada 2023, 70).
The introduction of online tax filing and automation has improved the system’s efficiency. However, continued underfunding for auditors and investigators enables slippage. An estimated $25 billion per year is lost due to tax noncompliance. Fewer than half of tax evasion court cases result in convictions. Faulty procedures and overburdened prosecutors undermine enforcement.
Aggressive “tax schemes” often go unpenalized, which incentivizes this behavior (CBC 2015).
Citations:
Canada, Department of Finance. 2023. Budget 2023, A Made-in-Canada Plan. Ottawa: His Majesty the King in Right of Canada.
Gillespie, W. I. 1979. “Postwar Canadian Fiscal Policy Revisited, 1945-1975.” Canadian Tax Journal 27: 265–76.
https://pipsc.ca/news-issues/tax-fairness#:~:text=The%20Parliamentary%20Budget%20Officer%20estimates,yield%20%245.75%20in%20tax%20revenue
https://www.cbc.ca/news/business/taxes/tax-time-2015-why-tax-cheats-in-canada-are-rarely-jailed-1.2960595
Canada, Department of Finance. 2023. Budget 2023, A Made-in-Canada Plan. Ottawa: His Majesty the King in Right of Canada.
Gillespie, W. I. 1979. “Postwar Canadian Fiscal Policy Revisited, 1945-1975.” Canadian Tax Journal 27: 265–76.
https://pipsc.ca/news-issues/tax-fairness#:~:text=The%20Parliamentary%20Budget%20Officer%20estimates,yield%20%245.75%20in%20tax%20revenue
https://www.cbc.ca/news/business/taxes/tax-time-2015-why-tax-cheats-in-canada-are-rarely-jailed-1.2960595
Denmark
It is a consequence of an extended welfare state that total tax revenue as a share of GDP is high. However, a series of tax reforms over the years have aimed to reduce tax distortions by broadening the tax base and lowering marginal tax rates. Recent initiatives include earned-income taxes and favorable taxation – and subsidies – for individuals who postpone retirement. A recent reform aimed at strengthening work incentives also includes a higher marginal tax rate for the very rich.
While the administration of the tax system in general is very efficient and IT-based, operating smoothly and automatically for most households, there have been recent cases of malfunctioning systems and tax evasion. These issues have raised questions about the system’s efficiency and adequacy. In particular, a new property tax system has been controversial, especially regarding the valuation of property, which constitutes the basis of the tax.
The overall tax structure is decided by the state. While a component of income taxation is municipal, the degree of freedom for municipalities in setting the tax rate is restricted by a municipal “tax stop.” This effectively implies that one municipality can only raise its tax rate if another municipality reduces its tax rate. Municipalities have some leverage over the land tax (grundskyld).
The overall structure is adequate for financing the public sector even given the demands of an aging population.
While the administration of the tax system in general is very efficient and IT-based, operating smoothly and automatically for most households, there have been recent cases of malfunctioning systems and tax evasion. These issues have raised questions about the system’s efficiency and adequacy. In particular, a new property tax system has been controversial, especially regarding the valuation of property, which constitutes the basis of the tax.
The overall tax structure is decided by the state. While a component of income taxation is municipal, the degree of freedom for municipalities in setting the tax rate is restricted by a municipal “tax stop.” This effectively implies that one municipality can only raise its tax rate if another municipality reduces its tax rate. Municipalities have some leverage over the land tax (grundskyld).
The overall structure is adequate for financing the public sector even given the demands of an aging population.
Citations:
Ministry of Finance. 2023. Aftale mellem regeringen og Danmarksdemokraterne, Det Konservative Folkeparti, Radikale Venstre og Nye Borgerlige om: Reform af personskat. https://fm.dk/media/27385/aftale-om-reform-af-personskat.pdf
Ministry of Taxation. 2023. “Faktaark 10: Ændringer i beløbsgrænser of satser.” https://skm.dk/media/xpxn1uqs/faktaark-10-aendringer-i-satser-og-beloebsgraenser.pdf
Ministry of Industry, Business and Financial Affairs. 2022. https://em.dk/aktuelt/udgivelser-og-aftaler/2022/jan/-aftale-om-staerke-og-innovative-virksomheder
Ministry of Finance. 2023. Aftale mellem regeringen og Danmarksdemokraterne, Det Konservative Folkeparti, Radikale Venstre og Nye Borgerlige om: Reform af personskat. https://fm.dk/media/27385/aftale-om-reform-af-personskat.pdf
Ministry of Taxation. 2023. “Faktaark 10: Ændringer i beløbsgrænser of satser.” https://skm.dk/media/xpxn1uqs/faktaark-10-aendringer-i-satser-og-beloebsgraenser.pdf
Ministry of Industry, Business and Financial Affairs. 2022. https://em.dk/aktuelt/udgivelser-og-aftaler/2022/jan/-aftale-om-staerke-og-innovative-virksomheder
New Zealand
New Zealand’s government has been actively addressing potential disincentives within the tax system that might discourage individuals from seeking employment and companies from making investments. The most important measures intended to mitigate these disincentives include lower marginal tax rates for low- to middle-income earners as a means of incentivizing work; tax credits and deductions for businesses to encourage employment, investment, and innovation; and simplified tax rules to reduce compliance burdens.
New Zealand’s tax administration, managed by the Inland Revenue Department (IRD), is generally considered to have sufficient administrative capacities to collect government-levied taxes. The IRD has invested in modern digital systems (e.g., O’Neill 2023) – which allow for easier and more efficient tax filing, payments and data management – and employs a risk-based approach to compliance. This approach focuses efforts on areas with higher risks of noncompliance, helping to optimize resources for maximum effectiveness (Inland Revenue 2023: 98).
New Zealand also has enforcement measures to address tax evasion, such as penalties for noncompliance and investigations into suspected cases. The IRD collaborates with other government agencies (e.g., the Serious Fraud Office) and international counterparts to gather information and address cross-border tax evasion. However, critics have pointed out that tax evasion investigations can suffer from a lack of resources (Wells 2023).
New Zealand’s tax administration, managed by the Inland Revenue Department (IRD), is generally considered to have sufficient administrative capacities to collect government-levied taxes. The IRD has invested in modern digital systems (e.g., O’Neill 2023) – which allow for easier and more efficient tax filing, payments and data management – and employs a risk-based approach to compliance. This approach focuses efforts on areas with higher risks of noncompliance, helping to optimize resources for maximum effectiveness (Inland Revenue 2023: 98).
New Zealand also has enforcement measures to address tax evasion, such as penalties for noncompliance and investigations into suspected cases. The IRD collaborates with other government agencies (e.g., the Serious Fraud Office) and international counterparts to gather information and address cross-border tax evasion. However, critics have pointed out that tax evasion investigations can suffer from a lack of resources (Wells 2023).
Citations:
Inland Revenue. 2023. Inland Revenue Annual Report Te Tari Taake Pūrongo ā-Tau 2022-23. https://www.ird.govt.nz/-/media/project/ir/home/documents/about-us/publications/annual-and-corporate-reports/annual-reports/annual-report-2023.pdf
O’Neill, R. 2023. “Inland Revenue Eyes Local Cloud Hosting for Its Brand New Tax Engine.” Reseller News, May 22. https://www.reseller.co.nz/article/707263/inland-revenue-eyes-local-cloud-hosting-its-brand-new-tax-engine/
Wells, I. 2023. “Newsable: Billions Likely Lost to Tax Evasion, as White Collar Crime Investigators Go Underfunded.” Stuff, May 15. https://www.stuff.co.nz/national/crime/300878382/newsable-billions-likely-lost-to-tax-evasion-as-white-collar-crime-investigators-go-underfunded
Inland Revenue. 2023. Inland Revenue Annual Report Te Tari Taake Pūrongo ā-Tau 2022-23. https://www.ird.govt.nz/-/media/project/ir/home/documents/about-us/publications/annual-and-corporate-reports/annual-reports/annual-report-2023.pdf
O’Neill, R. 2023. “Inland Revenue Eyes Local Cloud Hosting for Its Brand New Tax Engine.” Reseller News, May 22. https://www.reseller.co.nz/article/707263/inland-revenue-eyes-local-cloud-hosting-its-brand-new-tax-engine/
Wells, I. 2023. “Newsable: Billions Likely Lost to Tax Evasion, as White Collar Crime Investigators Go Underfunded.” Stuff, May 15. https://www.stuff.co.nz/national/crime/300878382/newsable-billions-likely-lost-to-tax-evasion-as-white-collar-crime-investigators-go-underfunded
7
Austria
The Austrian government receives reasonable tax revenues, sufficiently funding its comparatively generous welfare schemes. Currently, there is no legal minimum salary in Austria, so taking up an occupation might involve accepting a poorly paid job. However, as in other countries, very low salaries are not taxed, and most salaries have a lower bound due to collective bargaining agreements that cover almost all employees. In 2023, an annual salary of up to €11,693 was not taxed. Income taxes are particularly high in Austria, which is detrimental to employment in general. In contrast, taxation on wealth is almost nonexistent compared to international standards (Arbeiterkammer 2023).
The overall burden of taxes and other levies is very high in Austria, placing the country in the top tier of European nations (ranked 3 out of 29 countries, surpassed only by Denmark and France). The Austrian government is committed to addressing tax avoidance seriously, but the amount lost due to tax evasion has clearly exceeded €1 billion – nearly 4% of the country’s health budget or 5.6% of the education budget (Wirtschaftskammer 2023).
In a recent comparative study assessing different countries’ “capacity of tax administrations to collect and process data for investigating and ultimately taxing those people and companies who usually have most means and opportunities to escape their tax obligations,” Austria featured in the top tier of countries, with a score of 65 in 2022 compared to an average score of just 47 (see Tax Justice Network).
However, in its 2023 report, the Austrian Court of Audit criticized the serious lack of trained personnel in this field, which undermines the government’s declared ambition to avoid different forms of tax avoidance or evasion. Early in 2022, fewer than 200 of the scheduled 236 full-time positions had been filled. Additionally, newly planned IT resources were not considered to be functioning as intended (Rechnungshof 2023).
The overall burden of taxes and other levies is very high in Austria, placing the country in the top tier of European nations (ranked 3 out of 29 countries, surpassed only by Denmark and France). The Austrian government is committed to addressing tax avoidance seriously, but the amount lost due to tax evasion has clearly exceeded €1 billion – nearly 4% of the country’s health budget or 5.6% of the education budget (Wirtschaftskammer 2023).
In a recent comparative study assessing different countries’ “capacity of tax administrations to collect and process data for investigating and ultimately taxing those people and companies who usually have most means and opportunities to escape their tax obligations,” Austria featured in the top tier of countries, with a score of 65 in 2022 compared to an average score of just 47 (see Tax Justice Network).
However, in its 2023 report, the Austrian Court of Audit criticized the serious lack of trained personnel in this field, which undermines the government’s declared ambition to avoid different forms of tax avoidance or evasion. Early in 2022, fewer than 200 of the scheduled 236 full-time positions had been filled. Additionally, newly planned IT resources were not considered to be functioning as intended (Rechnungshof 2023).
Citations:
https://www.arbeiterkammer.at/beratung/steuerundeinkommen/dazuverdienen/Steuerberechnung_fuer_Zuverdienst.html
https://www.wko.at/oe/oesterreich/chart-of-the-week-2023-11-10.pdf (Wirtschaftskammer 2023)
https://www.bundesfinanzministerium.de/Content/DE/Downloads/Broschueren_Bestellservice/die-wichtigsten-steuern-im-internationalen-vergleich-2022.pdf?__blob=publicationFile&v=6
Rechnungshof. 2023. “Personalmangel große Hürde bei Reform im Bereich Finanzstrafsachen.” https://www.rechnungshof.gv.at/rh/home/news/news/news_3/Personalmangel_Huerde_bei_Reform_Finanzstrafsachen.html#
https://taxjustice.net/country-profiles/austria/
https://www.ots.at/presseaussendung/OTS_20220406_OTS0129/finanzpolizei-2021-bei-28000-kontrollen-36-mio-euro-strafen-beantragt
https://www.arbeiterkammer.at/beratung/steuerundeinkommen/dazuverdienen/Steuerberechnung_fuer_Zuverdienst.html
https://www.wko.at/oe/oesterreich/chart-of-the-week-2023-11-10.pdf (Wirtschaftskammer 2023)
https://www.bundesfinanzministerium.de/Content/DE/Downloads/Broschueren_Bestellservice/die-wichtigsten-steuern-im-internationalen-vergleich-2022.pdf?__blob=publicationFile&v=6
Rechnungshof. 2023. “Personalmangel große Hürde bei Reform im Bereich Finanzstrafsachen.” https://www.rechnungshof.gv.at/rh/home/news/news/news_3/Personalmangel_Huerde_bei_Reform_Finanzstrafsachen.html#
https://taxjustice.net/country-profiles/austria/
https://www.ots.at/presseaussendung/OTS_20220406_OTS0129/finanzpolizei-2021-bei-28000-kontrollen-36-mio-euro-strafen-beantragt
France
Tax rates are high for individuals and businesses in France, although this has not prevented the existence of a structural public deficit. Despite its high level, taxation does not seem to serve as a strong disincentive to different economic actors. It is largely based on indirect taxation, especially on consumption. Taxation on labor is significant, but it also supports a highly developed social protection system and extensive public services. Firms generally oppose high taxes, but benefit from a variety of exemptions. The effective average tax on business has decreased significantly since 2016, but still ranks above the OECD average. However, this has not harmed France’s attractiveness for international investors, as it was ranked sixth worldwide in 2022 (Business France 2022; Ernst&Young 2023).
In international comparison, the fiscal administration has been recognized for its high capacity levels, although it has also been one of the targets for the reduction in the number of civil servants. It maintains a broad ability to manage the complex fiscal system, which to date has been simplified only marginally. Tax evasion rates remain significant. Following monitoring and enforcement measures, authorities have collected €14.6 billion in additional revenues, indicating the broad prevalence of these practices (Court of Accounts 2023). While the end of bank secrecy with Switzerland has improved the situation on this front, the fight against “fiscal paradises” is far from complete.
In international comparison, the fiscal administration has been recognized for its high capacity levels, although it has also been one of the targets for the reduction in the number of civil servants. It maintains a broad ability to manage the complex fiscal system, which to date has been simplified only marginally. Tax evasion rates remain significant. Following monitoring and enforcement measures, authorities have collected €14.6 billion in additional revenues, indicating the broad prevalence of these practices (Court of Accounts 2023). While the end of bank secrecy with Switzerland has improved the situation on this front, the fight against “fiscal paradises” is far from complete.
Citations:
Business France. 2022. “La France au 6e rang mondial des pays les plus attractifs.” https://www.businessfrance.fr/decouvrir-la-france-actualite-la-france-au-6e-rang-mondial-des-pays-les-plus-attractifs
Court of Accounts. 2023. “La détection de la fraude fiscale des particuliers.” https://www.ccomptes.fr/fr/publications/la-detection-de-la-fraude-fiscale-des-particuliers
ErnstYoung. 2023. “France Attractiveness Survey 2023.” https://assets.ey.com/content/dam/ey-sites/ey-com/fr_fr/topics/attractiveness/barometre-de-l-attractivite-de-la-france-2023/ey-attractivite-france2023-episode1-executive-summary-uk.pdf
Business France. 2022. “La France au 6e rang mondial des pays les plus attractifs.” https://www.businessfrance.fr/decouvrir-la-france-actualite-la-france-au-6e-rang-mondial-des-pays-les-plus-attractifs
Court of Accounts. 2023. “La détection de la fraude fiscale des particuliers.” https://www.ccomptes.fr/fr/publications/la-detection-de-la-fraude-fiscale-des-particuliers
ErnstYoung. 2023. “France Attractiveness Survey 2023.” https://assets.ey.com/content/dam/ey-sites/ey-com/fr_fr/topics/attractiveness/barometre-de-l-attractivite-de-la-france-2023/ey-attractivite-france2023-episode1-executive-summary-uk.pdf
Hungary
Hungary raises a substantial amount of revenue through consumption taxes. The share of consumption taxes in overall revenue is 45.3%, which is significantly higher than the OECD average of 32.3%. Corporate taxes are extremely low, contributing only 2% of state revenues (OECD: 9.6%). Since 2010, successive Orbán governments have transformed the Hungarian tax system. In 2011, the progressive income tax was replaced with a flat tax. In 2012, the standard value-added tax (VAT) rate was increased from 25% to 27% – the highest level in the European Union – with reduced tax rates on selected products and services. In 2017, a uniform corporate income tax of 9% replaced a two-tier system with rates of 10% and 19%. The effective average tax rate for businesses dropped from 19.3% in 2016 to 11.1%. The personal income tax rate was flattened at 15%. Between 2017 and 2018, employers’ social security contributions were cut by seven percentage points. These changes have resulted in a slight decline in the tax-to-GDP ratio since 2016. The move to a flat income tax, combined with a strong reliance on the taxation of consumption, has made the Hungarian tax system less redistributive.
The tax burden, especially on larger companies, has substantially decreased. However, companies still struggle with frequent changes in taxation policy and the complexity of the tax regime, which includes many sectoral taxes. Moreover, tax policy and its administration have been instrumentalized to favor oligarchs close to Fidesz and punish outsiders. The classification of businesses as “reliable,” “average” or “risky” by the National Tax and Customs Authority (NAV) – combined with the promise of preferences for “reliable” taxpayers – points to favoritism.
In Hungary, the tax burden is high for the general population, while it allows companies to improve their productivity. Even so, the complexity of tax regulations and the high rate of social security contributions take a heavy administrative and financial toll on small and medium-sized companies, providing an incentive for tax evasion (Filep-Mosberger and Reiff 2022). This tax policy aligns with Fidesz’s neoliberal economic approach. Combining the employers’ and employees’ social contributions, the burden in Hungary is high.
The tax burden, especially on larger companies, has substantially decreased. However, companies still struggle with frequent changes in taxation policy and the complexity of the tax regime, which includes many sectoral taxes. Moreover, tax policy and its administration have been instrumentalized to favor oligarchs close to Fidesz and punish outsiders. The classification of businesses as “reliable,” “average” or “risky” by the National Tax and Customs Authority (NAV) – combined with the promise of preferences for “reliable” taxpayers – points to favoritism.
In Hungary, the tax burden is high for the general population, while it allows companies to improve their productivity. Even so, the complexity of tax regulations and the high rate of social security contributions take a heavy administrative and financial toll on small and medium-sized companies, providing an incentive for tax evasion (Filep-Mosberger and Reiff 2022). This tax policy aligns with Fidesz’s neoliberal economic approach. Combining the employers’ and employees’ social contributions, the burden in Hungary is high.
Citations:
Filep-Mosberger, P., & Reiff, Á. 2022. “Income Tax Evasion Estimation in Hungary.” MNB Working Papers (No. 2022/4).
Filep-Mosberger, P., & Reiff, Á. 2022. “Income Tax Evasion Estimation in Hungary.” MNB Working Papers (No. 2022/4).
Ireland
The Irish tax system is relatively effective in addressing disincentives for seeking employment. However, there are specific issues such as high marginal tax rates for second earners due to a male breadwinner family-based system, and steep cliffs in low-paid interactions with welfare and tax systems, which policy attempts to taper. From the perspective of companies making investments, the tax system is considered effective, with some viewing it as overly generous due to historical and ongoing tax breaks for R&D investments. Ireland is also known for its favorable tax treatment of cultural work, exempting the first €50,000 of income for artistic work. According to the OECD, Ireland has one of the lowest disincentives to work as a percentage of earnings lost to taxes and benefits lost in return to work (OECD, 2024).
The administrative capacity for tax collection in Ireland is robust, with the Revenue Commissioners considered a best practice administrator. There is pressure to extend its administrative capacities beyond revenue collection. While there is a relatively robust and public prosecution of tax evasion, the issue lies in the degree to which tax avoidance is legal and does not require prosecution.
Ireland’s over-reliance on corporation tax creates sustainability issues for tax and spend policies. Historically low corporate tax rates have incentivized corporations to route international revenues through Ireland, creating an international tax justice issue. Increased flows of multinational corporation (MNC) revenue through Ireland have boosted recent corporation tax volumes, complicating the sustainability of Irish tax revenue. This dependency is highlighted by the Irish Fiscal Advisory Council (IFAC) and the Economic and Social Research Institute (ESRI), noting the vulnerability of Ireland’s revenue to shifts in MNC activity or changes in global corporate tax policies, particularly those of the United States. The “rainy day” fund, disbanded during the pandemic, was reestablished in Budget 2024 as the Ireland Strategic Investment Fund, but contributions to it were critiqued as insufficient by both ESRI (2023) and IFAC (2023).
The distortion of Irish GDP, largely due to the transfer pricing activities of MNCs, presents a risk to tax sustainability and affects the accuracy of performance indicators. Paul Krugman famously referred to this phenomenon as “leprechaun economics.” For international comparisons, Ireland’s GNP is often used instead of the inflated GDP. General figures for investment as a percentage of GNP tend to be underestimated, while growth figures are overestimated. In 2017, the Irish Central Statistics Office responded by developing the modified Gross National Income indicator (GNI*), to provide a more accurate picture. In 2021, Ireland’s public spending was 24.4% of GDP, significantly below the EU-27 average When measured by the more realistic modified Gross National Income, the ratiowas 39.3% of GNI* , which is still below the EU-27 average for public spending. .
The administrative capacity for tax collection in Ireland is robust, with the Revenue Commissioners considered a best practice administrator. There is pressure to extend its administrative capacities beyond revenue collection. While there is a relatively robust and public prosecution of tax evasion, the issue lies in the degree to which tax avoidance is legal and does not require prosecution.
Ireland’s over-reliance on corporation tax creates sustainability issues for tax and spend policies. Historically low corporate tax rates have incentivized corporations to route international revenues through Ireland, creating an international tax justice issue. Increased flows of multinational corporation (MNC) revenue through Ireland have boosted recent corporation tax volumes, complicating the sustainability of Irish tax revenue. This dependency is highlighted by the Irish Fiscal Advisory Council (IFAC) and the Economic and Social Research Institute (ESRI), noting the vulnerability of Ireland’s revenue to shifts in MNC activity or changes in global corporate tax policies, particularly those of the United States. The “rainy day” fund, disbanded during the pandemic, was reestablished in Budget 2024 as the Ireland Strategic Investment Fund, but contributions to it were critiqued as insufficient by both ESRI (2023) and IFAC (2023).
The distortion of Irish GDP, largely due to the transfer pricing activities of MNCs, presents a risk to tax sustainability and affects the accuracy of performance indicators. Paul Krugman famously referred to this phenomenon as “leprechaun economics.” For international comparisons, Ireland’s GNP is often used instead of the inflated GDP. General figures for investment as a percentage of GNP tend to be underestimated, while growth figures are overestimated. In 2017, the Irish Central Statistics Office responded by developing the modified Gross National Income indicator (GNI*), to provide a more accurate picture. In 2021, Ireland’s public spending was 24.4% of GDP, significantly below the EU-27 average When measured by the more realistic modified Gross National Income, the ratiowas 39.3% of GNI* , which is still below the EU-27 average for public spending. .
Citations:
IFAC. 2023. “Fiscal Assessment Report, December 2023 – Irish Fiscal Advisory Council.” https://www.fiscalcouncil.ie/wp-content/uploads/2023/12/Fiscal-Assessment-Report-December-2023-Irish-Fiscal-Advisory-Council-Dublin.pdf
ESRI. 2023. “Budget Perspectives 2024.” https://www.esri.ie/events/budget-perspectives-2024
OECD. 2024. “Financial Disincentive to Return to Work (Indicator).” doi: 10.1787/3ef6e9d7-en (Accessed on 19 February 2024).
IFAC. 2023. “Fiscal Assessment Report, December 2023 – Irish Fiscal Advisory Council.” https://www.fiscalcouncil.ie/wp-content/uploads/2023/12/Fiscal-Assessment-Report-December-2023-Irish-Fiscal-Advisory-Council-Dublin.pdf
ESRI. 2023. “Budget Perspectives 2024.” https://www.esri.ie/events/budget-perspectives-2024
OECD. 2024. “Financial Disincentive to Return to Work (Indicator).” doi: 10.1787/3ef6e9d7-en (Accessed on 19 February 2024).
Slovenia
Tax revenue comes from a wide range of taxes. Income tax accounts for approximately 40%, with social security contributions at more than 30% and corporate tax at 10%. According to the OECD, this is among the highest in its category. While the average tax wedge for a single employee has increased since 2009 by less than 1%, it remains lower than the pre-2009 levels. Slovenia ranked 14th out of 38 OECD countries in terms of the tax rate in 2022, with a rate of 37.4% compared to the OECD average of 34.0%.
Many employers and economists call for lower income taxes to address investment problems in Slovenia. Others, however, emphasize the need for higher productivity instead of lower taxes. Prime Minister Janša’s government responded to the former group by preparing a “mini-tax reform.” In contrast, Prime Minister Golob’s government announced several higher taxes for 2023. The OECD advocates for changes to the tax system to foster growth by further reducing taxes on labor and increasing taxes on consumption and property.
The tax authorities reported a decline in tax liabilities for 2023, which totaled €841.4 million, 6.1% less than the previous year. This trend of decreasing tax liabilities has persisted for years. In 2022, the Financial Administration filed 61 criminal charges with the public prosecutor’s offices (31 cases, 33.69% less than in 2021) and reported 46 criminal offenses to the police (30 cases, 39.47% less than in 2021). A total of 254 offenders were charged.
In 2022, authorities conducted 471 income tax checks – covering tax on income from employment, other income, capital assets, and undeclared income from employment – identifying an additional €18,815,871 in tax debts. This number of checks is significantly lower than in 2020 (580), when almost twice as much additional tax debt was identified.
The Tax Justice Network reports that the tax shortfall had a significant social impact, equivalent to 6.67% of the healthcare budget and 8.12% of education spending.
Many employers and economists call for lower income taxes to address investment problems in Slovenia. Others, however, emphasize the need for higher productivity instead of lower taxes. Prime Minister Janša’s government responded to the former group by preparing a “mini-tax reform.” In contrast, Prime Minister Golob’s government announced several higher taxes for 2023. The OECD advocates for changes to the tax system to foster growth by further reducing taxes on labor and increasing taxes on consumption and property.
The tax authorities reported a decline in tax liabilities for 2023, which totaled €841.4 million, 6.1% less than the previous year. This trend of decreasing tax liabilities has persisted for years. In 2022, the Financial Administration filed 61 criminal charges with the public prosecutor’s offices (31 cases, 33.69% less than in 2021) and reported 46 criminal offenses to the police (30 cases, 39.47% less than in 2021). A total of 254 offenders were charged.
In 2022, authorities conducted 471 income tax checks – covering tax on income from employment, other income, capital assets, and undeclared income from employment – identifying an additional €18,815,871 in tax debts. This number of checks is significantly lower than in 2020 (580), when almost twice as much additional tax debt was identified.
The Tax Justice Network reports that the tax shortfall had a significant social impact, equivalent to 6.67% of the healthcare budget and 8.12% of education spending.
Citations:
Ministrstvo za finance. 2023. “Letno poročilo Finančne uprave Republike Slovenia.” https://www.gov.si/assets/organi-v-sestavi/FURS/Strateski-dokumenti/2023/Letno-porocilo-Financne-uprave-za-leto-2022.pdf
OECD. 2023. “Taxing Wages – Slovenia.” https://www.oecd.org/tax/tax-policy/taxing-wages-slovenia.pdf
OECD. 2023. “Revenue Statistics – Slovenia.” https://www.oecd.org/tax/revenue-statistics-slovenia.pdf
Tax Justice Network. 2024. “Slovenia.” https://taxjustice.net/country-profiles/slovenia/
Ministrstvo za finance. 2023. “Letno poročilo Finančne uprave Republike Slovenia.” https://www.gov.si/assets/organi-v-sestavi/FURS/Strateski-dokumenti/2023/Letno-porocilo-Financne-uprave-za-leto-2022.pdf
OECD. 2023. “Taxing Wages – Slovenia.” https://www.oecd.org/tax/tax-policy/taxing-wages-slovenia.pdf
OECD. 2023. “Revenue Statistics – Slovenia.” https://www.oecd.org/tax/revenue-statistics-slovenia.pdf
Tax Justice Network. 2024. “Slovenia.” https://taxjustice.net/country-profiles/slovenia/
Spain
According to the OECD, tax compliance in Spain has improved recently. Spain demonstrates commendable performance in tax compliance and administration, excelling in the digitalization of its tax processes. This digital advancement helps reduce tax arrears and lowers compliance costs. There is potential for further improvement by allocating more resources to the Tax Administration Agency to enhance system efficiency. As outlined in the RRP, the fiscal system is being modernized to reduce the informal economy and tax fraud by increasing staff and tax investigations. Tax reforms within the RRP, aligned with recommendations from an expert committee, aim to align Spain’s revenue-to-GDP ratio more closely with the EU average. These reforms focus on bolstering corporate, wealth, and environmental taxation while reducing tax exemptions. However, experts note that these changes are still pending, as Spain needs to improve tax revenue to balance the increased public deficit accumulated over the last decade. In late 2022, a tax reform was implemented, raising the asset tax for wealthier residents while reducing it for more modest families (see also “Policies Targeting Tax Equity”).
Citations:
Instituto de Estudios Fiscales. 20122. Libro blanco sobre la reforma tributaria. Madrid: Instituto de Estudios Fiscales.
Instituto de Estudios Fiscales. 20122. Libro blanco sobre la reforma tributaria. Madrid: Instituto de Estudios Fiscales.
UK
Taxes in the UK have been increasing, with the tax take as a proportion of GDP reaching a recent high in 2023. However, it remains relatively low compared to other European countries. In 2022, the Institute for Fiscal Studies described the UK’s tax burden as “at its highest sustained level since the 1950s,” in the context of a recent failed attempt by the Truss government to introduce major tax cuts (Adam et al. 2022). The UK tax system balances income and expenditure taxes and includes a variety of specific taxes within a complex tax code. Tax decisions are primarily made during the chancellor of the exchequer’s twice-yearly “fiscal events.” The most recent event, in November 2023, included headline announcements on cutting payroll taxes (national insurance) and increasing investment allowances for companies. However, the failure to uprate tax bands effectively resulted in “stealth” taxes, pushing more people into paying income tax or into higher tax rate bands.
Overall, tax collection functions adequately, although His Majesty’s Revenue and Customs (HMRC) faced sharp criticism in December 2023 from the chair of the House of Commons Treasury Committee for reducing telephone support. Additionally, a January 2023 report by the public accounts committee criticized HMRC for poor service to taxpayers and an increase in uncollected tax. Staff cuts at HMRC have contributed to these issues.
There are some variations in taxation among the UK’s nations. The Scotland Acts of 2012 and 2016 granted the Scottish government new taxation and borrowing powers, which it has used sparingly until recently. Proposals for 2024 include a new tax rate for moderately affluent citizens that is more onerous than in the rest of the UK. The National Assembly of Wales has far less fiscal discretion, while the ongoing suspension of the Northern Ireland Executive inhibits changes, resulting in de facto direct rule from London.
Overall, tax collection functions adequately, although His Majesty’s Revenue and Customs (HMRC) faced sharp criticism in December 2023 from the chair of the House of Commons Treasury Committee for reducing telephone support. Additionally, a January 2023 report by the public accounts committee criticized HMRC for poor service to taxpayers and an increase in uncollected tax. Staff cuts at HMRC have contributed to these issues.
There are some variations in taxation among the UK’s nations. The Scotland Acts of 2012 and 2016 granted the Scottish government new taxation and borrowing powers, which it has used sparingly until recently. Proposals for 2024 include a new tax rate for moderately affluent citizens that is more onerous than in the rest of the UK. The National Assembly of Wales has far less fiscal discretion, while the ongoing suspension of the Northern Ireland Executive inhibits changes, resulting in de facto direct rule from London.
Citations:
Https://committees.parliament.uk/publications/33390/documents/182713/default/
Adam, S., Delestre, I., Emmerson, C., Johnson, P., Joyce, R., Stockton, I.
Waters, T., Xu, X., and Zaranko, B. 2022. “Mini-budget response.” Institute.
for Fiscal Studies. 2023. “Mini Budget Response.” https://ifs.org.uk/articles/mini-budget-respo
nse
Https://committees.parliament.uk/publications/33390/documents/182713/default/
Adam, S., Delestre, I., Emmerson, C., Johnson, P., Joyce, R., Stockton, I.
Waters, T., Xu, X., and Zaranko, B. 2022. “Mini-budget response.” Institute.
for Fiscal Studies. 2023. “Mini Budget Response.” https://ifs.org.uk/articles/mini-budget-respo
nse
6
Australia
Australian taxes as a proportion of GDP (29.5%) are relatively low compared to the OECD average (34.5%) (OECD 2023; Whiteford 2022). However, reliance on income taxes is relatively high, while consumption taxes are low, and wealth/land taxes are almost nonexistent. This over-reliance on income taxes is seen as a deficiency that results in inadequate revenue to meet expenditure needs and creates excessive disincentive effects for productive activity. This issue is increasingly exacerbated by a growing need to address policy challenges stemming from an aging population, climate change, and geopolitical risk.
The tax system is moderately effective in constraining global tax abuse. The Tax Justice Network (2023) estimates that approximately AUD 3.8 billion is lost in tax revenue every year due to tax abuse by corporations and individuals, equating to 0.9% of the country’s tax revenue (or AUD 152 per capita of the Australian population). There is much debate about the efficiency and equity of Australia’s tax profile, with commentators arguing that the country should consider raising more money by increasing taxes on mining and energy companies (Denniss 2022).
The tax system is moderately effective in constraining global tax abuse. The Tax Justice Network (2023) estimates that approximately AUD 3.8 billion is lost in tax revenue every year due to tax abuse by corporations and individuals, equating to 0.9% of the country’s tax revenue (or AUD 152 per capita of the Australian population). There is much debate about the efficiency and equity of Australia’s tax profile, with commentators arguing that the country should consider raising more money by increasing taxes on mining and energy companies (Denniss 2022).
Citations:
Whiteford, P. 2022. “Do Australians pay too much income tax? 6 charts on how we rank against the rest of the world.” The Conversation. https://theconversation.com/do-australians-pay-too-much-income-tax-6-charts-on-how-we-rank-against-the-rest-of-the-world-185223
Denniss, R. 2022. “It’s Time to Tax Mining and Energy Giants Properly.” The Australia Institute. https://australiainstitute.org.au/post/its-time-to-tax-mining-and-energy-giants-properly-struggling-australians-should-share-in-their-record-profits
Tax Justice Network. 2023. “Country Profiles: Australia.” https://taxjustice.net/country-profiles/australia/
OECD. 2023. Revenue Statistics 2023: Australia. https://www.oecd.org/tax/revenue-statistics-australia.pdf.
Whiteford, P. 2022. “Do Australians pay too much income tax? 6 charts on how we rank against the rest of the world.” The Conversation. https://theconversation.com/do-australians-pay-too-much-income-tax-6-charts-on-how-we-rank-against-the-rest-of-the-world-185223
Denniss, R. 2022. “It’s Time to Tax Mining and Energy Giants Properly.” The Australia Institute. https://australiainstitute.org.au/post/its-time-to-tax-mining-and-energy-giants-properly-struggling-australians-should-share-in-their-record-profits
Tax Justice Network. 2023. “Country Profiles: Australia.” https://taxjustice.net/country-profiles/australia/
OECD. 2023. Revenue Statistics 2023: Australia. https://www.oecd.org/tax/revenue-statistics-australia.pdf.
Belgium
Taxation in Belgium involves the collection of taxes at both the national and local levels. Major federal taxes encompass income tax, social security, corporate taxes, and value-added tax, while local levels involve property and communal taxes. Tax revenue stood at 45.6% of GDP in 2022, the second-highest share following France of the EU according to Eurostat.
The European Semester highlights that high labor taxes discourage work, with the tax burden exceeding the EU average for most wage levels. Some initiatives aim to boost low-wage earners’ net income, but they inadvertently increase the tax rate for lower-middle-income earners, creating a “low-wage trap.” The High Council of Finance suggests a general employment bonus could alleviate this. However, the “low-wage trap” might deter lifelong learning and working longer hours (European Commission 2023).
Belgium, as a small open economy, faces concerns about potential capital outflow if it opts for taxation. In the pursuit of attracting capital and fostering investment, the country maintains numerous tax loopholes and exemptions to reduce distortionary incentives or to stimulate entrepreneurship. Notably, Belgium ranks 16th in the 2021 Corporate Tax Haven Index by the Tax Justice Network, citing issues in Tax Court Transparency and the existence of loopholes, contributing to corporate taxation avoidance for both income and capital. The European Semester also stresses the complexity of capital taxation leading to distortions in investment behavior (European Commission 2023).
The current government aims to address benefit fraud and tax evasion (the first one, as often, being smaller by a sizable amount), but these efforts are considered inadequate by a prominent judge. The judge advocates for bolstering resources in administration and the judiciary, simplifying rules, and eliminating potential gaps and loopholes (see press article).
Finally, the current government was planning a significant tax reform to mitigate the discouraging effects of labor taxation. However, disagreements among the diverse partners in the (broad) government coalition have resulted in a deferral of the reform to the next legislature or, possibly, indefinitely.
The European Semester highlights that high labor taxes discourage work, with the tax burden exceeding the EU average for most wage levels. Some initiatives aim to boost low-wage earners’ net income, but they inadvertently increase the tax rate for lower-middle-income earners, creating a “low-wage trap.” The High Council of Finance suggests a general employment bonus could alleviate this. However, the “low-wage trap” might deter lifelong learning and working longer hours (European Commission 2023).
Belgium, as a small open economy, faces concerns about potential capital outflow if it opts for taxation. In the pursuit of attracting capital and fostering investment, the country maintains numerous tax loopholes and exemptions to reduce distortionary incentives or to stimulate entrepreneurship. Notably, Belgium ranks 16th in the 2021 Corporate Tax Haven Index by the Tax Justice Network, citing issues in Tax Court Transparency and the existence of loopholes, contributing to corporate taxation avoidance for both income and capital. The European Semester also stresses the complexity of capital taxation leading to distortions in investment behavior (European Commission 2023).
The current government aims to address benefit fraud and tax evasion (the first one, as often, being smaller by a sizable amount), but these efforts are considered inadequate by a prominent judge. The judge advocates for bolstering resources in administration and the judiciary, simplifying rules, and eliminating potential gaps and loopholes (see press article).
Finally, the current government was planning a significant tax reform to mitigate the discouraging effects of labor taxation. However, disagreements among the diverse partners in the (broad) government coalition have resulted in a deferral of the reform to the next legislature or, possibly, indefinitely.
Citations:
https://ec.europa.eu/eurostat/statistics-explained/index.php?title=Tax_revenue_statistics#Tax_revenue-to-GDP_ratio:_France.2C_Belgium_and_Austria_show_the_highest_ratios
European Commission. 2023. “2023 European Semester: Country Report – Belgium.” Brussels. Available at: https://economy-finance.ec.europa.eu/publications/2023-european-semester-country-reports_en#details
Belgium’s report for the Corporate Tax Haven Index by the Tax Justice Network: https://cthi.taxjustice.net/en/cthi/profiles?country=BE
A press article on the measures taken by the government deemed insufficient by a judge: https://www.brusselstimes.com/514132/is-belgium-doing-enough-to-fight-tax-evasion
A press article on the failed tax reform: https://www.lesoir.be/526311/article/2023-07-18/reforme-fiscale-la-vivaldi-renonce
https://ec.europa.eu/eurostat/statistics-explained/index.php?title=Tax_revenue_statistics#Tax_revenue-to-GDP_ratio:_France.2C_Belgium_and_Austria_show_the_highest_ratios
European Commission. 2023. “2023 European Semester: Country Report – Belgium.” Brussels. Available at: https://economy-finance.ec.europa.eu/publications/2023-european-semester-country-reports_en#details
Belgium’s report for the Corporate Tax Haven Index by the Tax Justice Network: https://cthi.taxjustice.net/en/cthi/profiles?country=BE
A press article on the measures taken by the government deemed insufficient by a judge: https://www.brusselstimes.com/514132/is-belgium-doing-enough-to-fight-tax-evasion
A press article on the failed tax reform: https://www.lesoir.be/526311/article/2023-07-18/reforme-fiscale-la-vivaldi-renonce
Czechia
By European standards, the Czech tax system features a low level of direct taxes, both on companies and individuals, which results in a relatively low share of government revenue in GDP. This significantly constrains the government’s ability to finance infrastructure investment, which has been heavily dependent on EU support – a source expected to decline. Low tax levels reflect governments’ attempts to win electoral support by holding down personal tax levels.
The average income tax rate during the observed period was lower than the OECD average (27%), decreasing from 25.21% in 2020 to 19.70% in 2021 and 19.48% in 2022. These changes were made by the Babiš government before the parliamentary elections in 2021 and during a time of a growing budget deficit due to pandemic measures. The effective average tax rate for businesses was 16.70% in 2020 and 17.0% in 2021, lower than the OECD average of 20%.
The tax system is administered by the Financial Administration under the Ministry of Finance, employing 14,000 individuals, half of whom are engaged in checking tax returns. The administration consistently complains of inadequate resources for countering tax evasion, yet it claims to have identified CZK 37 billion in otherwise unpaid taxes in 2022. Identified serious tax fraud typically relates to VAT, and 867 such cases were referred for legal action in 2022, totaling CZK 5.5 billion. The most serious was the OCTAVIAN case, involving tax evasion of CZK 700 million and taking over eight years to investigate. Eleven individuals finally faced charges for activities in the period 2009 – 2010, although the key figure had yet to be extradited from the UK, where he claimed asylum on the grounds that he could not expect a fair trial in Czechia. According to the Financial Administration, such investigations typically require multi-agency cooperation across several countries, for which only very limited resources are available.
Reducing VAT evasion among smaller businesses remains a controversial issue. To address this, compulsory electronic cash registration was introduced in 2016 for catering and hotels and in 2017 for retail, with plans for expansion to more sectors in 2020. The initiative was always opposed by the ODS and vocal small-business owners, who cited the additional financial burden of purchasing the necessary equipment. The system was completely abolished under the Fiala government at the start of 2024. Opponents argued it was expensive and ineffective. Babiš claimed it had generated CZK 35 billion in extra revenue, though that claim is difficult to verify. While the introduction of electronic cash registers coincided with an increase in VAT revenue, this did not result in a higher share of total tax revenue.
The Financial Administration of Czechia plans to build a new information system, set to be partially operational in 2026, to establish a central database, improve tax collection efficiency, and detect tax evasion.
The average income tax rate during the observed period was lower than the OECD average (27%), decreasing from 25.21% in 2020 to 19.70% in 2021 and 19.48% in 2022. These changes were made by the Babiš government before the parliamentary elections in 2021 and during a time of a growing budget deficit due to pandemic measures. The effective average tax rate for businesses was 16.70% in 2020 and 17.0% in 2021, lower than the OECD average of 20%.
The tax system is administered by the Financial Administration under the Ministry of Finance, employing 14,000 individuals, half of whom are engaged in checking tax returns. The administration consistently complains of inadequate resources for countering tax evasion, yet it claims to have identified CZK 37 billion in otherwise unpaid taxes in 2022. Identified serious tax fraud typically relates to VAT, and 867 such cases were referred for legal action in 2022, totaling CZK 5.5 billion. The most serious was the OCTAVIAN case, involving tax evasion of CZK 700 million and taking over eight years to investigate. Eleven individuals finally faced charges for activities in the period 2009 – 2010, although the key figure had yet to be extradited from the UK, where he claimed asylum on the grounds that he could not expect a fair trial in Czechia. According to the Financial Administration, such investigations typically require multi-agency cooperation across several countries, for which only very limited resources are available.
Reducing VAT evasion among smaller businesses remains a controversial issue. To address this, compulsory electronic cash registration was introduced in 2016 for catering and hotels and in 2017 for retail, with plans for expansion to more sectors in 2020. The initiative was always opposed by the ODS and vocal small-business owners, who cited the additional financial burden of purchasing the necessary equipment. The system was completely abolished under the Fiala government at the start of 2024. Opponents argued it was expensive and ineffective. Babiš claimed it had generated CZK 35 billion in extra revenue, though that claim is difficult to verify. While the introduction of electronic cash registers coincided with an increase in VAT revenue, this did not result in a higher share of total tax revenue.
The Financial Administration of Czechia plans to build a new information system, set to be partially operational in 2026, to establish a central database, improve tax collection efficiency, and detect tax evasion.
Citations:
https://www.financnisprava.cz/assets/cs/prilohy/fs-financni-sprava-cr/Vyrocni_zprava_o_cinnosti_FS_CR_za_rok_2022.pdf
https://www.financnisprava.cz/assets/cs/prilohy/fs-financni-sprava-cr/Vyrocni_zprava_o_cinnosti_FS_CR_za_rok_2022.pdf
Germany
Germany’s tax system has effectively generated dynamic revenue growth. From 2019, the last year before the COVID-19 pandemic, to 2023, revenues increased from €799 billion to €916 billion, a rise of 14.6% despite the strong economic downturn caused by the pandemic (BMF 2023 a,b). Current tax projections indicate continued strong growth, with revenues expected to surpass €1 trillion in 2025 (BMF, 2023a).
However, the German tax system must today be seen as one of the significant reasons for a declining German growth potential. High marginal tax rates disincentivize both employment and corporate investment.
The top marginal personal income tax rate of 47.5% is comparable to the OECD average (OECD 2023), but the average marginal rate remains a key challenge for Germany’s competitiveness. An average single earner pays marginal taxes, including social security contributions, of 58.4% of labor costs. This places Germany at a top position in the OECD and 15 percentage points above the OECD average (OECD 2023: 75). These high marginal tax rates reduce the willingness to work and incentivize a cutback of working hours. This situation has serious consequences for the country’s growth potential given the shrinking labor force due to the aging population.
The corporate tax system in Germany lacks international competitiveness. Over the past decade, Germany’s position in effective corporate tax rate comparisons has steadily declined. In 2022, very few industrial countries impose a higher tax burden on companies. Among 35 European countries, Japan, and the United States, Germany ranks third in its effective average tax rate on companies, which includes all details of tax base definitions (ZEW, 2023). In Europe, only Spain imposes a slightly larger tax burden on companies. Consequently, Germany has lost considerable tax appeal as a destination for foreign direct investment. Although Germany is among the initiators of the new OECD rules on international minimum corporate tax rates, this project is unlikely to improve German tax competitiveness since the international minimum tax rate will be set far below the German level.
The German tax administration, by international standards, effectively collects revenues and combats tax evasion. International estimates on the size of the shadow economy consistently report GDP shares for Germany that are clearly below the average for EU and OECD countries (Hassan and Schneider, 2016).
However, the German tax system must today be seen as one of the significant reasons for a declining German growth potential. High marginal tax rates disincentivize both employment and corporate investment.
The top marginal personal income tax rate of 47.5% is comparable to the OECD average (OECD 2023), but the average marginal rate remains a key challenge for Germany’s competitiveness. An average single earner pays marginal taxes, including social security contributions, of 58.4% of labor costs. This places Germany at a top position in the OECD and 15 percentage points above the OECD average (OECD 2023: 75). These high marginal tax rates reduce the willingness to work and incentivize a cutback of working hours. This situation has serious consequences for the country’s growth potential given the shrinking labor force due to the aging population.
The corporate tax system in Germany lacks international competitiveness. Over the past decade, Germany’s position in effective corporate tax rate comparisons has steadily declined. In 2022, very few industrial countries impose a higher tax burden on companies. Among 35 European countries, Japan, and the United States, Germany ranks third in its effective average tax rate on companies, which includes all details of tax base definitions (ZEW, 2023). In Europe, only Spain imposes a slightly larger tax burden on companies. Consequently, Germany has lost considerable tax appeal as a destination for foreign direct investment. Although Germany is among the initiators of the new OECD rules on international minimum corporate tax rates, this project is unlikely to improve German tax competitiveness since the international minimum tax rate will be set far below the German level.
The German tax administration, by international standards, effectively collects revenues and combats tax evasion. International estimates on the size of the shadow economy consistently report GDP shares for Germany that are clearly below the average for EU and OECD countries (Hassan and Schneider, 2016).
Citations:
BMF. 2023a. Datensammlung zur Steuerpolitik. Berlin: Bundesministerium der Finanzen.
BMF. 2023b. “Ergebnisse der Steuerschätzung vom 24. bis 26. Oktober 2023.” Monatsbericht des BMF, November.
Hassan, M., and F. Schneider. 2016. “Size and Development of the Shadow Economies of 157 Worldwide Countries: Updated and New Measures from 1999 to 2013.” Journal of Global Economics 4 (3): 1–14.
OECD. 2023. Taxing Wages, Indexation of Labour Taxation and Benefits in OECD Countries. Paris: OECD Publishing.
ZEW. 2023. “Mannheim Tax Index.” www.zew.de/mannheim-tax-index
BMF. 2023a. Datensammlung zur Steuerpolitik. Berlin: Bundesministerium der Finanzen.
BMF. 2023b. “Ergebnisse der Steuerschätzung vom 24. bis 26. Oktober 2023.” Monatsbericht des BMF, November.
Hassan, M., and F. Schneider. 2016. “Size and Development of the Shadow Economies of 157 Worldwide Countries: Updated and New Measures from 1999 to 2013.” Journal of Global Economics 4 (3): 1–14.
OECD. 2023. Taxing Wages, Indexation of Labour Taxation and Benefits in OECD Countries. Paris: OECD Publishing.
ZEW. 2023. “Mannheim Tax Index.” www.zew.de/mannheim-tax-index
Israel
Tax policy includes tax exemptions for individuals and companies to encourage investment and labor market participation. For individuals, there are tax exemptions for women, Israeli citizens, parents with small children and university graduates. Employees do not need to file an annual tax report to receive an exemption.
There are also exemptions for companies, especially high-tech firms, and those operating in peripheral regions, to encourage investment in Israel, particularly in areas where there is a shortage of jobs.
The administrative capacity to collect taxes is generally sufficient. However, over the past two years, a personnel shortage in the Tax Authority has made it more challenging for the agency to meet its goals. In Israel, only self-employed workers are required to file an annual tax report, which makes it difficult for the authority to identify tax evasion. To address this, the Tax Authority has launched a platform for receiving anonymous reports on tax evasion and conducts investigations to uncover such cases. Nevertheless, these efforts do not cover the entire scope of tax evasion.
The current war with Hamas has dramatically increased public spending on military and social needs. However, it is still unclear how the government will increase revenues following the war.
There are also exemptions for companies, especially high-tech firms, and those operating in peripheral regions, to encourage investment in Israel, particularly in areas where there is a shortage of jobs.
The administrative capacity to collect taxes is generally sufficient. However, over the past two years, a personnel shortage in the Tax Authority has made it more challenging for the agency to meet its goals. In Israel, only self-employed workers are required to file an annual tax report, which makes it difficult for the authority to identify tax evasion. To address this, the Tax Authority has launched a platform for receiving anonymous reports on tax evasion and conducts investigations to uncover such cases. Nevertheless, these efforts do not cover the entire scope of tax evasion.
The current war with Hamas has dramatically increased public spending on military and social needs. However, it is still unclear how the government will increase revenues following the war.
Lithuania
The tax system is largely aligned with the goal of ensuring adequate tax revenues. A significant portion of government revenue comes from indirect taxes, especially the value-added tax (VAT), which is relatively high at 21% (up from 18% during the financial crisis a decade and a half ago). Meanwhile, environmental and property tax rates are relatively low. Taxes on labor (personal income tax and social security contributions) present a barrier to the competitiveness of Lithuanian businesses. According to the OECD, in 2022 the average rate of income tax and employees’ social security contributions in Lithuania was 37.11%, compared to the OECD average of 27%.
Despite high average tax rates on labor income, tax revenue as a percentage of GDP is below the OECD average, constituting the third-lowest such figure in the EU. This is the result of a highly differentiated, or as the World Bank calls it in its recent assessment, schedular tax system, in which statutory and effective tax rates vary significantly between legal forms of economic activity (employment contracts, individual activity certificates, etc.) and between sources of income (wages, capital gains, etc.).
Furthermore, although its overall incidence is declining, significant tax evasion persists. According to the European Commission, the VAT gap (as a percentage of theoretical VAT liability) remains significantly higher than the EU average – in 2020, it was the fifth-highest such figure in the EU. The current coalition government, in its program adopted in late 2020, committed to reducing the VAT gap from 25% to 10%. However, the target date for achieving this goal is 2030 – well beyond the term of the current government.
According to the Tax Justice Network, tax administration capacity in Lithuania was below the OECD average in 2022 (respectively with index indicator scores of 40 and 47). Potential tax revenues are still influenced by the country’s significant shadow economy (estimated at 22.4% of all economic activity in 2022), extensive tax avoidance, widespread tax exemptions and low tax morale. An improvement in VAT and excise tax collection has been noted in recent years; this is attributed partially to improvements in tax administration and partially to a reduction in fuel and tobacco-product smuggling from Russia’s Kaliningrad region and Belarus (due to the general decline in trade with those countries).
In 2022, the government adopted changes to the Law on Tax Administration and related legal norms regarding the protection of taxpayers’ data, expanding the list of sanctions to further reduce tax evasion and the VAT gap.
Despite high average tax rates on labor income, tax revenue as a percentage of GDP is below the OECD average, constituting the third-lowest such figure in the EU. This is the result of a highly differentiated, or as the World Bank calls it in its recent assessment, schedular tax system, in which statutory and effective tax rates vary significantly between legal forms of economic activity (employment contracts, individual activity certificates, etc.) and between sources of income (wages, capital gains, etc.).
Furthermore, although its overall incidence is declining, significant tax evasion persists. According to the European Commission, the VAT gap (as a percentage of theoretical VAT liability) remains significantly higher than the EU average – in 2020, it was the fifth-highest such figure in the EU. The current coalition government, in its program adopted in late 2020, committed to reducing the VAT gap from 25% to 10%. However, the target date for achieving this goal is 2030 – well beyond the term of the current government.
According to the Tax Justice Network, tax administration capacity in Lithuania was below the OECD average in 2022 (respectively with index indicator scores of 40 and 47). Potential tax revenues are still influenced by the country’s significant shadow economy (estimated at 22.4% of all economic activity in 2022), extensive tax avoidance, widespread tax exemptions and low tax morale. An improvement in VAT and excise tax collection has been noted in recent years; this is attributed partially to improvements in tax administration and partially to a reduction in fuel and tobacco-product smuggling from Russia’s Kaliningrad region and Belarus (due to the general decline in trade with those countries).
In 2022, the government adopted changes to the Law on Tax Administration and related legal norms regarding the protection of taxpayers’ data, expanding the list of sanctions to further reduce tax evasion and the VAT gap.
Citations:
OECD: Dataset: Taxing Wages – Comparative tables URL: https://stats.oecd.org/Index.aspx?DataSetCode=AWCOMP#
European Commission. 2022. “VAT Gap Report 2022.” DOI: 10.2778/87504
Schneider, F., and A. Asslani. 2022. Taxation of the Informal Economy in the EU. Publication for the Economic and Monetary Affairs Subcommittee on tax matters (FISC), Policy Department for Economic, Scientific and Quality of Life Policies, European Parliament, Luxembourg.
Tax Justice Network URL: https://iff.taxjustice.net/#/explorer
World Bank. 2022. TSI Project 20LT09 Micro Enterprises and Self-employed Tax Regulatory Assessment for Removing Hurdles to Growth: Report Assessing the Impacts of Tax Optimization and Bunching in MEs and Self-employed and Legal Entities Responses to Size-based Tax Rates in Lithuania. Output 1.
OECD: Dataset: Taxing Wages – Comparative tables URL: https://stats.oecd.org/Index.aspx?DataSetCode=AWCOMP#
European Commission. 2022. “VAT Gap Report 2022.” DOI: 10.2778/87504
Schneider, F., and A. Asslani. 2022. Taxation of the Informal Economy in the EU. Publication for the Economic and Monetary Affairs Subcommittee on tax matters (FISC), Policy Department for Economic, Scientific and Quality of Life Policies, European Parliament, Luxembourg.
Tax Justice Network URL: https://iff.taxjustice.net/#/explorer
World Bank. 2022. TSI Project 20LT09 Micro Enterprises and Self-employed Tax Regulatory Assessment for Removing Hurdles to Growth: Report Assessing the Impacts of Tax Optimization and Bunching in MEs and Self-employed and Legal Entities Responses to Size-based Tax Rates in Lithuania. Output 1.
Poland
The “Polish Deal” (Polski Ład), introduced in early 2022, was a tax scheme aimed at boosting the post-pandemic economy. It involved an extensive tax system overhaul, increased family benefits, higher healthcare expenditures and additional public investments. The initiative faced criticism for its added spending commitments, elevated tax load on entrepreneurs and the middle class, and unclear investment strategies. Widespread confusion led to numerous amendments in the same year.
The scheme introduced a reduction in the tax scale from 17% to 12%. The tax-free allowance was raised to PLN 30,000, and the tax threshold was increased to PLN 120,000. Individuals earning below PLN 13,000 saw their tax burden reduced. Unfortunately, the inflationary situation did not favor investments, which reached only 16.7% of GDP in 2022, the lowest such figure since 1994. Many businesses were concerned about their financial liquidity and elected to delay investments until economic conditions improved. This improvement was expected to occur in 2024, with a predicted growth in investment spending of more than 2%.
In Poland, tax administration institutions include the Ministry of Finance, which oversees financial policies, and the National Revenue Administration (Krajowa Administracja Skarbowa, KAS), which is responsible for tax collection. Additionally, the Fiscal Administration Chamber (Izba Administracji Skarbowej, IAS) handles tax-related legal matters, and local tax offices (Urząd Skarbowy) manage tax affairs at the regional level. Their effectiveness has increased since 2015, as the VAT tax gap has been narrowing. This gap was approximately 4.9% in 2022, making it one of the smallest such figures in Europe. However, collecting tax obligations owed to the state continues to present challenges. Tax authorities claim to detect irregularities, yet only around 10% of the allegedly outstanding arrears are subject to enforcement.
The scheme introduced a reduction in the tax scale from 17% to 12%. The tax-free allowance was raised to PLN 30,000, and the tax threshold was increased to PLN 120,000. Individuals earning below PLN 13,000 saw their tax burden reduced. Unfortunately, the inflationary situation did not favor investments, which reached only 16.7% of GDP in 2022, the lowest such figure since 1994. Many businesses were concerned about their financial liquidity and elected to delay investments until economic conditions improved. This improvement was expected to occur in 2024, with a predicted growth in investment spending of more than 2%.
In Poland, tax administration institutions include the Ministry of Finance, which oversees financial policies, and the National Revenue Administration (Krajowa Administracja Skarbowa, KAS), which is responsible for tax collection. Additionally, the Fiscal Administration Chamber (Izba Administracji Skarbowej, IAS) handles tax-related legal matters, and local tax offices (Urząd Skarbowy) manage tax affairs at the regional level. Their effectiveness has increased since 2015, as the VAT tax gap has been narrowing. This gap was approximately 4.9% in 2022, making it one of the smallest such figures in Europe. However, collecting tax obligations owed to the state continues to present challenges. Tax authorities claim to detect irregularities, yet only around 10% of the allegedly outstanding arrears are subject to enforcement.
Citations:
https://www.dentons.com/en/services-and-solutions/global-tax-guide-to-doing-business-in/poland
https://www.dentons.com/en/services-and-solutions/global-tax-guide-to-doing-business-in/poland
Portugal
In 2022, most OECD countries experienced a decline in the tax-to-GDP ratio (OECD, 2023). However, Portugal stood out as an exception, maintaining high levels of taxation on income and consumption, specifically at 36.5%. The government forecasts a further increase in the tax burden to 37.2% of GDP for 2023 (Ministry of Finance, 2023). If realized, this forecast would represent a rise compared to 2022 and establish a new historical peak. The government justifies this upward trend by citing inflation, increased job market dynamism (with more people employed), and the budgetary consolidation goals pursued by recent administrations. Nevertheless, Portugal’s tax-to-GDP ratio remains below the EU-27 average (Eurostat, 2023).
The high tax burden in Portugal discourages companies from investing and families from allocating their income toward savings or consumption. Consistent recommendations urge Portugal to reduce contextual business costs and establish a taxation framework that offers greater predictability for investment.
Despite recent progress, the Portuguese tax authority still faces significant challenges in addressing offshore wealth accumulation and sophisticated tax evasion schemes. Although Portugal has a Strategic Plan to Combat Fraud and Tax Evasion, more than half of the plan’s measures remain unimplemented. Notably, about 22% of Portugal’s GDP was held offshore in 2022 (EU Tax Observatory, 2023).
To combat tax evasion and money laundering, more proactive and effective on-the-ground supervision is needed. However, the Portuguese tax authority is currently stretched thin in terms of human resources. The Tax Workers’ Union has called for the immediate recruitment of an additional 2,000 employees and a reorganization of the entity’s operations to enhance efficiency (Dinheiro Vivo, 2023). This situation underscores the need for strengthened capacity and resources to effectively manage and enforce tax regulations.
The high tax burden in Portugal discourages companies from investing and families from allocating their income toward savings or consumption. Consistent recommendations urge Portugal to reduce contextual business costs and establish a taxation framework that offers greater predictability for investment.
Despite recent progress, the Portuguese tax authority still faces significant challenges in addressing offshore wealth accumulation and sophisticated tax evasion schemes. Although Portugal has a Strategic Plan to Combat Fraud and Tax Evasion, more than half of the plan’s measures remain unimplemented. Notably, about 22% of Portugal’s GDP was held offshore in 2022 (EU Tax Observatory, 2023).
To combat tax evasion and money laundering, more proactive and effective on-the-ground supervision is needed. However, the Portuguese tax authority is currently stretched thin in terms of human resources. The Tax Workers’ Union has called for the immediate recruitment of an additional 2,000 employees and a reorganization of the entity’s operations to enhance efficiency (Dinheiro Vivo, 2023). This situation underscores the need for strengthened capacity and resources to effectively manage and enforce tax regulations.
Citations:
OECD. 2023. Revenue Statistics 2023: Tax Revenue Buoyancy in OECD Countries. Paris: OECD Publishing.
https://doi.org/10.1787/9d0453d5-enhttps://www.oecd.org/tax/revenue-statistics-2522770x.htm
Ministry of Finance. 2023. “Relatório do Orçamento do Estado 2024.”
https://www.portugal.gov.pt/download-ficheiros/ficheiro.aspx?v=%3D%3DBQAAAB%2BLCAAAAAAABAAzNLY0NAQA8%2BjEBAUAAAA%3D
Eurostat. 2023. “Main National Accounts Tax Aggregates.”
https://ec.europa.eu/eurostat/databrowser/view/gov_10a_taxag/default/table?lang=en
EU Tax Observatory. 2023. “Offshore Financial Wealth Database.”
https://atlas-offshore.world/download-data/
Dinheiro Vivo. 2023. “Ana Gamboa: ‘Autoridade Tributária está num ponto de rutura extrema ao nível dos recursos humanos’.” Dinherio Vivo, September 23. https://www.dinheirovivo.pt/entrevistas/ana-gamboa-autoridade-tributaria-esta-num-ponto-de-rutura-extrema-ao-nivel-dos-recursos-humanos-17068466.html
OECD. 2023. Revenue Statistics 2023: Tax Revenue Buoyancy in OECD Countries. Paris: OECD Publishing.
https://doi.org/10.1787/9d0453d5-enhttps://www.oecd.org/tax/revenue-statistics-2522770x.htm
Ministry of Finance. 2023. “Relatório do Orçamento do Estado 2024.”
https://www.portugal.gov.pt/download-ficheiros/ficheiro.aspx?v=%3D%3DBQAAAB%2BLCAAAAAAABAAzNLY0NAQA8%2BjEBAUAAAA%3D
Eurostat. 2023. “Main National Accounts Tax Aggregates.”
https://ec.europa.eu/eurostat/databrowser/view/gov_10a_taxag/default/table?lang=en
EU Tax Observatory. 2023. “Offshore Financial Wealth Database.”
https://atlas-offshore.world/download-data/
Dinheiro Vivo. 2023. “Ana Gamboa: ‘Autoridade Tributária está num ponto de rutura extrema ao nível dos recursos humanos’.” Dinherio Vivo, September 23. https://www.dinheirovivo.pt/entrevistas/ana-gamboa-autoridade-tributaria-esta-num-ponto-de-rutura-extrema-ao-nivel-dos-recursos-humanos-17068466.html
The tax system is only somewhat aligned with the goals of ensuring adequate tax revenues.
5
Estonia
There is a wide consensus that the current tax system needs revision due to a long-term trend of decreasing tax returns, an aging population and environmental pressures. The Russian war of aggression in Ukraine has made the forecasts even more pessimistic. Tax reforms are one of the major issues in political debates in 2022 – 2023.
One of the main and lasting challenges comes from the Estonian welfare system, which is financed almost entirely (80%) through social insurance contributions. High labor costs may weaken the country’s economic position and lead to labor relations abuses. Even more importantly, social insurance contributions alone cannot provide sufficient financing for social services, given an aging population and changing work patterns, which destabilize social tax receipts. In addition to public pension funds that are persistently accumulating debt, there are serious concerns about the financial sustainability of the national health insurance fund (EHIF).
According to forecast reports by Arenguseire Keskus (2020) and the Estonian Health Insurance Fund (2022), EHIF will enter conditions of deep and increasing debt within two to three years. If the funding principles remain unchanged, maintaining the availability of public healthcare at the current level will be impossible. Despite the urgency, two government coalitions (2022, 2023) led by the neoliberal Reform Party have neglected the issue, including proposals offered by the Social Democrats, a coalition partner.
Government rigidity with regard to social protection revenues may harm employers’ incentives to create low-paid and part-time jobs, as these are subject to the standard rate of social security contributions. Small and medium-sized businesses often prefer to pay dividends instead of fair wages as a means of “optimizing” tax expenditures. In the debate on the EU Platform Work Directive, the Estonian government clearly sided with platforms and voted against the planned regulations. However, starting in 2024, platforms such as Uber, Bolt and Airbnb will be required to send information about their service providers and their earned income to the Tax and Custom Board.
Advanced digital tax declaration systems contribute to the administrative capacity of tax collection and minimize tax avoidance. The challenge is that the current tax legislation in some cases allows individuals to avoid paying adequate social security contributions and income tax.
One of the main and lasting challenges comes from the Estonian welfare system, which is financed almost entirely (80%) through social insurance contributions. High labor costs may weaken the country’s economic position and lead to labor relations abuses. Even more importantly, social insurance contributions alone cannot provide sufficient financing for social services, given an aging population and changing work patterns, which destabilize social tax receipts. In addition to public pension funds that are persistently accumulating debt, there are serious concerns about the financial sustainability of the national health insurance fund (EHIF).
According to forecast reports by Arenguseire Keskus (2020) and the Estonian Health Insurance Fund (2022), EHIF will enter conditions of deep and increasing debt within two to three years. If the funding principles remain unchanged, maintaining the availability of public healthcare at the current level will be impossible. Despite the urgency, two government coalitions (2022, 2023) led by the neoliberal Reform Party have neglected the issue, including proposals offered by the Social Democrats, a coalition partner.
Government rigidity with regard to social protection revenues may harm employers’ incentives to create low-paid and part-time jobs, as these are subject to the standard rate of social security contributions. Small and medium-sized businesses often prefer to pay dividends instead of fair wages as a means of “optimizing” tax expenditures. In the debate on the EU Platform Work Directive, the Estonian government clearly sided with platforms and voted against the planned regulations. However, starting in 2024, platforms such as Uber, Bolt and Airbnb will be required to send information about their service providers and their earned income to the Tax and Custom Board.
Advanced digital tax declaration systems contribute to the administrative capacity of tax collection and minimize tax avoidance. The challenge is that the current tax legislation in some cases allows individuals to avoid paying adequate social security contributions and income tax.
Citations:
Arenguseire Keskus. 2020. Eesti Tervishoiu Tulevik. Stsenaariumid aastani 2035. https://arenguseire.ee/uudised/tervishoiu-rahastamise-probleem
ERR. 2022. “Prognoos: haigekassa eelarvet ootab paarisaja miljoni eurone miinus.” https://www.err.ee/1608699778/prognoos-haigekassa-eelarvet-ootab-paarisaja-miljoni-eurone-miinus
Arenguseire Keskus. 2020. Eesti Tervishoiu Tulevik. Stsenaariumid aastani 2035. https://arenguseire.ee/uudised/tervishoiu-rahastamise-probleem
ERR. 2022. “Prognoos: haigekassa eelarvet ootab paarisaja miljoni eurone miinus.” https://www.err.ee/1608699778/prognoos-haigekassa-eelarvet-ootab-paarisaja-miljoni-eurone-miinus
Greece
Ensuring adequate tax compliance in Greece has been challenging due to a long history of tax evasion. A 2012 study estimated that the shadow economy in Greece accounted for around 27% of GDP between 1999 and 2010, compared to an OECD average of 20% (IMF 2013: 11).
Several factors contribute to this lack of tax compliance, including the large proportion of self-employment (28% of total employment; OECD 2020: 9), the indirect tax burden (with VAT at 24%), the high unemployment rate (9.4% in November 2023, the second highest in the EU after Spain; Eurostat 2024), and low tax morale. The self-employed consistently underreport their revenues, and they are numerous and difficult to control. Additionally, tax morale is low, as citizens have long doubted the effective use of public funds, both before and after the economic crisis (Exadaktylos and Zahariadis 2014).
Compared to other OECD countries, Greece’s tax administration capacity remains among the lowest (Tax Justice Network 2023). While the effective average tax rate for businesses is close to the OECD average (Mannheim Tax Index 2021), disincentives for prospective investors persist. Although Greece’s average income tax rate is below the OECD average (OECD 2022), the social insurance wedge – relatively high contributions that businesses and employees pay to social security funds – acts as a significant deterrent.
Tax officials today have better access to bank accounts than before the economic crisis. The customs unit’s mobile squads conduct random inspections of businesses, particularly during the long Greek summer. A special unit of the Independent Authority for Public Revenue (AADE 2024) investigates large businesses, smaller firms, the self-employed, and high-net-worth individuals (Petrakis 2019).
Several factors contribute to this lack of tax compliance, including the large proportion of self-employment (28% of total employment; OECD 2020: 9), the indirect tax burden (with VAT at 24%), the high unemployment rate (9.4% in November 2023, the second highest in the EU after Spain; Eurostat 2024), and low tax morale. The self-employed consistently underreport their revenues, and they are numerous and difficult to control. Additionally, tax morale is low, as citizens have long doubted the effective use of public funds, both before and after the economic crisis (Exadaktylos and Zahariadis 2014).
Compared to other OECD countries, Greece’s tax administration capacity remains among the lowest (Tax Justice Network 2023). While the effective average tax rate for businesses is close to the OECD average (Mannheim Tax Index 2021), disincentives for prospective investors persist. Although Greece’s average income tax rate is below the OECD average (OECD 2022), the social insurance wedge – relatively high contributions that businesses and employees pay to social security funds – acts as a significant deterrent.
Tax officials today have better access to bank accounts than before the economic crisis. The customs unit’s mobile squads conduct random inspections of businesses, particularly during the long Greek summer. A special unit of the Independent Authority for Public Revenue (AADE 2024) investigates large businesses, smaller firms, the self-employed, and high-net-worth individuals (Petrakis 2019).
Citations:
AADE. 2024. https://www.gov.gr/en/upourgeia/oloi-foreis/anexartete-arkhe-demosion-esodon-aade
Eurostat. 2024. “Euro Area Unemployment at 6.4%.” https://ec.europa.eu/eurostat/documents/2995521/18278350/3-09012024-AP-EN.pdf/616998cd-5675-cd0d-8fb2-180a16c9af53#:~:text=The%20EU%20unemployment%20rate%20was,office%20of%20the%20European%20Union
Exadaktylos, Th. and N. Zahariadis. 2014. “Quid pro Quo: Political Trust and Policy Implementation in Greece during the Age of Austerity.” Policy and Politics 42 (1): 160-183.
IMF. 2013. “Greece.” Country report 133/155. https://www.imf.org/external/pubs/ft/scr/2013/cr13155.pdf
Mannheim Tax Index. 2021. https://www.zew.de/mannheim-tax-index
OECD. 2020. “Inclusive Entrepreneurship Policies, Country Assessment Notes – Greece.” https://www.oecd.org/cfe/smes/Greece-IE-2020.pdf
OECD. 2022. “Dataset: Taxing Wages – Comparative tables.” https://stats.oecd.org/Index.aspx?DataSetCode=AWCOMP#
Petrakis, M. 2019. “Taxing Times.” IMF, September 2019. https://www.imf.org/en/Publications/fandd/issues/2019/09/improving-tax-collection-in-greece-petrakis
Tax Justice Network. 2023. “https://iff.taxjustice.net/#/explorer”
AADE. 2024. https://www.gov.gr/en/upourgeia/oloi-foreis/anexartete-arkhe-demosion-esodon-aade
Eurostat. 2024. “Euro Area Unemployment at 6.4%.” https://ec.europa.eu/eurostat/documents/2995521/18278350/3-09012024-AP-EN.pdf/616998cd-5675-cd0d-8fb2-180a16c9af53#:~:text=The%20EU%20unemployment%20rate%20was,office%20of%20the%20European%20Union
Exadaktylos, Th. and N. Zahariadis. 2014. “Quid pro Quo: Political Trust and Policy Implementation in Greece during the Age of Austerity.” Policy and Politics 42 (1): 160-183.
IMF. 2013. “Greece.” Country report 133/155. https://www.imf.org/external/pubs/ft/scr/2013/cr13155.pdf
Mannheim Tax Index. 2021. https://www.zew.de/mannheim-tax-index
OECD. 2020. “Inclusive Entrepreneurship Policies, Country Assessment Notes – Greece.” https://www.oecd.org/cfe/smes/Greece-IE-2020.pdf
OECD. 2022. “Dataset: Taxing Wages – Comparative tables.” https://stats.oecd.org/Index.aspx?DataSetCode=AWCOMP#
Petrakis, M. 2019. “Taxing Times.” IMF, September 2019. https://www.imf.org/en/Publications/fandd/issues/2019/09/improving-tax-collection-in-greece-petrakis
Tax Justice Network. 2023. “https://iff.taxjustice.net/#/explorer”
Italy
The Italian tax system is strained by the need to finance high public spending and interest on significant public debt. It also struggles to significantly reduce high levels of tax evasion and the size of the informal economy. Consequently, the level of fiscal pressure remains high (42.9% in 2022 according to the OECD), and the tax burden is unevenly distributed. Tax pressure is very high for households and companies that regularly pay taxes, while it is low for those who evade taxes (e.g., many companies and a large number of independent contractors and self-employed individuals). Families with children have limited exemptions, and labor and business are heavily taxed, resulting in fewer new businesses and employment opportunities.
The capacity of the tax administration has improved over the past year. One significant measure introduced by recent governments is the online system for filing income tax returns, the “730 precompilato,” which has seen increasing use each year. This system simplifies the tax filing process, replacing paper forms for most taxpayers. The general shift to electronic invoicing and the new VAT payment method have also enhanced tax control effectiveness.
The NRRP aims to reduce Italy’s tax evasion rate from 18.5% in 2019 to 15.8% in 2024, a challenging target given the current executive’s approach. Notably, the Meloni government has raised the threshold for the flat tax (15%) for the self-employed from €65,000 to €85,000 and plans to reduce the number of personal income tax rates from four to three in 2024, financed two-thirds by deficit spending.
The capacity of the tax administration has improved over the past year. One significant measure introduced by recent governments is the online system for filing income tax returns, the “730 precompilato,” which has seen increasing use each year. This system simplifies the tax filing process, replacing paper forms for most taxpayers. The general shift to electronic invoicing and the new VAT payment method have also enhanced tax control effectiveness.
The NRRP aims to reduce Italy’s tax evasion rate from 18.5% in 2019 to 15.8% in 2024, a challenging target given the current executive’s approach. Notably, the Meloni government has raised the threshold for the flat tax (15%) for the self-employed from €65,000 to €85,000 and plans to reduce the number of personal income tax rates from four to three in 2024, financed two-thirds by deficit spending.
Japan
Both the welfare and tax systems generally encourage employment in Japan. However, the Japanese tax system seriously disincentivizes individuals, particularly women, from seeking high-paying employment or full-time jobs. After surpassing an income threshold of JPY 1 million (€6,400) per year, workers married to a full-time worker have to pay local residence taxes, and lose some cash benefits and child allowances. Above an income threshold of JPY 1.03 million per year, they are subject to national income tax. Exceeding further thresholds leads to compulsory enrollment in the employees’ insurance as well as loss of spousal deduction. Due to these barriers, many housewives prefer to work part-time. The Japanese government has announced plans to address this problem, though detailed policies are yet to be announced. In October 2023, Prime Minister Kishida also revealed his intention to introduce tax breaks for corporations to promote investment.
While the tax-revenue-to-GDP ratio is slightly above the OECD average, a major issue with the tax system is that revenues continue to fall way short of government spending. Japan has by far the highest debt ratio of any country. VAT increases since 1989 have proven highly unpopular and are often softened with a number of exemptions. Despite continuous reductions in recent decades, corporate tax rates in Japan remain relatively high.
Japan’s tax administration capacity has been evaluated slightly above the OECD average in the Tax Justice Network ranking. Generally, tax evasion is effectively punished in Japan. According to the Tax Justice Network, Japan loses more than $8.3 billion annually due to global tax abuse committed by multinational corporations and private individuals. This corresponds to 0.87% of Japan’s tax revenue, lower than the regional average of 1.6% and the global average of 2.8%. Under the Tax Haven Counter Measure Law from 1978, the profits earned by subsidiaries of Japanese companies located in tax havens are treated as income of the parent corporations and taxed in Japan.
While the tax-revenue-to-GDP ratio is slightly above the OECD average, a major issue with the tax system is that revenues continue to fall way short of government spending. Japan has by far the highest debt ratio of any country. VAT increases since 1989 have proven highly unpopular and are often softened with a number of exemptions. Despite continuous reductions in recent decades, corporate tax rates in Japan remain relatively high.
Japan’s tax administration capacity has been evaluated slightly above the OECD average in the Tax Justice Network ranking. Generally, tax evasion is effectively punished in Japan. According to the Tax Justice Network, Japan loses more than $8.3 billion annually due to global tax abuse committed by multinational corporations and private individuals. This corresponds to 0.87% of Japan’s tax revenue, lower than the regional average of 1.6% and the global average of 2.8%. Under the Tax Haven Counter Measure Law from 1978, the profits earned by subsidiaries of Japanese companies located in tax havens are treated as income of the parent corporations and taxed in Japan.
Citations:
Kato, Yuka. 2023. “Tax avoidance is not illegal, but is it unfair!?” Meiji University. https://english-meiji.net/articles/4175/
Morinobu, Shigeki. 2023. “Making Work Pay for Japanese Women: Toward a Smarter Approach to Tax and Social Security Reform.” The Tokyo Foundation for Policy Research. https://www.tokyofoundation.org/research/detail.php?id=946
OECD. 2023. “Revenue Statistics 2023 – Japan.” https://www.oecd.org/tax/revenue-statistics-japan.pdf
Tax Foundation. 2023. “Taxes in Japan.” https://taxfoundation.org/location/japan/
Tax Justice Network. 2023. “Japan.” https://taxjustice.net/country-profiles/japan/
Yamaguchi, Mari. 2023. “Japan’s Prime Minister Kishida Plans an Income Tax Cut for Households and Corporate Tax Breaks.” AP News, October 23. https://apnews.com/article/japan-kishida-economy-tax-cuts-05cea22ccacfb21fe4eb4df88d7b8b7d
Kato, Yuka. 2023. “Tax avoidance is not illegal, but is it unfair!?” Meiji University. https://english-meiji.net/articles/4175/
Morinobu, Shigeki. 2023. “Making Work Pay for Japanese Women: Toward a Smarter Approach to Tax and Social Security Reform.” The Tokyo Foundation for Policy Research. https://www.tokyofoundation.org/research/detail.php?id=946
OECD. 2023. “Revenue Statistics 2023 – Japan.” https://www.oecd.org/tax/revenue-statistics-japan.pdf
Tax Foundation. 2023. “Taxes in Japan.” https://taxfoundation.org/location/japan/
Tax Justice Network. 2023. “Japan.” https://taxjustice.net/country-profiles/japan/
Yamaguchi, Mari. 2023. “Japan’s Prime Minister Kishida Plans an Income Tax Cut for Households and Corporate Tax Breaks.” AP News, October 23. https://apnews.com/article/japan-kishida-economy-tax-cuts-05cea22ccacfb21fe4eb4df88d7b8b7d
Latvia
Latvia ranks second in the International Tax Competitiveness Index 2023 and has some of the lowest tax rates in the EU. Its corporate tax rank (first in 2023) and individual tax rank (third) demonstrate a practical approach to taxation management.
Latvia’s corporate tax system ranks 16th out of 64 countries measured in 2022 with an indicator of 0.33. This demonstrates that Latvia’s corporate tax is simple and competitive, as it allows loss carryovers.
Meanwhile, the tax-to-GDP ratio was 30.2% in 2022, compared to 29.0% in 2000 (OECD, 2023). In addition, Latvia ranks 38th in the tax-to-GDP ratio among the 38 OECD countries (OECD, 2023). With a relatively low tax-to-GDP rate and a high shadow economy, Latvia has room for improvement in tax collection, which could positively affect the business environment by minimizing the shadow economy.
The shadow economy in Latvia remains significant, with a substantial proportion of non-reported wages, or “envelope wages” – 46.7% of the shadow economy in 2022 – while undeclared income represented about 29%. The prevalence of envelope wages and undeclared income demonstrates the restricted administrative capacity to collect taxes and combat the shadow economy.
Each year, during the state budget development process, the government changes the tax laws – mostly in personal income tax and value-added tax laws – to ensure budgetary income. However, industries have criticized the government for amending the personal income tax too often and have requested that the government simplify income tax calculations for individuals. The law on personal income tax was adopted in 1993 and has been amended yearly since.
In 2023, the government approved “The Road Map for Designing the National Tax Policy White Paper 2024 – 2027” to outline new national policy guidelines by early 2024. The government foresees actions to minimize the shadow economy and relieve the tax burden for low-wage earners. The Latvian tax system currently includes 14 taxes, and the government plans to change some tax rates but not introduce comprehensive reforms in taxation.
Latvia’s corporate tax system ranks 16th out of 64 countries measured in 2022 with an indicator of 0.33. This demonstrates that Latvia’s corporate tax is simple and competitive, as it allows loss carryovers.
Meanwhile, the tax-to-GDP ratio was 30.2% in 2022, compared to 29.0% in 2000 (OECD, 2023). In addition, Latvia ranks 38th in the tax-to-GDP ratio among the 38 OECD countries (OECD, 2023). With a relatively low tax-to-GDP rate and a high shadow economy, Latvia has room for improvement in tax collection, which could positively affect the business environment by minimizing the shadow economy.
The shadow economy in Latvia remains significant, with a substantial proportion of non-reported wages, or “envelope wages” – 46.7% of the shadow economy in 2022 – while undeclared income represented about 29%. The prevalence of envelope wages and undeclared income demonstrates the restricted administrative capacity to collect taxes and combat the shadow economy.
Each year, during the state budget development process, the government changes the tax laws – mostly in personal income tax and value-added tax laws – to ensure budgetary income. However, industries have criticized the government for amending the personal income tax too often and have requested that the government simplify income tax calculations for individuals. The law on personal income tax was adopted in 1993 and has been amended yearly since.
In 2023, the government approved “The Road Map for Designing the National Tax Policy White Paper 2024 – 2027” to outline new national policy guidelines by early 2024. The government foresees actions to minimize the shadow economy and relieve the tax burden for low-wage earners. The Latvian tax system currently includes 14 taxes, and the government plans to change some tax rates but not introduce comprehensive reforms in taxation.
Citations:
Tax Foundation. 2023. “International Tax Competitiveness Index 2023.” https://taxfoundation.org/research/all/global/2023-international-tax-competitiveness-index/
2. Tax Complexity Index 2022. https://www.taxcomplexity.org/
OECD. 2022. OECD Economic Surveys: Latvia 2022. https://www.oecd.org/latvia/oecd-economic-surveys-latvia-25222988.htm
Sauka, A., and T. Putninš. 2023. “Shadow Economy Index for the Baltic Countries.” https://www.sseriga.edu/shadow-economy-index-baltic-countries
Liepiņa, I. 2023. “Nodokļu reformas ēnā.” Bilance 11 (503): 2023.
Finanšu ministrija. 2023. “Par Valsts nodokļu politikas pamatnostādņu 2024.-2027. gadam izstrādes virzību.” https://tapportals.mk.gov.lv/legal_acts/14378840-4469-4c8f-8d4d-4c513c891d76
OECD. 2023. “Revenue Statistics 2023 – Latvia.” https://www.oecd.org/tax/tax-policy/revenue-statistics-latvia.pdf
Tax Foundation. 2023. “International Tax Competitiveness Index 2023.” https://taxfoundation.org/research/all/global/2023-international-tax-competitiveness-index/
2. Tax Complexity Index 2022. https://www.taxcomplexity.org/
OECD. 2022. OECD Economic Surveys: Latvia 2022. https://www.oecd.org/latvia/oecd-economic-surveys-latvia-25222988.htm
Sauka, A., and T. Putninš. 2023. “Shadow Economy Index for the Baltic Countries.” https://www.sseriga.edu/shadow-economy-index-baltic-countries
Liepiņa, I. 2023. “Nodokļu reformas ēnā.” Bilance 11 (503): 2023.
Finanšu ministrija. 2023. “Par Valsts nodokļu politikas pamatnostādņu 2024.-2027. gadam izstrādes virzību.” https://tapportals.mk.gov.lv/legal_acts/14378840-4469-4c8f-8d4d-4c513c891d76
OECD. 2023. “Revenue Statistics 2023 – Latvia.” https://www.oecd.org/tax/tax-policy/revenue-statistics-latvia.pdf
Slovakia
The tax quota II (taxes and social contribution to GDP) continuously increases in Slovakia, reaching 42.4% by 2023. Due to fiscal challenges generated by the “poly-crisis,” the government seeks ways to increase public revenues, independent of potential disincentives of the tax system that may discourage individuals from seeking employment and companies from making investments. Many experts criticize the especially high levels of social contributions. According to the OECD (2023), the level of social security contributions is significantly higher than the EU average and is expected to grow as the new Fico government increases health insurance contributions by 1%.
The body responsible for tax collection is “Finančná správa” SR. This agency has sufficient administrative capacity to collect taxes, although the efficiency of tax collection remains problematic. According to the Tax Justice Network’s Corporate Tax Haven Index, Slovakia ranks 51, better than most other new EU members.
Thanks to several improvements within the tax collection system, the tax gap in Slovakia has gradually decreased but remains higher than the EU average (European Union, 2023). Administrative costs of taxation in Slovakia are higher than in most other developed countries (for older data, see Nemec, Pompura, and Šagát, 2015). This point is emphasized by the European Semester Report 2022 (European Union, 2022: 8): “Further efforts simplifying taxes and improving compliance can increase public revenues and ensure fairness.”
The body responsible for tax collection is “Finančná správa” SR. This agency has sufficient administrative capacity to collect taxes, although the efficiency of tax collection remains problematic. According to the Tax Justice Network’s Corporate Tax Haven Index, Slovakia ranks 51, better than most other new EU members.
Thanks to several improvements within the tax collection system, the tax gap in Slovakia has gradually decreased but remains higher than the EU average (European Union, 2023). Administrative costs of taxation in Slovakia are higher than in most other developed countries (for older data, see Nemec, Pompura, and Šagát, 2015). This point is emphasized by the European Semester Report 2022 (European Union, 2022: 8): “Further efforts simplifying taxes and improving compliance can increase public revenues and ensure fairness.”
Citations:
Nemec, J., Pompura, L., and Šagát, V. 2015. “Administrative Costs of Taxation in Slovakia.” European Financial and Accounting Journal 10 (2): 51-61.
European Union. 2022. 2022 Country Report – Slovakia. Brussels: European Union.
European Union. 2023. VAT Gap Report 2023. Brussels: European Union.
OECD. 2023. Revenue Statistics 2023 – the Slovak Republic. Paris: OECD.
https://cenastatu.sme.sk/kv-d-cdz/2022/
https://www.financnasprava.sk/sk/titulna-stranka
Nemec, J., Pompura, L., and Šagát, V. 2015. “Administrative Costs of Taxation in Slovakia.” European Financial and Accounting Journal 10 (2): 51-61.
European Union. 2022. 2022 Country Report – Slovakia. Brussels: European Union.
European Union. 2023. VAT Gap Report 2023. Brussels: European Union.
OECD. 2023. Revenue Statistics 2023 – the Slovak Republic. Paris: OECD.
https://cenastatu.sme.sk/kv-d-cdz/2022/
https://www.financnasprava.sk/sk/titulna-stranka
Netherlands
In a brief promotional clip, the Tax Service (Belastingdienst, BD) identifies its mission as “bringing in money for The Netherlands Ltd.,” aiming for digital transactions where possible and engaging in personal interactions when necessary. However, the clip also highlights a disconnect: Although 78% of Dutch citizens shop online and 83% use online banking services, the BD primarily communicates with its millions of clients via through postal letters. This massive operation involves 25,000 civil servants out of the 110,000 employed by the national government, handling 20 million queries, 1 million refunds, 500,000 objections and 200,000 office visits annually. Despite these challenges, tax collection itself appears on the surface to function well.
Nonetheless, the BD faces significant challenges. Once considered to be one of the most advanced tax authorities globally, it now operates on outdated computer systems and is struggling with overdue maintenance of critical ICT infrastructure. These issues jeopardize future tax collection, prompting the government to postpone necessary tax policy updates until after 2026. Compounding these problems are structural staff shortages resulting from an ill-conceived early pension scheme, which has further hampered citizen services.
Recent disclosures revealed that the BD categorizes implementation and compliance risks as “high” across five tax categories, collectively generating nearly €100 billion in revenue, a quarter of the state’s income in 2023. The BD’s ability to uphold complex tax laws has been compromised over the years, exacerbated by its dual role in tax collection and the administration of various supplements, allowances and refunds.
Taxation in the Netherlands is intricate and opaque. Income policies rely not only on tax rates and brackets but also on credits, benefits tailored to household situations and incomes, and a labyrinth of exemptions, deductions and adjustments. Adjusting allowances and supplements is technically simpler than creating new subsidies, which requires legislative changes and more time. This complexity burdens both taxpayers and tax administrators alike. For taxpayers, this complexity sometimes results in a “poverty trap,” where accepting paid work or a slight increase in income can lead to a net loss due to reduced allowances or exemptions. The infamous child benefit scandal, which eroded trust in Dutch governance, directly stemmed from these complexities and a strong focus on fraud detection.
ICT failures have also compromised legal standards. Algorithms used for benefit calculations and fraud detection were found to discriminate against non-Dutch households. Despite warnings, the BD proceeded with the use of potentially discriminatory algorithms, prioritizing organizational interests over legal compliance and fundamental rights. Political pressures from the Ministry of Finance further obstructed transparency in tax policies, leaving citizens and businesses unaware of updated interpretations of tax laws, potentially resulting in overpaid taxes.
Nonetheless, the BD faces significant challenges. Once considered to be one of the most advanced tax authorities globally, it now operates on outdated computer systems and is struggling with overdue maintenance of critical ICT infrastructure. These issues jeopardize future tax collection, prompting the government to postpone necessary tax policy updates until after 2026. Compounding these problems are structural staff shortages resulting from an ill-conceived early pension scheme, which has further hampered citizen services.
Recent disclosures revealed that the BD categorizes implementation and compliance risks as “high” across five tax categories, collectively generating nearly €100 billion in revenue, a quarter of the state’s income in 2023. The BD’s ability to uphold complex tax laws has been compromised over the years, exacerbated by its dual role in tax collection and the administration of various supplements, allowances and refunds.
Taxation in the Netherlands is intricate and opaque. Income policies rely not only on tax rates and brackets but also on credits, benefits tailored to household situations and incomes, and a labyrinth of exemptions, deductions and adjustments. Adjusting allowances and supplements is technically simpler than creating new subsidies, which requires legislative changes and more time. This complexity burdens both taxpayers and tax administrators alike. For taxpayers, this complexity sometimes results in a “poverty trap,” where accepting paid work or a slight increase in income can lead to a net loss due to reduced allowances or exemptions. The infamous child benefit scandal, which eroded trust in Dutch governance, directly stemmed from these complexities and a strong focus on fraud detection.
ICT failures have also compromised legal standards. Algorithms used for benefit calculations and fraud detection were found to discriminate against non-Dutch households. Despite warnings, the BD proceeded with the use of potentially discriminatory algorithms, prioritizing organizational interests over legal compliance and fundamental rights. Political pressures from the Ministry of Finance further obstructed transparency in tax policies, leaving citizens and businesses unaware of updated interpretations of tax laws, potentially resulting in overpaid taxes.
Citations:
Belastingdienst. 2022. “Vernieuwen dienstverlening en toezicht.”
NRC, Stokmans, and Vermeulen. 2023. “Belastingdienst ziet ‘hoge risico’s’ bij het innen van 100 miljard euro aan belasting.” NRC July 12.
Ziesemer. 2023. “Waarom het maar niet lukt om ons belastingstelsel makkelijker te maken.” De Correspondent September 14.
Nu.nl. 2023. “ICT-problemen bij de Belastingdienst duren al zeker achttien jaar.” March 4.
Deijkers, J., and Van Wensen, H. 2023. “Door ICT-problemen Belastingdienst dreigt een nieuwe fiscale ramp.” Elseviers Weekblad November 8.
“`Davidson, David, and Sebastiaan Brommersma. 2023. “Belastingdienst blijft wet overtreden met mogelijk discriminerende fraude-algoritmen.” Follow the Money December 14.“`
NRC, Jeroen Wester. 2023. “Martijn Nouwen | wetenschapper. Financiën hield openbaarmaking van belastingbeleid tegen, ‘dit leidt tot rechtsongelijkheid’.” NRC March 28.
NRC, Derk Stokmans Stefan Vermeulen. 2023. “Staatssecretaris Marnix van Rij over de hervormingen bij de Belastingdienst: ‘Ik vind het veel te lang duren’.” March 22.
Belastingdienst. 2022. “Vernieuwen dienstverlening en toezicht.”
NRC, Stokmans, and Vermeulen. 2023. “Belastingdienst ziet ‘hoge risico’s’ bij het innen van 100 miljard euro aan belasting.” NRC July 12.
Ziesemer. 2023. “Waarom het maar niet lukt om ons belastingstelsel makkelijker te maken.” De Correspondent September 14.
Nu.nl. 2023. “ICT-problemen bij de Belastingdienst duren al zeker achttien jaar.” March 4.
Deijkers, J., and Van Wensen, H. 2023. “Door ICT-problemen Belastingdienst dreigt een nieuwe fiscale ramp.” Elseviers Weekblad November 8.
“`Davidson, David, and Sebastiaan Brommersma. 2023. “Belastingdienst blijft wet overtreden met mogelijk discriminerende fraude-algoritmen.” Follow the Money December 14.“`
NRC, Jeroen Wester. 2023. “Martijn Nouwen | wetenschapper. Financiën hield openbaarmaking van belastingbeleid tegen, ‘dit leidt tot rechtsongelijkheid’.” NRC March 28.
NRC, Derk Stokmans Stefan Vermeulen. 2023. “Staatssecretaris Marnix van Rij over de hervormingen bij de Belastingdienst: ‘Ik vind het veel te lang duren’.” March 22.
USA
The United States enjoys a diverse tax base, with federal revenues coming from income tax, payroll tax, corporate tax, and consumption tax (Kwak 2013). However, the U.S. tax system is famously complicated, with a bewildering array of deductions, tax expenditures, and loopholes (Parlow 2013). This complexity enables those with the means to hire professionals to help them legally reduce their tax contributions (Graetz 2003). The U.S. tax system does not produce enough revenue to eliminate the deficit and provide sufficient resources to fulfill major obligations in the long run.
The Internal Revenue Service (IRS) is the primary federal agency responsible for tax administration in the United States. It collects taxes and enforces tax laws at the federal level. In recent years, it has modernized its systems, allowing for online tax filing and the use of data analytics.
There are reasonable tax enforcement and compliance efforts, including audits and penalties for noncompliance (Alstadsæter et al. 2019). In addition to the IRS, the U.S. Treasury has the Financial Crimes Enforcement Network (FinCEN), which analyzes financial data to identify potential financial crimes, such as money laundering or financing terrorism. Tax evasion cases are then prosecuted by the Department of Justice, which works closely with these agencies (Slemrod 2007).
Biden’s Inflation Reduction Act addressed long-standing IRS funding deficiencies by providing $79.4 billion in stable, long-term funding through 2031. This funding aims to improve tax compliance by cracking down on high-income individuals and corporations who often avoided paying their lawfully owed taxes and to enhance service for millions of Americans who do pay their taxes. The funding will enable the IRS to modernize its IT infrastructure, administer new energy tax credits, and rebuild the agency’s administrative capacity.
The Internal Revenue Service (IRS) is the primary federal agency responsible for tax administration in the United States. It collects taxes and enforces tax laws at the federal level. In recent years, it has modernized its systems, allowing for online tax filing and the use of data analytics.
There are reasonable tax enforcement and compliance efforts, including audits and penalties for noncompliance (Alstadsæter et al. 2019). In addition to the IRS, the U.S. Treasury has the Financial Crimes Enforcement Network (FinCEN), which analyzes financial data to identify potential financial crimes, such as money laundering or financing terrorism. Tax evasion cases are then prosecuted by the Department of Justice, which works closely with these agencies (Slemrod 2007).
Biden’s Inflation Reduction Act addressed long-standing IRS funding deficiencies by providing $79.4 billion in stable, long-term funding through 2031. This funding aims to improve tax compliance by cracking down on high-income individuals and corporations who often avoided paying their lawfully owed taxes and to enhance service for millions of Americans who do pay their taxes. The funding will enable the IRS to modernize its IT infrastructure, administer new energy tax credits, and rebuild the agency’s administrative capacity.
Citations:
Joel Slemrod. 2007. “Cheating Ourselves: The Economics of Tax Evasion.” Journal of Economic Perspectives.
Annette Alstadsæter, Niels Johannesen, and Gabriel Zucman. 2019. “Tax Evasion and Inequality.” American Economic Review.
Jeffrey Parlow. 2013. “The Necessity of Complexity in the Tax System.” Wyoming Law Review.
Michael Graetz. 2003. “100 Million Unnecessary Returns: A Fresh Start for the US Tax System.” Yale Law Journal.
Sunjoo Kwak. 2013. “Tax Base Composition and Revenue Volatility.” Public Budgeting and Finance.
Joel Slemrod. 2007. “Cheating Ourselves: The Economics of Tax Evasion.” Journal of Economic Perspectives.
Annette Alstadsæter, Niels Johannesen, and Gabriel Zucman. 2019. “Tax Evasion and Inequality.” American Economic Review.
Jeffrey Parlow. 2013. “The Necessity of Complexity in the Tax System.” Wyoming Law Review.
Michael Graetz. 2003. “100 Million Unnecessary Returns: A Fresh Start for the US Tax System.” Yale Law Journal.
Sunjoo Kwak. 2013. “Tax Base Composition and Revenue Volatility.” Public Budgeting and Finance.
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The tax system is not at all aligned with the goals of ensuring adequate tax revenues.
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