To what extent do existing tax institutions and procedures consider equity aspects?
The tax system is fully aligned with the goal of ensuring equity.
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9
Denmark
Denmark is among the most equal countries in the world, due to its highly redistributive and progressive tax system. In 2022, the Gini coefficient was estimated by Statistics Denmark to be 30. Although the Gini coefficient has been slightly increasing over the past 15 years, it remains low in international comparisons. Relative poverty rates are also low in Denmark. According to Statistics Denmark, 3.7% of the population has a net income below 50% of the median income (Statistics Denmark 2023).
The Economic Council of the Labor Movement argues that inequality will increase slightly as a consequence of the 2023 tax reform. However, it also contends that this tax reform is the most balanced in terms of equity in the past 20 years (Economic Council of the Labor Movement 2023).
The Economic Council of the Labor Movement argues that inequality will increase slightly as a consequence of the 2023 tax reform. However, it also contends that this tax reform is the most balanced in terms of equity in the past 20 years (Economic Council of the Labor Movement 2023).
Citations:
The Economic Council of the Labor Movement. 2023. “Regeringens skatteudspil øger uligheden trods forsøg på balance.” https://www.ae.dk/analyse/2023-11-regeringens-skatteudspil-oeger-uligheden-trods-forsoeg-paa-balance
Statistics Denmark. 2022. “Income inequality 2022.” https://www.dst.dk/da/Statistik/emner/arbejde-og-indkomst/indkomst-og-loen/indkomstulighed
The Economic Council of the Labor Movement. 2023. “Regeringens skatteudspil øger uligheden trods forsøg på balance.” https://www.ae.dk/analyse/2023-11-regeringens-skatteudspil-oeger-uligheden-trods-forsoeg-paa-balance
Statistics Denmark. 2022. “Income inequality 2022.” https://www.dst.dk/da/Statistik/emner/arbejde-og-indkomst/indkomst-og-loen/indkomstulighed
The tax system is largely aligned with the goal of ensuring equity.
8
Austria
In several critical assessments of both horizontal and vertical equity, Austria has been found to offer much room for improvement. Specifically, most of the state’s revenues come from taxes on labor and value-added taxes, while very little is generated by any form of wealth taxes.
Also, the Austrian practice of public and private employers paying 13th and 14th salaries per year – which are effectively less taxed – has been considered to particularly benefit recipients of higher salaries (Reflektive 2018). Apart from that and relatively high value-added taxes, tax progression is rather high. The Gini coefficient drops significantly from pre-tax to post-tax income (Rocha-Akis 2023).
With an average rate of income tax and employees’ social security contributions for single persons with no children at 31.19%, Austria ranked 24th out of 30 countries in a recent survey. With an effective average tax rate for companies at 23.10% in 2021, Austria ranked 19th out of 27 countries in a recent survey (OECD 2023; Mannheim Tax Index).
The most significant equity effects are achieved not by taxation but by redistribution, where Austria stands out among the countries with the highest levels of post-tax redistribution. Considering child-related benefits and tax provisions, the net average tax rate for an average married worker with two children in Austria was 10.7% in 2022. This rate is the 28th lowest in the OECD and compares with the OECD average of 14.1% (OECD 2023).
Also, the Austrian practice of public and private employers paying 13th and 14th salaries per year – which are effectively less taxed – has been considered to particularly benefit recipients of higher salaries (Reflektive 2018). Apart from that and relatively high value-added taxes, tax progression is rather high. The Gini coefficient drops significantly from pre-tax to post-tax income (Rocha-Akis 2023).
With an average rate of income tax and employees’ social security contributions for single persons with no children at 31.19%, Austria ranked 24th out of 30 countries in a recent survey. With an effective average tax rate for companies at 23.10% in 2021, Austria ranked 19th out of 27 countries in a recent survey (OECD 2023; Mannheim Tax Index).
The most significant equity effects are achieved not by taxation but by redistribution, where Austria stands out among the countries with the highest levels of post-tax redistribution. Considering child-related benefits and tax provisions, the net average tax rate for an average married worker with two children in Austria was 10.7% in 2022. This rate is the 28th lowest in the OECD and compares with the OECD average of 14.1% (OECD 2023).
Citations:
https://www.oehgb.at/wp-content/uploads/2014/12/Eigentuemertag_2014_Ladner.pdf
https://www.momentum-institut.at/system/files/2022-02/PB%202022.01%200101%20Steuerstruktur.pdf
Rocha-Akis, Silvia, Jürgen Bierbaumer, Benjamin Bittschi, Julia Bock-Schappelwein, Martina Einsiedl, Marian Fink, Michael Klien, Simon Loretz, Christine Mayrhuber. 2023. “Umverteilung durch den Staat in Österreich 2019 und Entwicklungen von 2005 bis 2019.” https://www.wifo.ac.at/news/umverteilung_durch_den_staat_in_oesterreich
OECD. 2023. Taxing Wages 2023: Indexation of Labour Taxation and Benefits in OECD Countries. Paris: OECD Publishing. https://doi.org/10.1787/8c99fa4d-en
https://www.reflektive.at/weihnachtsgeld-als-steuergeschenk-fuer-besserverdienende/
Mannheim Tax Index: https://www.zew.de/mannheim-tax-index
https://www.oehgb.at/wp-content/uploads/2014/12/Eigentuemertag_2014_Ladner.pdf
https://www.momentum-institut.at/system/files/2022-02/PB%202022.01%200101%20Steuerstruktur.pdf
Rocha-Akis, Silvia, Jürgen Bierbaumer, Benjamin Bittschi, Julia Bock-Schappelwein, Martina Einsiedl, Marian Fink, Michael Klien, Simon Loretz, Christine Mayrhuber. 2023. “Umverteilung durch den Staat in Österreich 2019 und Entwicklungen von 2005 bis 2019.” https://www.wifo.ac.at/news/umverteilung_durch_den_staat_in_oesterreich
OECD. 2023. Taxing Wages 2023: Indexation of Labour Taxation and Benefits in OECD Countries. Paris: OECD Publishing. https://doi.org/10.1787/8c99fa4d-en
https://www.reflektive.at/weihnachtsgeld-als-steuergeschenk-fuer-besserverdienende/
Mannheim Tax Index: https://www.zew.de/mannheim-tax-index
France
France’s tax system is highly redistributive. According to the French public observatory on inequalities (Observatoire des inégalités 2023), the Gini coefficient (rate between the average primary income of the richest 10% compared to the 10% poorest) is 19.6 for primary incomes; it drops to 5.5 through the effect of taxation and welfare transfers. This is one of the most redistributive effects within the OECD.
The tax system is overall fair across different actors with similar capacities. Looking at individuals, the main difference lies in the status of the person, depending on whether he or she is self-employed or a salaried employee. Taxation tends to be higher for the self-employed, but with more specific exemptions. A few professions, such as journalists, also benefit from partial tax exemptions with disputable grounds.
Taxation is progressive when it is direct. Income tax is paid by roughly half the population, and the highest marginal rate is about 45%. For companies, the logic of redistribution is less present. Larger firms tend to pay more taxes, but also have more ways to avoid them. Recent debates have particularly concerned the implementation of a new minimal tax rate for global companies (Laffite et al. 2021). Usually, labor-intensive companies tend to pay more taxes than capital-intensive companies. In all cases, the highest-earning individuals and companies tend to pay relatively less than other income categories. Bach et al. (2023) show that the tax rate declines from 46% for the 0.1% of the richest households to 26% for the 0.0002% richest.
The tax system is overall fair across different actors with similar capacities. Looking at individuals, the main difference lies in the status of the person, depending on whether he or she is self-employed or a salaried employee. Taxation tends to be higher for the self-employed, but with more specific exemptions. A few professions, such as journalists, also benefit from partial tax exemptions with disputable grounds.
Taxation is progressive when it is direct. Income tax is paid by roughly half the population, and the highest marginal rate is about 45%. For companies, the logic of redistribution is less present. Larger firms tend to pay more taxes, but also have more ways to avoid them. Recent debates have particularly concerned the implementation of a new minimal tax rate for global companies (Laffite et al. 2021). Usually, labor-intensive companies tend to pay more taxes than capital-intensive companies. In all cases, the highest-earning individuals and companies tend to pay relatively less than other income categories. Bach et al. (2023) show that the tax rate declines from 46% for the 0.1% of the richest households to 26% for the 0.0002% richest.
Citations:
Bach, L., Bozio, A., Guillouzouic, A., and Malgouyres, C. 2023. “Quels impôts les milliardaires paient-ils?” Note de l’Institut des Politiques Publiques 92. Retrieved 15 January 2024 from https://www.ipp.eu/wp-content/uploads/2023/06/Note_IPP_Billionaires-version-actualisee.pdf
Laffitte, S., Martin, J., Parenti, M., Souillard, B., and Toubal, F. 2021. “Taxation minimale des multinationales: contours et quantification.” https://www.cae-eco.fr/staticfiles/pdf/cae-focus064.pdf
Observatoire des inégalités. 2023. “Redistribution: comment les impôts et les prestations réduisent les inégalités.” https://www.inegalites.fr/Redistribution-comment-les-impots-et-les-prestations-reduisent-les-inegalites
Bach, L., Bozio, A., Guillouzouic, A., and Malgouyres, C. 2023. “Quels impôts les milliardaires paient-ils?” Note de l’Institut des Politiques Publiques 92. Retrieved 15 January 2024 from https://www.ipp.eu/wp-content/uploads/2023/06/Note_IPP_Billionaires-version-actualisee.pdf
Laffitte, S., Martin, J., Parenti, M., Souillard, B., and Toubal, F. 2021. “Taxation minimale des multinationales: contours et quantification.” https://www.cae-eco.fr/staticfiles/pdf/cae-focus064.pdf
Observatoire des inégalités. 2023. “Redistribution: comment les impôts et les prestations réduisent les inégalités.” https://www.inegalites.fr/Redistribution-comment-les-impots-et-les-prestations-reduisent-les-inegalites
Norway
Taxes on income from work are generally higher than taxes on financial assets, property, and profits. Since non-work income is the main source of wealth for the richest segments of the population, a separate wealth tax is implemented to ensure a just taxation system and collect taxes from the very wealthy. Unlike other taxes, the wealth tax is politically controversial. Critics argue that the strong growth in house prices extends the impact of the wealth tax to groups not originally targeted, as the value of homes is included in the tax calculation. In 2023, significant media attention focused on super-rich individuals who moved to countries with more favorable tax systems to protest the Norwegian wealth tax.
Distributional considerations (vertical equity) and a higher tax level for high-income earners (a progressive tax rate) have been central elements in the design of the work income tax system. Additionally, for low-income earners, the tax system is designed to avoid levying taxes on income below the poverty line, defined as 60% of the median income.
Distributional considerations (vertical equity) and a higher tax level for high-income earners (a progressive tax rate) have been central elements in the design of the work income tax system. Additionally, for low-income earners, the tax system is designed to avoid levying taxes on income below the poverty line, defined as 60% of the median income.
Citations:
Ausheim, S., and Strøm-Andresen, J. 2023. “Utvikling i formuesskatten siste 10 år – noen utvalgte perspektiver.” Regnskap Norge https://www.regnskapnorge.no/faget/artikler/skatt/utvikling-i-formuesskatten-siste-10-ar/
Ausheim, S., and Strøm-Andresen, J. 2023. “Utvikling i formuesskatten siste 10 år – noen utvalgte perspektiver.” Regnskap Norge https://www.regnskapnorge.no/faget/artikler/skatt/utvikling-i-formuesskatten-siste-10-ar/
Sweden
Horizontal equity in tax policy has improved in recent years. Simplification of the tax system, including fewer deductible items, has broadened the overall tax base. This improvement in horizontal equity results from a combination of a less progressive tax rate and an overall reduction in taxes.
Vertical inequity has increased significantly over the past decade (OECD 2015; 2022). While the country remains one of the more egalitarian in the OECD, the trend of rising inequality persists. One way to counteract this trend is to improve the redistribution effectiveness of the tax and benefit system.
A recent report suggests that the tax system would also benefit from incorporating a gender perspective, arguing that gender blindness has adversely affected women’s income (Jämställdhetsmyndigheten 2023). The report revisits the long-standing debate on the need for tax reform, which was considered during the January Agreement – the compromise that allowed for the formation of the previous government in 2018 – but was never initiated.
Vertical inequity has increased significantly over the past decade (OECD 2015; 2022). While the country remains one of the more egalitarian in the OECD, the trend of rising inequality persists. One way to counteract this trend is to improve the redistribution effectiveness of the tax and benefit system.
A recent report suggests that the tax system would also benefit from incorporating a gender perspective, arguing that gender blindness has adversely affected women’s income (Jämställdhetsmyndigheten 2023). The report revisits the long-standing debate on the need for tax reform, which was considered during the January Agreement – the compromise that allowed for the formation of the previous government in 2018 – but was never initiated.
Citations:
OECD. 2015. “Sweden Policy Brief.” https://www.oecd.org/sweden/sweden-achieving-greater-equality-of-opportunities-and-outcomes.pdf
OECD. 2022. “Country profiles: Sweden.” https://www.oecd.org/regional/oecd-regional-outlook-2023-country-profiles-sweden.pdf
Jämställdhetsmyndigheten. 2022. “Kunskapsunderlag om frågor som rör skatter och jämställdhet.” https://jamstalldhetsmyndigheten.se/media/xr5fihnu/underlagsrapport-2023-2-skatter-och-jämställdhet.pdf
OECD. 2015. “Sweden Policy Brief.” https://www.oecd.org/sweden/sweden-achieving-greater-equality-of-opportunities-and-outcomes.pdf
OECD. 2022. “Country profiles: Sweden.” https://www.oecd.org/regional/oecd-regional-outlook-2023-country-profiles-sweden.pdf
Jämställdhetsmyndigheten. 2022. “Kunskapsunderlag om frågor som rör skatter och jämställdhet.” https://jamstalldhetsmyndigheten.se/media/xr5fihnu/underlagsrapport-2023-2-skatter-och-jämställdhet.pdf
7
Canada
Equity is ostensibly one of the goals of the Canadian tax system. Yet large inequities exist in the treatment of salaries and wages compared with capital investment income and real estate holdings.
Canada’s tax system aims for horizontal equity, generally trying to treat those with similar income levels equally. However, provisions like capital gains exclusions and business deductions can enable higher-income groups to face lower effective tax rates than lower-wage workers.
Groups like seniors, workers with disabilities, and families with children do receive some tax incentives and credits aimed at supporting their higher costs, but pension income, for example, is fully taxed.
Vertical equity is also aimed for in the form of a “progressive” system in which higher earners pay larger shares of taxes. Canada’s progressive income tax schedule imposes higher percentage taxes on sections of income as earnings rise.
However, the concentration of savings and capital gains among higher earners leads to this income being taxed at lower rates, undermining vertical equity. Most deductions also tend to provide greater benefits to higher-income groups, reducing their effective rates.
Canada’s tax system aims for horizontal equity, generally trying to treat those with similar income levels equally. However, provisions like capital gains exclusions and business deductions can enable higher-income groups to face lower effective tax rates than lower-wage workers.
Groups like seniors, workers with disabilities, and families with children do receive some tax incentives and credits aimed at supporting their higher costs, but pension income, for example, is fully taxed.
Vertical equity is also aimed for in the form of a “progressive” system in which higher earners pay larger shares of taxes. Canada’s progressive income tax schedule imposes higher percentage taxes on sections of income as earnings rise.
However, the concentration of savings and capital gains among higher earners leads to this income being taxed at lower rates, undermining vertical equity. Most deductions also tend to provide greater benefits to higher-income groups, reducing their effective rates.
Finland
The state taxes individual incomes at progressive rates ranging from 12.64% (for an annual taxable income of €20,500) to 44% (for an annual taxable income of €150,000) in 2024 (Vero.fi: Tax Administration n.d.). Municipal taxes vary from 4.4% to 10.8%, depending on the municipal authority. Generally speaking, demands for vertical equity are largely satisfied. However, this is less true of horizontal equity.
The corporate income tax rate was lowered in January 2014 from 24.5% to 20%, which is, on average, less than in other Nordic countries and EU member states. Adjustments in recent years have made Finland’s taxation system less complex and more transparent.
The corporate income tax rate was lowered in January 2014 from 24.5% to 20%, which is, on average, less than in other Nordic countries and EU member states. Adjustments in recent years have made Finland’s taxation system less complex and more transparent.
Citations:
Vero.fi: Tax Administration. n.d. “Changes in Taxation.” https://www.vero.fi/en/About-us/newsroom/changes-in-taxation/
Vero.fi: Tax Administration. n.d. “Changes in Taxation.” https://www.vero.fi/en/About-us/newsroom/changes-in-taxation/
Germany
In principle, the German tax system treats entities with similar tax-paying abilities in a similar manner. Exemptions often relate to sectoral tax subsidies. For example, farmers are exempt from paying the motor vehicle tax (Kfz-Steuer) and benefit from a tax subsidy on diesel fuel consumption. These exemptions often have historical origins and are defended by special interest groups, even if they have clearly lost their justification. Following a 2023 ruling of the Federal Constitutional Court on the Debt Brake, the government has proposed phasing out these sectoral tax exemptions, which, from the perspective of equal sectoral treatment, would represent progress.
A specific feature of the German income tax system is its attention to the details of each individual tax case. Taxpayers can claim reductions for a multitude of special circumstances. Although this attempt to ensure maximum fairness for each case creates significant complexity, it contributes to vertical equity.
Germany’s tax and transfer system is notably effective in redistributing income between the rich and the poor among OECD countries. This system significantly reduces inequality in market incomes, resulting in a more equitable post-tax scenario. The Gini coefficient, which is 0.49 for pre-tax market incomes, drops to 0.29 for disposable incomes after applying all redistributive tax and transfer mechanisms (Sachverständigenrat 2019). Thus, the tax and transfer system excels in achieving its redistributive objectives and equalizing incomes.
Germany taxes inheritances but allows generous provisions for corporate wealth. There is no wealth tax, and the idea is highly controversial. Therefore, while income is significantly equalized through the tax system, this is less true for wealth.
A specific feature of the German income tax system is its attention to the details of each individual tax case. Taxpayers can claim reductions for a multitude of special circumstances. Although this attempt to ensure maximum fairness for each case creates significant complexity, it contributes to vertical equity.
Germany’s tax and transfer system is notably effective in redistributing income between the rich and the poor among OECD countries. This system significantly reduces inequality in market incomes, resulting in a more equitable post-tax scenario. The Gini coefficient, which is 0.49 for pre-tax market incomes, drops to 0.29 for disposable incomes after applying all redistributive tax and transfer mechanisms (Sachverständigenrat 2019). Thus, the tax and transfer system excels in achieving its redistributive objectives and equalizing incomes.
Germany taxes inheritances but allows generous provisions for corporate wealth. There is no wealth tax, and the idea is highly controversial. Therefore, while income is significantly equalized through the tax system, this is less true for wealth.
Citations:
Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung. 2019. Den Strukturwandel meistern, Jahresgutachten 19/20. Wiesbaden: Sachverständigenrat.
Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung. 2019. Den Strukturwandel meistern, Jahresgutachten 19/20. Wiesbaden: Sachverständigenrat.
Ireland
Irish tax policies largely ensure horizontal equity by treating different groups of economic actors with similar tax-paying abilities consistently. However, two areas require attention: the tax treatment of second earners, who face high marginal tax rates, and the tax treatment of landlords, whose income is subject to income tax rather than corporate tax. The income tax system is relatively progressive, imposing higher taxes on those with a greater ability to pay, thus ensuring vertical equity. However, the indirect tax system is less progressive than the income and property tax systems, disproportionately impacting the lowest income deciles due to Value Added Tax and heavy excise taxes on alcohol and tobacco products, which have been increased in recent budgets.
Income tax, considered progressive, has become slightly less so due to targeted tax reductions for middle to higher earners, increasing the standard bands and cutting the higher rate (SJI 2023, TASC 2023). The 2022 Commission on Tax and Welfare examined potential disincentives within the tax system that may discourage individuals from seeking employment and companies from making investments. It set out medium to long-term policy scenarios to advise the government, effectively seeking to raise revenue while protecting incentives.
The effective tax rate for businesses is low at 14% and has decreased in recent years, while the average rate of income tax and social security contributions for employees is relatively low at 27.5%, up from 20.35% in 2007, suggesting an inequitable balance. Despite considerable inequality in market income in Ireland compared to OECD nations, taxation and the transfer system help narrow the gap, making post-tax income more equitable (McGauran, 2021). However, measures of income poverty and material deprivation in Ireland still point to a high incidence of low living standards (Roantree et al., 2021).
Equity also requires a global assessment of labor and capital impacts. The “double Irish” corporation tax facility was replaced in 2016 with a “knowledge box” providing a 6.25% corporate tax rate on profits from certain patents and copyrighted software resulting from qualifying R&D conducted in Ireland. With 25% of the Irish business labor force directly employed by MNCs, income tax is less affected. At the fiscal level, over 75% of corporate tax receipts and 40% of income tax and Universal Social Charge payments come from MNCs. Corporation tax receipts were €15.3 billion in 2021, €3.5 billion (almost 30%) higher than 2020, reflecting strong exports (DOF 2022). This growth continued into 2022 and 2023, with a slight drop in late 2023 before a recovery. Receipts are heavily concentrated, with around 10 large firms (including Apple, Dell, Google, Intel, Microsoft, and Oracle) accounting for 56% of all corporation tax generated in 2020, with pharma and IT sectors dominating.
Income tax, considered progressive, has become slightly less so due to targeted tax reductions for middle to higher earners, increasing the standard bands and cutting the higher rate (SJI 2023, TASC 2023). The 2022 Commission on Tax and Welfare examined potential disincentives within the tax system that may discourage individuals from seeking employment and companies from making investments. It set out medium to long-term policy scenarios to advise the government, effectively seeking to raise revenue while protecting incentives.
The effective tax rate for businesses is low at 14% and has decreased in recent years, while the average rate of income tax and social security contributions for employees is relatively low at 27.5%, up from 20.35% in 2007, suggesting an inequitable balance. Despite considerable inequality in market income in Ireland compared to OECD nations, taxation and the transfer system help narrow the gap, making post-tax income more equitable (McGauran, 2021). However, measures of income poverty and material deprivation in Ireland still point to a high incidence of low living standards (Roantree et al., 2021).
Equity also requires a global assessment of labor and capital impacts. The “double Irish” corporation tax facility was replaced in 2016 with a “knowledge box” providing a 6.25% corporate tax rate on profits from certain patents and copyrighted software resulting from qualifying R&D conducted in Ireland. With 25% of the Irish business labor force directly employed by MNCs, income tax is less affected. At the fiscal level, over 75% of corporate tax receipts and 40% of income tax and Universal Social Charge payments come from MNCs. Corporation tax receipts were €15.3 billion in 2021, €3.5 billion (almost 30%) higher than 2020, reflecting strong exports (DOF 2022). This growth continued into 2022 and 2023, with a slight drop in late 2023 before a recovery. Receipts are heavily concentrated, with around 10 large firms (including Apple, Dell, Google, Intel, Microsoft, and Oracle) accounting for 56% of all corporation tax generated in 2020, with pharma and IT sectors dominating.
Citations:
TASC. 2023. “TASC Publications.” https://www.tasc.ie/publications
SJI. 2023. “Budget 2024 Analysis and Critique.” https://www.socialjustice.ie/content/publications/budget-2024-analysis-and-critique
McGauran, A. M. 2021. “Welfare and Employment in Ireland: Income, Wealth, Redistribution and Their Implications for the Welfare System.” https://www.nesc.ie/publications/welfare-and-employment-in-ireland-income-wealth-redistribution-and-theirimplications-for-the-welfare-system-151-7/
Roantree, B., Karina Doorley, Seamus McGuinness, Bertrand Maître, Sylvia C. Murphy, and Emma Quinn. 2021. Poverty, Income Inequality and Living Standards in Ireland. Dublin: Economic and Social Research Institute and Community Foundation for Ireland. https://www.esri.ie/publications/poverty-income-inequality-and-living-standards-inireland-first-annual-report
TASC. 2023. “TASC Publications.” https://www.tasc.ie/publications
SJI. 2023. “Budget 2024 Analysis and Critique.” https://www.socialjustice.ie/content/publications/budget-2024-analysis-and-critique
McGauran, A. M. 2021. “Welfare and Employment in Ireland: Income, Wealth, Redistribution and Their Implications for the Welfare System.” https://www.nesc.ie/publications/welfare-and-employment-in-ireland-income-wealth-redistribution-and-theirimplications-for-the-welfare-system-151-7/
Roantree, B., Karina Doorley, Seamus McGuinness, Bertrand Maître, Sylvia C. Murphy, and Emma Quinn. 2021. Poverty, Income Inequality and Living Standards in Ireland. Dublin: Economic and Social Research Institute and Community Foundation for Ireland. https://www.esri.ie/publications/poverty-income-inequality-and-living-standards-inireland-first-annual-report
Japan
Japan generally has a fair tax system, with 40.2% of revenues raised from social insurance taxes, 19.5% from consumption taxes, 19.1% from individual taxes, 12.9% from corporate taxes and 8.1% from property taxes. Corporate taxes have been continuously reduced but are still comparatively high at 29.7%. The consumption tax rate, introduced in 1989, was raised to 10% in 2019, but remains relatively low compared with other OECD states.
Both income and inheritance taxes are highly progressive with tax rates varying between 5% and 45% for the former, and between 10% and 55% for the latter tax, depending on income. Redistribution is also ensured by a reduced 8% consumption tax rate on food and beverages. In addition, a hometown tax was introduced in 2008 to reduce income disparities between urban and rural regions. Under this system, taxpayers may deduct donations to countryside areas from their income and inhabitant taxes.
Nevertheless, some taxpayer groups, such as farmers, are more privileged than others, as they have access to more tax deductions than salaried workers. Moreover, the introduction of the Qualified Invoicing System in October 2023 put tax-exempt businesses at a significant market disadvantage, compelling many freelancers and small businesses to register as consumption taxpayers to avoid losing clients.
While the redistributive function of the tax system has improved over the years, it remains limited in comparison to other systems (Shiozaki 2020) and is often criticized for disadvantaging low-wage workers.
Both income and inheritance taxes are highly progressive with tax rates varying between 5% and 45% for the former, and between 10% and 55% for the latter tax, depending on income. Redistribution is also ensured by a reduced 8% consumption tax rate on food and beverages. In addition, a hometown tax was introduced in 2008 to reduce income disparities between urban and rural regions. Under this system, taxpayers may deduct donations to countryside areas from their income and inhabitant taxes.
Nevertheless, some taxpayer groups, such as farmers, are more privileged than others, as they have access to more tax deductions than salaried workers. Moreover, the introduction of the Qualified Invoicing System in October 2023 put tax-exempt businesses at a significant market disadvantage, compelling many freelancers and small businesses to register as consumption taxpayers to avoid losing clients.
While the redistributive function of the tax system has improved over the years, it remains limited in comparison to other systems (Shiozaki 2020) and is often criticized for disadvantaging low-wage workers.
Citations:
Margolis, Eric. 2023. “Freelancers aren’t happy with Japan’s new invoice system.” The Japan Times September 25. https://www.japantimes.co.jp/community/2023/09/25/how-tos/freelancer-tax-system/
Shiozaki, Akihisa. 2020. “Japan’s Homogeneous Welfare State. Development and Future Challenges.” In The Crisis of Liberal Internationalism: Japan and the World Order, eds. Yoshi Funabashi and John Ikenberry. Washington, DC: Brookings Institution Press, 203-236.
Tax Foundation. 2023. “Taxes in Japan.” https://taxfoundation.org/location/japan/
World Economic Forum. 2023. “The Pros and Cons of Furusato Nozei, Japan’s Hometown Tax Programme.” https://www.weforum.org/agenda/2023/02/japans-hometown-tax-programme-show-challenges-for-the-future-tax-system/
Margolis, Eric. 2023. “Freelancers aren’t happy with Japan’s new invoice system.” The Japan Times September 25. https://www.japantimes.co.jp/community/2023/09/25/how-tos/freelancer-tax-system/
Shiozaki, Akihisa. 2020. “Japan’s Homogeneous Welfare State. Development and Future Challenges.” In The Crisis of Liberal Internationalism: Japan and the World Order, eds. Yoshi Funabashi and John Ikenberry. Washington, DC: Brookings Institution Press, 203-236.
Tax Foundation. 2023. “Taxes in Japan.” https://taxfoundation.org/location/japan/
World Economic Forum. 2023. “The Pros and Cons of Furusato Nozei, Japan’s Hometown Tax Programme.” https://www.weforum.org/agenda/2023/02/japans-hometown-tax-programme-show-challenges-for-the-future-tax-system/
Slovenia
The corporate tax rate is 19% and, according to an OECD report, is one of the lowest in comparison. Prime Minister Golob’s government has increased it to 22% for 2024 – 2028. The progressive income tax for individuals with a handful of different rates ensures a certain vertical equity. Since 2023 (Golob government), the highest income tax rate is back to 50% (previously 45%) for those in the highest tax bracket. The general tax-free allowance was increased to €5,000 in 2023, as already provided for in the mini-tax reform of Prime Minister Janša’s government. However, this reform had promised that the amount would be €7,500 in 2024, while the current government of Prime Minister Golob has decided that the general tax allowance will remain at €5,000 in 2024.
Citations:
OECD. 2024. “Tax Database.” https://www.oecd.org/tax/tax-policy/tax-database/
OECD. 2024. “Tax Database.” https://www.oecd.org/tax/tax-policy/tax-database/
UK
Income tax is the largest component of UK tax revenue, accounting for just under a quarter in the tax year 2022/23, followed by national insurance (a payroll tax) at close to 18%, and VAT at 16%. Corporation and capital taxes raise a further 13%, with a variety of other taxes, levies, and duties making up the balance. The income tax system is progressive, with bands of 20%, 40%, and 45%, providing reasonable vertical equity. However, this exists in a context where the UK Gini coefficient was around 0.25 in 1980 and 0.4 in 2018 (Institute for Fiscal Studies 2022). An anomaly in the system arises from the “personal allowance” – the amount any income taxpayer can earn before entering the lower rate band. Once taxable income (including from savings and investments) reaches £100,000, the personal allowance is reduced by £1 for every additional £2 of income, creating a de facto 60% tax band for those earning between £100,000 and £125,000.
Recent decisions have maintained various thresholds in cash terms, rather than adjusting for inflation, effectively bringing more taxpayers into the income tax net and pushing more into higher bands – a phenomenon known as “fiscal drag.” An attempt by the short-lived Truss administration to abolish the 45% rate for higher earners drew widespread criticism and was quickly abandoned. In his November 2023 autumn statement, the Chancellor of the Exchequer highlighted a reduction in national insurance, but the fiscal drag effect meant the median taxpayer still paid more.
Evidence summarized in a House of Commons briefing shows that the top percentile contributes 29% of income tax revenue, with a further 31% from those in the 90-99 percentiles. The briefing also reveals that VAT and other indirect taxes disproportionately affect the poorest households as a proportion of disposable income. While this is clearly regressive, the relatively low share of indirect taxes in total tax revenue mitigates the horizontal inequity.
With a high proportion of income tax and national insurance assessed through the PAYE system, where payments are made directly from employers, horizontal equity is largely maintained. However, tax avoidance remains a constant battle between high earners and tax authorities. Over the years, some of the more egregious loopholes have been closed, but the very wealthy often still find ways to limit their tax bills, sometimes by directing income to tax havens. One such avoidance option is through “non-domiciled” status, where people with substantial earnings outside the UK can avoid tax by registering in a lower tax jurisdiction. Although there are relatively few non-doms, they can benefit significantly, albeit with a charge from the UK tax authorities. The issue gained prominence when Rishi Sunak’s wife was found to have non-dom status, prompting her to change her status in response to public criticism. Whether to abolish non-dom status is currently a dividing line between the two main political parties.
Recent decisions have maintained various thresholds in cash terms, rather than adjusting for inflation, effectively bringing more taxpayers into the income tax net and pushing more into higher bands – a phenomenon known as “fiscal drag.” An attempt by the short-lived Truss administration to abolish the 45% rate for higher earners drew widespread criticism and was quickly abandoned. In his November 2023 autumn statement, the Chancellor of the Exchequer highlighted a reduction in national insurance, but the fiscal drag effect meant the median taxpayer still paid more.
Evidence summarized in a House of Commons briefing shows that the top percentile contributes 29% of income tax revenue, with a further 31% from those in the 90-99 percentiles. The briefing also reveals that VAT and other indirect taxes disproportionately affect the poorest households as a proportion of disposable income. While this is clearly regressive, the relatively low share of indirect taxes in total tax revenue mitigates the horizontal inequity.
With a high proportion of income tax and national insurance assessed through the PAYE system, where payments are made directly from employers, horizontal equity is largely maintained. However, tax avoidance remains a constant battle between high earners and tax authorities. Over the years, some of the more egregious loopholes have been closed, but the very wealthy often still find ways to limit their tax bills, sometimes by directing income to tax havens. One such avoidance option is through “non-domiciled” status, where people with substantial earnings outside the UK can avoid tax by registering in a lower tax jurisdiction. Although there are relatively few non-doms, they can benefit significantly, albeit with a charge from the UK tax authorities. The issue gained prominence when Rishi Sunak’s wife was found to have non-dom status, prompting her to change her status in response to public criticism. Whether to abolish non-dom status is currently a dividing line between the two main political parties.
Citations:
https://www.bbc.co.uk/news/business-32216346
https://commonslibrary.parliament.uk/research-briefings/cbp-8513/
Institute for Fiscal Studies. 2022. “IFS Incomes, Poverty, and Inequality.”
tab ‘Inequality’), https://ifs.org.uk/living-standards-poverty-and-inequality-uk
https://www.bbc.co.uk/news/business-32216346
https://commonslibrary.parliament.uk/research-briefings/cbp-8513/
Institute for Fiscal Studies. 2022. “IFS Incomes, Poverty, and Inequality.”
tab ‘Inequality’), https://ifs.org.uk/living-standards-poverty-and-inequality-uk
6
Australia
Australia raises a relatively high proportion of its taxation from income tax, and its income tax regime is more progressive than many other similar countries. Australia levies relatively low average and marginal tax rates at low income levels but relatively high marginal tax rates at high income levels (The Treasury 2023). Furthermore, while many other countries levy a social security contribution as effectively a flat-rate tax, Australia does not impose a separate social security contribution, with pensions funded from the main revenue stream, supplemented by private contributions. Compared to other resource-rich advanced economies, Australia imposes relatively low tax rates on its large and highly profitable mining and energy sector, which some commentators argue is inequitable because it results in a greater tax burden on other sectors (Denniss 2022).
Citations:
The Treasury. 2023. “Tax White Paper: At a Glance.” https://treasury.gov.au/review/tax-white-paper/at-a-glance.
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/
The Treasury. 2023. “Tax White Paper: At a Glance.” https://treasury.gov.au/review/tax-white-paper/at-a-glance.
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/
Czechia
The tax administration in Czechia strives to apply the principle of horizontal equity to the extent its resources allow. Taxpayers have the right to appeal tax office decisions, and in 2022, 4,991 individuals exercised this right, with 3,705 appeals related to VAT assessments. Of these, 2,123 were accepted by the tax authorities. Those dissatisfied with the outcomes can file complaints through the court system; 517 did so in 2022, although most of these complaints were rejected.
Vertical equity is a crucial aspect of the personal income tax system. No tax is levied on an amount equivalent to roughly 70% of the average wage. A 15% tax rate applies to income up to 48 times the minimum wage, after which the tax rate increases to 23%. However, this structure adds little to progressivity, as social insurance payments increase with income up to that threshold and are then capped.
Comparatively low corporate tax rates benefit high-income individuals and private companies, many of which transfer income out of the country to lower-tax regimes. In October 2023, the Chamber of Deputies approved a law on equalization taxes to ensure a minimum level of taxation for large multinational and domestic groups. Czechia will require these groups to pay at least a 15% income tax, which is lower than the current effective rate. This move positions Czechia among countries not allowing themselves to become tax havens. However, it does not prevent companies operating in Czechia from finding ways to declare profits elsewhere and avoid Czech taxation.
Vertical equity is a crucial aspect of the personal income tax system. No tax is levied on an amount equivalent to roughly 70% of the average wage. A 15% tax rate applies to income up to 48 times the minimum wage, after which the tax rate increases to 23%. However, this structure adds little to progressivity, as social insurance payments increase with income up to that threshold and are then capped.
Comparatively low corporate tax rates benefit high-income individuals and private companies, many of which transfer income out of the country to lower-tax regimes. In October 2023, the Chamber of Deputies approved a law on equalization taxes to ensure a minimum level of taxation for large multinational and domestic groups. Czechia will require these groups to pay at least a 15% income tax, which is lower than the current effective rate. This move positions Czechia among countries not allowing themselves to become tax havens. However, it does not prevent companies operating in Czechia from finding ways to declare profits elsewhere and avoid Czech taxation.
Israel
Income tax in Israel is progressive, though the exemptions described in the previous section tend to reduce its progressiveness, as exemptions mainly apply to high earners. Over the years, there has been a steady decrease in the income and corporate tax burden, accompanied by a rise in indirect taxes (especially VAT), which are regressive. The VAT in Israel is quite high at 17% and is set to increase to 18% in 2025 due to the costs of war. The VAT is consistent across services and areas, except for fruits and vegetables, which are completely exempt. There is no inheritance tax in Israel, but there is a tax on capital that contributes very little to government revenue.
Each year, the government designates several areas of the country (mostly peripheral regions) as eligible for tax exemptions, which individuals can deduct from their overall tax liabilities, including labor and capital. Corporate taxes also include various exemptions for companies located in peripheral areas to encourage investment in these regions.
In addition, there is no VAT in Eilat, a touristic city in the south of Israel.
Each year, the government designates several areas of the country (mostly peripheral regions) as eligible for tax exemptions, which individuals can deduct from their overall tax liabilities, including labor and capital. Corporate taxes also include various exemptions for companies located in peripheral areas to encourage investment in these regions.
In addition, there is no VAT in Eilat, a touristic city in the south of Israel.
Lithuania
The tax system is largely aligned with the goal of ensuring equity. In terms of horizontal equity, there are mismatches between various groups of economic actors with similar tax-paying abilities. Labor is taxed somewhat more heavily than capital, while specific groups such as farmers and lawyers benefit from tax exemptions.
In a recent assessment of the Lithuanian tax system, the World Bank (2022) calculated over 72 differentiated tax treatments by type of entity, size, type of activity and source of income (capital/labor). Previous governments have reduced the number of exemptions provided to various professions and economic activities with regard to personal income tax, social security contributions and VAT. Social security contribution rates were reduced after the 2019 reform, but the personal income tax rate was increased. Ceilings on these contributions, reintroduced in 2019, start at a very high level but are gradually decreased.
Overall, the tax system’s capacity for vertical equity and redistribution is relatively limited in Lithuania. The system places a higher tax burden on those with a greater ability to pay taxes, as large companies pay more substantial sums than do small companies. For many years, Lithuania had a flat income tax rate of 15%. However, this was changed to a progressive structure with two brackets: 20% and 32%. Progressivity is further enhanced by an untaxed income threshold, which benefits lower-wage earners.
Nevertheless, only wages are taxed progressively; income derived from individual activity certificates, business certificates and dividends is not. As a result, when total income is skewed toward dividends and individual activity certificates, the impact of progressive tax rates is significantly weakened. According to a World Bank study, the effective tax rate on income steadily increases between approximately the 20th and 90th income percentiles but declines above that level.
In 2021 the current coalition government initiated a process of tax reform aimed at enhancing equity, particularly horizontal equity. This involved reducing existing tax exemptions for certain types of businesses and expanding the base for the real estate tax. However, these reform proposals did not receive support from the liberal members of the governing coalition, and faced criticism from business associations. A tax reform plan in 2023 was not implemented due to a lack of support in the parliament. Nevertheless, the legislature agreed to increase the untaxed income threshold by 20% starting in 2024 for individuals earning up the level of the average monthly wage.
In a recent assessment of the Lithuanian tax system, the World Bank (2022) calculated over 72 differentiated tax treatments by type of entity, size, type of activity and source of income (capital/labor). Previous governments have reduced the number of exemptions provided to various professions and economic activities with regard to personal income tax, social security contributions and VAT. Social security contribution rates were reduced after the 2019 reform, but the personal income tax rate was increased. Ceilings on these contributions, reintroduced in 2019, start at a very high level but are gradually decreased.
Overall, the tax system’s capacity for vertical equity and redistribution is relatively limited in Lithuania. The system places a higher tax burden on those with a greater ability to pay taxes, as large companies pay more substantial sums than do small companies. For many years, Lithuania had a flat income tax rate of 15%. However, this was changed to a progressive structure with two brackets: 20% and 32%. Progressivity is further enhanced by an untaxed income threshold, which benefits lower-wage earners.
Nevertheless, only wages are taxed progressively; income derived from individual activity certificates, business certificates and dividends is not. As a result, when total income is skewed toward dividends and individual activity certificates, the impact of progressive tax rates is significantly weakened. According to a World Bank study, the effective tax rate on income steadily increases between approximately the 20th and 90th income percentiles but declines above that level.
In 2021 the current coalition government initiated a process of tax reform aimed at enhancing equity, particularly horizontal equity. This involved reducing existing tax exemptions for certain types of businesses and expanding the base for the real estate tax. However, these reform proposals did not receive support from the liberal members of the governing coalition, and faced criticism from business associations. A tax reform plan in 2023 was not implemented due to a lack of support in the parliament. Nevertheless, the legislature agreed to increase the untaxed income threshold by 20% starting in 2024 for individuals earning up the level of the average monthly wage.
Citations:
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.”
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.”
New Zealand
Existing tax institutions and procedures are designed with considerations for equity, aiming to achieve fairness and balance in the tax system.
In August 2023, Parliament passed the Taxation Principles Reporting Bill, which establishes a statutory framework requiring the Commissioner of Inland Revenue to report annually on New Zealand’s tax settings against a set of core principles, including horizontal and vertical equity. The bill has been criticized for providing only vague definitions of these core tax principles (Barrett 2023).
The concept of “horizontal equity” is defined as meaning “people with similar levels of income should pay similar amounts of tax.” This definition is incompatible with the Income Tax Act because people with similar levels of income often do not pay similar levels of tax due to credits and deductions that help offset tax burdens for specific groups, such as families with children through the Working for Families tax credit package.
New Zealand’s tax system generally aims to achieve vertical equity. However, despite various mechanisms intended to impose a greater tax burden on those with greater financial capacity, the tax system demonstrates weaknesses in accomplishing vertical equity and addressing societal inequality. Notably, compared to the OECD average, New Zealand relies heavily on personal income tax and a goods and services tax (GST) (OECD 2023). While GST is generally considered a regressive tax because it disproportionately affects lower-income individuals, New Zealand’s personal “broad base, low rate” income tax also lacks progressivity. Furthermore, New Zealand does not have a comprehensive wealth tax or a capital gains tax, partly because the Labour government (2017 – 2023) ignored calls, including recommendations from its own Tax Working Group (Walls 2019), to introduce a capital gains tax. In 2020, a law change gave Inland Revenue the power to require the wealthiest families to submit their earnings information. A two-year investigation into high-wealth individuals (311 who generally have a net worth of more than $50 million) concluded in 2023 and revealed that they pay less than half the amount of tax, across all forms of income, than do most other New Zealanders (RNZ 2023).
The Taxation Principles Reporting Bill 2023 does not address this problem, despite stating that “the tax system should be progressive. Tax is progressive if people with higher levels of economic income pay a higher proportion of that income in tax.” Importantly, the bill provides governments with considerable scope to decide how to balance the core tax principles.
In August 2023, Parliament passed the Taxation Principles Reporting Bill, which establishes a statutory framework requiring the Commissioner of Inland Revenue to report annually on New Zealand’s tax settings against a set of core principles, including horizontal and vertical equity. The bill has been criticized for providing only vague definitions of these core tax principles (Barrett 2023).
The concept of “horizontal equity” is defined as meaning “people with similar levels of income should pay similar amounts of tax.” This definition is incompatible with the Income Tax Act because people with similar levels of income often do not pay similar levels of tax due to credits and deductions that help offset tax burdens for specific groups, such as families with children through the Working for Families tax credit package.
New Zealand’s tax system generally aims to achieve vertical equity. However, despite various mechanisms intended to impose a greater tax burden on those with greater financial capacity, the tax system demonstrates weaknesses in accomplishing vertical equity and addressing societal inequality. Notably, compared to the OECD average, New Zealand relies heavily on personal income tax and a goods and services tax (GST) (OECD 2023). While GST is generally considered a regressive tax because it disproportionately affects lower-income individuals, New Zealand’s personal “broad base, low rate” income tax also lacks progressivity. Furthermore, New Zealand does not have a comprehensive wealth tax or a capital gains tax, partly because the Labour government (2017 – 2023) ignored calls, including recommendations from its own Tax Working Group (Walls 2019), to introduce a capital gains tax. In 2020, a law change gave Inland Revenue the power to require the wealthiest families to submit their earnings information. A two-year investigation into high-wealth individuals (311 who generally have a net worth of more than $50 million) concluded in 2023 and revealed that they pay less than half the amount of tax, across all forms of income, than do most other New Zealanders (RNZ 2023).
The Taxation Principles Reporting Bill 2023 does not address this problem, despite stating that “the tax system should be progressive. Tax is progressive if people with higher levels of economic income pay a higher proportion of that income in tax.” Importantly, the bill provides governments with considerable scope to decide how to balance the core tax principles.
Citations:
Barrett, J. 2023. “Making NZ’s Tax System Fairer Is a Good Idea – But This Proposed New Law Isn’t the Answer.” The Conversation, June 1. https://theconversation.com/making-nzs-tax-system-fairer-is-a-good-idea-but-this-proposed-new-law-isnt-the-answer-206745
RNZ [Radio New Zealand]. 2023. “Wealthiest Paying Tax at Much Lower Rate Than Most Other New Zealanders – IRD Report.” https://www.rnz.co.nz/news/national/488705/wealthiest-paying-tax-at-much-lower-rate-than-most-other-new-zealanders-ird-report
OECD. 2023. “Revenue Statistics 2023: New Zealand.” https://www.oecd.org/tax/revenue-statistics-new-zealand.pdf
Walls, J. 2019. “Government kills off capital gains tax, won’t happen on Jacinda Ardern’s watch.” New Zealand Herald, April 17. https://www.nzherald.co.nz/nz/government-kills-off-capital-gains-tax-wont-happen-on-jacinda-arderns-watch/PRAJYZ2BSONYAFTJI4HJ6JUS5A/
Barrett, J. 2023. “Making NZ’s Tax System Fairer Is a Good Idea – But This Proposed New Law Isn’t the Answer.” The Conversation, June 1. https://theconversation.com/making-nzs-tax-system-fairer-is-a-good-idea-but-this-proposed-new-law-isnt-the-answer-206745
RNZ [Radio New Zealand]. 2023. “Wealthiest Paying Tax at Much Lower Rate Than Most Other New Zealanders – IRD Report.” https://www.rnz.co.nz/news/national/488705/wealthiest-paying-tax-at-much-lower-rate-than-most-other-new-zealanders-ird-report
OECD. 2023. “Revenue Statistics 2023: New Zealand.” https://www.oecd.org/tax/revenue-statistics-new-zealand.pdf
Walls, J. 2019. “Government kills off capital gains tax, won’t happen on Jacinda Ardern’s watch.” New Zealand Herald, April 17. https://www.nzherald.co.nz/nz/government-kills-off-capital-gains-tax-wont-happen-on-jacinda-arderns-watch/PRAJYZ2BSONYAFTJI4HJ6JUS5A/
Poland
Poland’s income tax system is progressive, meaning tax rates depend on the amount of income earned. The tax obligation arises at the moment an event defined in the law occurs. It is irrelevant whether any actual payment has been made, which poses a significant challenge for businesses operating on the basis of delayed payments, as these companies must pay taxes even if they have not yet received the underlying revenue.
Poland introduced a minimum tax as of January 1, 2024. It will be paid by companies that have incurred a tax loss or have not exceeded a 2% profitability threshold. Additionally, the largest state monopolies contribute the most substantial fees to the state treasury, largely as a result of amounts allocated to purchase CO2 emission rights.
Poland introduced a minimum tax as of January 1, 2024. It will be paid by companies that have incurred a tax loss or have not exceeded a 2% profitability threshold. Additionally, the largest state monopolies contribute the most substantial fees to the state treasury, largely as a result of amounts allocated to purchase CO2 emission rights.
Slovakia
There are no recent academic studies on the horizontal and vertical equity of taxation in Slovakia. Experts opine that horizontal equity should not be a concern; however, the issue of vertical equity deserves attention. According to the European Semester Report 2022 (European Union, 2022: 8): “The tax burden on workers is high, particularly for low-income earners. This can discourage people from taking up work.” Several experts have proposed a return to a progressive personal income tax rate to help revitalize Slovak public finance and increase the level of vertical tax equity. However, the Fico government did not include this change in its recent tax reform packageage (Bakoš, 2023).
Citations:
Bakoš, T. 2023. “Schmögnerová a ľavičiari pripravili pre Fica nové dane. Viac zaplatia bohatí, Matovičov balíček sa prepracuje.” Pravda October 25. https://ekonomika.pravda.sk/ludia/clanok/686143-schmognerova-a-laviciari-pripravili-pre-fica-nove-dane-viac-zaplatia-bohati-matovicov-balicek-sa-prepracuje/
European Union. 2022. 2022 Country Report – Slovakia. Brussels: European Union.
Bakoš, T. 2023. “Schmögnerová a ľavičiari pripravili pre Fica nové dane. Viac zaplatia bohatí, Matovičov balíček sa prepracuje.” Pravda October 25. https://ekonomika.pravda.sk/ludia/clanok/686143-schmognerova-a-laviciari-pripravili-pre-fica-nove-dane-viac-zaplatia-bohati-matovicov-balicek-sa-prepracuje/
European Union. 2022. 2022 Country Report – Slovakia. Brussels: European Union.
Spain
Horizontal equity in Spain’s tax system is affected by the asymmetrical tax competence of autonomous communities. There are two distinct models: the common regime, applied uniformly across most autonomous communities, and the foral regime, which grants broad fiscal and financial self-governance to the Basque Country and Navarre, allowing them to set and regulate their own tax systems. Significant regional differences exist among the common regime autonomous communities, leading to varying tax rates for similar economic players in different regions. The main differences relate to taxes on revenues, donations, and asset transfers.
To improve horizontal equity, a finance ministry expert committee recommended harmonizing the tax system across autonomous communities in 2022. However, it is unlikely this measure will be implemented soon. Some regional governments, particularly Madrid, have faced criticism for cutting taxes on revenues and other items.
Regarding vertical equity, Spain’s tax revenues relative to GDP are modest, primarily driven by labor taxation. Social security contributions from workers and the self-employed are regressive, increasing inequality by reducing the redistributive effect of direct taxation. In 2022, the proportion of labor taxes to both GDP and total tax revenues was slightly below the EU average, as were revenues from consumption and environmental taxes. Spain’s tax scheme reduces inequality less than the EU average. To increase tax revenues, there is potential to leverage tax bases more extensively, such as implementing wealth-related taxes and more broadly applying the “polluter pays” principle (European Commission 2023).
The RRP addresses tax system reforms, following the EC recommendation to make taxes more progressive. The 2021 budget included increased tax rates for high-income individuals and corporations. In 2023, the government implemented tax reductions benefiting low- and medium-income households and small and medium-sized enterprises, while raising taxes for wealthier individuals, especially those with substantial capital income. A “solidarity tax” was introduced in 2023 on assets worth at least €3 million, impacting wealth, personal income, and corporate taxes, and generating €635 million in revenue.
To improve horizontal equity, a finance ministry expert committee recommended harmonizing the tax system across autonomous communities in 2022. However, it is unlikely this measure will be implemented soon. Some regional governments, particularly Madrid, have faced criticism for cutting taxes on revenues and other items.
Regarding vertical equity, Spain’s tax revenues relative to GDP are modest, primarily driven by labor taxation. Social security contributions from workers and the self-employed are regressive, increasing inequality by reducing the redistributive effect of direct taxation. In 2022, the proportion of labor taxes to both GDP and total tax revenues was slightly below the EU average, as were revenues from consumption and environmental taxes. Spain’s tax scheme reduces inequality less than the EU average. To increase tax revenues, there is potential to leverage tax bases more extensively, such as implementing wealth-related taxes and more broadly applying the “polluter pays” principle (European Commission 2023).
The RRP addresses tax system reforms, following the EC recommendation to make taxes more progressive. The 2021 budget included increased tax rates for high-income individuals and corporations. In 2023, the government implemented tax reductions benefiting low- and medium-income households and small and medium-sized enterprises, while raising taxes for wealthier individuals, especially those with substantial capital income. A “solidarity tax” was introduced in 2023 on assets worth at least €3 million, impacting wealth, personal income, and corporate taxes, and generating €635 million in revenue.
Citations:
European Commission. 2023. “Country Report – Spain.” Brussels, May 24. SWD(2023) 609 final. https://economy-finance.ec.europa.eu/system/files/2023-05/SWD_2023_609_1_EN_autre_document_travail_service_part1_v4.pdf
World Inequality Database, access: https://wid.world/country/spain/
Luis Ayala, ed. 2022. Desigualdad y pacto social. Barcelona: La Caixa.
European Commission. 2023. “Country Report – Spain.” Brussels, May 24. SWD(2023) 609 final. https://economy-finance.ec.europa.eu/system/files/2023-05/SWD_2023_609_1_EN_autre_document_travail_service_part1_v4.pdf
World Inequality Database, access: https://wid.world/country/spain/
Luis Ayala, ed. 2022. Desigualdad y pacto social. Barcelona: La Caixa.
USA
As Picketty and Saez (2007) have argued, federal income tax in the United States is “progressively designed, but its progressive nature is often undermined. Marginal rates increase as income rises. For example, the federal tax brackets range from 10% to 37%.”
Tax deductions, credits, and exemptions are used to promote horizontal equity by providing targeted relief to specific groups based on their circumstances (Roberts and Hite 1994). The Earned Income Tax Credit (EITC), for example, is phased out at higher income levels. The American Opportunity Credit and the Lifetime Learning Credit allow individuals to deduct some educational expenses from their tax bills, but these are only available to lower-income Americans (Crandall-Hollick 2014).
The Affordable Care Act (Obamacare) also provides tax credits to low- and middle-income families to subsidize the costs of healthcare (Saltzman et al. 2015). The legislation also imposes a 3.8% net investment income tax on high-income individuals with investment income (Hinde 2017).
Capital gains are taxed at a lower rate than income, which can lead to perverse situations where quite wealthy individuals pay a lower amount of tax than a middle-class family (Mehotra and Ott 2016). However, long-term capital gains are taxed at rates that are supposed to reflect income. Capital gains taxes range from 0% to 20% (Robbins 2018).
The alternative minimum tax (AMT) is designed to ensure wealthy individuals pay a minimum amount of tax, regardless of their ability to take advantage of deductions (Feenberg and Poterba 2004). The Trump administration lowered the maximum AMT from 39.6% to 28%. The Inflation Reduction Act of 2022 imposes a corporate alternative minimum tax of 15% on the adjusted financial statement income of large corporations.
“Inheritance tax (known in the United States as the estate tax) does not apply at the federal level for the vast majority of properties (Brunson 2019). Since the Trump presidency, estates under $11 million pay no inheritance tax (Smith 2021). Altogether, the redistributive capacity of the tax system in the United States is low, leading to massive income and wealth inequality.”
Tax deductions, credits, and exemptions are used to promote horizontal equity by providing targeted relief to specific groups based on their circumstances (Roberts and Hite 1994). The Earned Income Tax Credit (EITC), for example, is phased out at higher income levels. The American Opportunity Credit and the Lifetime Learning Credit allow individuals to deduct some educational expenses from their tax bills, but these are only available to lower-income Americans (Crandall-Hollick 2014).
The Affordable Care Act (Obamacare) also provides tax credits to low- and middle-income families to subsidize the costs of healthcare (Saltzman et al. 2015). The legislation also imposes a 3.8% net investment income tax on high-income individuals with investment income (Hinde 2017).
Capital gains are taxed at a lower rate than income, which can lead to perverse situations where quite wealthy individuals pay a lower amount of tax than a middle-class family (Mehotra and Ott 2016). However, long-term capital gains are taxed at rates that are supposed to reflect income. Capital gains taxes range from 0% to 20% (Robbins 2018).
The alternative minimum tax (AMT) is designed to ensure wealthy individuals pay a minimum amount of tax, regardless of their ability to take advantage of deductions (Feenberg and Poterba 2004). The Trump administration lowered the maximum AMT from 39.6% to 28%. The Inflation Reduction Act of 2022 imposes a corporate alternative minimum tax of 15% on the adjusted financial statement income of large corporations.
“Inheritance tax (known in the United States as the estate tax) does not apply at the federal level for the vast majority of properties (Brunson 2019). Since the Trump presidency, estates under $11 million pay no inheritance tax (Smith 2021). Altogether, the redistributive capacity of the tax system in the United States is low, leading to massive income and wealth inequality.”
Citations:
Smith, Laura. 2021. “Trump and Congress.” Policy Studies.
Samuel Brunson. 2019. “The Aftermath of the Death Tax.” Indiana Law Journal.
Daniel Feenberg and James Poterba. 2004. “The Alternative Minimum Tax and Effective Marginal Tax Rates.” National Tax Journal.
Ajay Mehrotra and Julia Ott. 2016. “The Curious Beginnings of the Capital Gains Tax Preference.” Fordham Law Review.
Jacob Robbins. 2018. “Capital Gains and the Distribution of Income in the United States.” National Bureau of Economic Research.
Jesse Hinde. 2017. “Incentive(less)? The Effectiveness of Tax Credits and Cost-Sharing Subsidies in the Affordable Care Act.” American Journal of Health Economics.
Evan Saltzman, Christine Eibner, and Alain Enthoven. 2015. “Improving The Affordable Care Act: An Assessment Of Policy Options For Providing Subsidies.” Health Affairs.
Margot L. Crandall-Hollick. 2014. “The American Opportunity Tax Credit: Overview, Analysis, and Policy Options.” Congressional Research Service.
Thomas Picketty and Emmanuel Saez. 2007. “How Progressive is the U.S. Federal Tax System? A Historical and International Perspective.” Journal of Economic Perspectives.
Michael Roberts and Peggy Hite. 1994. “Progressive Taxation, Fairness, and Compliance.” Law and Policy.
Smith, Laura. 2021. “Trump and Congress.” Policy Studies.
Samuel Brunson. 2019. “The Aftermath of the Death Tax.” Indiana Law Journal.
Daniel Feenberg and James Poterba. 2004. “The Alternative Minimum Tax and Effective Marginal Tax Rates.” National Tax Journal.
Ajay Mehrotra and Julia Ott. 2016. “The Curious Beginnings of the Capital Gains Tax Preference.” Fordham Law Review.
Jacob Robbins. 2018. “Capital Gains and the Distribution of Income in the United States.” National Bureau of Economic Research.
Jesse Hinde. 2017. “Incentive(less)? The Effectiveness of Tax Credits and Cost-Sharing Subsidies in the Affordable Care Act.” American Journal of Health Economics.
Evan Saltzman, Christine Eibner, and Alain Enthoven. 2015. “Improving The Affordable Care Act: An Assessment Of Policy Options For Providing Subsidies.” Health Affairs.
Margot L. Crandall-Hollick. 2014. “The American Opportunity Tax Credit: Overview, Analysis, and Policy Options.” Congressional Research Service.
Thomas Picketty and Emmanuel Saez. 2007. “How Progressive is the U.S. Federal Tax System? A Historical and International Perspective.” Journal of Economic Perspectives.
Michael Roberts and Peggy Hite. 1994. “Progressive Taxation, Fairness, and Compliance.” Law and Policy.
The tax system is only somewhat aligned with the goal of ensuring equity.
5
Belgium
By OECD standards, Belgium’s tax structure is relatively inequitable. The tax base is too narrow, placing excessive pressure on labor income. For over two decades, Belgium has had the OECD’s highest effective tax and social security wedge on labor, although this is gradually decreasing (see OECD data). This heavy burden on labor income creates incentives for tax avoidance and evasion. Conversely, much capital income (e.g., housing rents, capital gains, and some multinationals’ profits) is either inefficiently taxed or not taxed at all. Additionally, the widespread adoption of tax deductions and specific tax programs results in inefficiencies and distortions. Consequently, while horizontal and vertical equity within each income source (i.e., labor, capital, and corporate income) are theoretically guaranteed, differential treatment and a lack of information undermine this principle in practice.
Citations:
Tax wedge – OECD data: https://data.oecd.org/tax/tax-wedge.htm
Tax wedge – OECD data: https://data.oecd.org/tax/tax-wedge.htm
Greece
The Greek tax system is not well-aligned with the principle of horizontal equity (Tax Justice Network 2023). Despite improvements in tax system digitalization, new tax laws, and the operation of the Independent Authority for Public Revenue (IAPR), tax evasion remains prevalent among certain occupational groups.
Tax compliance among the self-employed and small enterprises, which form the backbone of the Greek economy, remains inconsistent. For example, in 2022, 67% of the self-employed declared an annual income below €10,000, despite significant increases in their turnover (European Commission 2023: 11). This suggests that some entrepreneurs and professionals report incomes lower than those of salaried workers earning the legally guaranteed minimum wage (€10,920 per year).
In December 2023, the government passed a new law targeting tax evasion, making it difficult for entrepreneurs and professionals (e.g., lawyers, engineers) who employ salaried workers to declare an annual income lower than that of their employees. The law also imposes heavy penalties on transactions over €500 made in cash and promotes the use of credit cards and bank transfers to reduce cash transactions. These steps aim to enhance horizontal equity.
However, some degree of vertical equity is achieved in Greece. The tax system imposes higher taxes on individuals and companies with greater ability to pay. Since 2021, the top personal income tax rate has been 44%, the 15th highest among EU Member States (Tax Foundation 2023). Among OECD countries, Greece is one of the least complicit in allowing individuals to hide their finances from legal scrutiny (Financial Secrecy Index 2022). Additionally, Greece is far from being a corporate tax haven compared to other OECD countries (Corporate Tax Haven Index 2021).
Tax compliance among the self-employed and small enterprises, which form the backbone of the Greek economy, remains inconsistent. For example, in 2022, 67% of the self-employed declared an annual income below €10,000, despite significant increases in their turnover (European Commission 2023: 11). This suggests that some entrepreneurs and professionals report incomes lower than those of salaried workers earning the legally guaranteed minimum wage (€10,920 per year).
In December 2023, the government passed a new law targeting tax evasion, making it difficult for entrepreneurs and professionals (e.g., lawyers, engineers) who employ salaried workers to declare an annual income lower than that of their employees. The law also imposes heavy penalties on transactions over €500 made in cash and promotes the use of credit cards and bank transfers to reduce cash transactions. These steps aim to enhance horizontal equity.
However, some degree of vertical equity is achieved in Greece. The tax system imposes higher taxes on individuals and companies with greater ability to pay. Since 2021, the top personal income tax rate has been 44%, the 15th highest among EU Member States (Tax Foundation 2023). Among OECD countries, Greece is one of the least complicit in allowing individuals to hide their finances from legal scrutiny (Financial Secrecy Index 2022). Additionally, Greece is far from being a corporate tax haven compared to other OECD countries (Corporate Tax Haven Index 2021).
Citations:
Corporate Tax Haven. 2021. “Interactive Map.” https://cthi.taxjustice.net/en/cthi/interactive-map
Financial Secrecy Index. 2022. “https://fsi.taxjustice.net/”
Tax Foundation. 2023. “Top Personal Income Tax Rates in Europe.” https://taxfoundation.org/data/all/eu/top-personal-income-tax-rates-europe-2023/#:~:text=Denmark%20(55.9%20percent)%2C%20France,among%20OECD%20countries%20in%202022
Tax Justice Network. 2023. “https://iff.taxjustice.net/#/explorer”
Corporate Tax Haven. 2021. “Interactive Map.” https://cthi.taxjustice.net/en/cthi/interactive-map
Financial Secrecy Index. 2022. “https://fsi.taxjustice.net/”
Tax Foundation. 2023. “Top Personal Income Tax Rates in Europe.” https://taxfoundation.org/data/all/eu/top-personal-income-tax-rates-europe-2023/#:~:text=Denmark%20(55.9%20percent)%2C%20France,among%20OECD%20countries%20in%202022
Tax Justice Network. 2023. “https://iff.taxjustice.net/#/explorer”
Italy
Italy’s tax system contains several distortions. There is a significant asymmetry between employees and the self-employed, with the latter being treated more favorably and responsible for a high proportion of tax evasion. Due to high evasion levels, revenues from value-added tax fall short of targets. Property and corporate profits are generally treated more favorably than personal income, with greater opportunities for tax evasion. Revenues from corporate profits taxation as a percentage of GDP are similar to those of other large European countries (Italy 2.1%; France 2.3%; Spain 1.97%; Germany 1.65% in 2020) (Openpolis).
Citations:
Oecd. 2023. “Revenue Statistics 2023.” https://www.oecd.org/tax/revenue-statistics-2522770x.htm
Liberati, P. 2020. “Alcune riflessioni sul sistema tributario italiano.” Economia italiana 1: 239-267.
REV: on corporate profits taxation see Open polis: https://www.openpolis.it/le-imposte-sui-profitti-dimpresa-in-europa/
Oecd. 2023. “Revenue Statistics 2023.” https://www.oecd.org/tax/revenue-statistics-2522770x.htm
Liberati, P. 2020. “Alcune riflessioni sul sistema tributario italiano.” Economia italiana 1: 239-267.
REV: on corporate profits taxation see Open polis: https://www.openpolis.it/le-imposte-sui-profitti-dimpresa-in-europa/
Latvia
The tax burden is unequal, with low-wage earners paying a higher proportion of taxes than medium- and high-income earners, despite progressive income taxation. Additionally, adverse demographic trends will impact further development and exacerbate the already unequal distribution of incomes. The European Commission has recognized that Latvia’s tax and benefit income distribution system is ineffective; thus, inequality and poverty will remain challenges in the coming decade.
Each year, the government has been increasing the minimum wage (€500 in 2022, €620 in 2023, €700 in 2024), while the non-taxable minimum income has remained unchanged at €500 for both 2023 and 2024. Thus, the government is expected to invest efforts to reduce poverty among the elderly and low-wage earners.
A micro-enterprise tax was created in 2010 as a simplified tax for small businesses and startups. Since then, the tax has undergone many changes, primarily aimed at limiting its applicability and encouraging all businesses to transition to a unified corporate tax regime. Starting in 2024, the government will implement a flat rate of 25% on turnover for the micro-enterprise tax.
Meanwhile, reacting to the high profits of banks in 2023, the government introduced a special corporate tax regime for banks and non-bank creditors, determining 20% of the previous year’s profit.
Each year, the government has been increasing the minimum wage (€500 in 2022, €620 in 2023, €700 in 2024), while the non-taxable minimum income has remained unchanged at €500 for both 2023 and 2024. Thus, the government is expected to invest efforts to reduce poverty among the elderly and low-wage earners.
A micro-enterprise tax was created in 2010 as a simplified tax for small businesses and startups. Since then, the tax has undergone many changes, primarily aimed at limiting its applicability and encouraging all businesses to transition to a unified corporate tax regime. Starting in 2024, the government will implement a flat rate of 25% on turnover for the micro-enterprise tax.
Meanwhile, reacting to the high profits of banks in 2023, the government introduced a special corporate tax regime for banks and non-bank creditors, determining 20% of the previous year’s profit.
Citations:
Koņuševskis, R., Leitāne, L., Rozīte, K., and Bule, L. 2019. “Nodokļu reforma neapliekamā minimuma, atvieglojumu un attaisnoto izdevumu piemērošanas problēmu, efektivitātes un risinājumu izvērtējumā.” https://www.tiesibsargs.lv/wp-content/uploads/migrate_2022/content/kopsavilkums_1551263741.pdf
Finanšu ministrija. 2023. “Valsts budžets 2024.gadam.” https://www.fm.gov.lv/lv/valsts-budzets
European Commission. 2023. “Country Report – Latvia.” Institutional Paper 238, June 2023. https://economy-finance.ec.europa.eu/publications/2023-country-report-latvia_en
Koņuševskis, R., Leitāne, L., Rozīte, K., and Bule, L. 2019. “Nodokļu reforma neapliekamā minimuma, atvieglojumu un attaisnoto izdevumu piemērošanas problēmu, efektivitātes un risinājumu izvērtējumā.” https://www.tiesibsargs.lv/wp-content/uploads/migrate_2022/content/kopsavilkums_1551263741.pdf
Finanšu ministrija. 2023. “Valsts budžets 2024.gadam.” https://www.fm.gov.lv/lv/valsts-budzets
European Commission. 2023. “Country Report – Latvia.” Institutional Paper 238, June 2023. https://economy-finance.ec.europa.eu/publications/2023-country-report-latvia_en
Portugal
Portugal has a progressive tax system for taxing income from work, meaning higher incomes are taxed at a higher average rate. However, the overall system penalizes workers and lower-income groups. This is because indirect taxes, such as VAT, are particularly high and have a greater impact on the income of the poorest.
To achieve budget consolidation, recent administrations have relied on indirect taxation by either maintaining high levels on certain indirect taxes, such as VAT, or raising rates on others. Although Portugal’s overall tax-to-GDP ratio in 2022 was below the EU-27 average, the country’s VAT-to-GDP ratio stood at 9.4%, surpassing the EU average of 7.5%. Notably, VAT and other indirect taxes are the primary sources of revenue for the Portuguese tax system, deviating from the norm observed in the EU. This substantial reliance on more regressive indirect taxation measures raises equity concerns. These taxes impose a higher effective tax rate on the poorest individuals, as they constitute a larger share of their income. Increasing indirect taxes while decreasing direct taxes, as has happened in recent years, has led to a reduction in the overall progressivity of the tax system.
A recent study suggests that Portugal’s tax system places a relatively low burden on wealth, in contrast to higher taxation on labor and consumption. This system positions Portugal as the third OECD country with the most significant disparity between the taxation of wages and dividends, underscoring its lack of effective measures to address the nation’s pronounced wealth inequality (Mergulhão, 2023). Despite the high progressivity of the Personal Income Tax (PIT) system, its impact is substantially diminished due to various “non-inclusion” options (“não englobamento”) and the multitude of available tax benefits.
To achieve budget consolidation, recent administrations have relied on indirect taxation by either maintaining high levels on certain indirect taxes, such as VAT, or raising rates on others. Although Portugal’s overall tax-to-GDP ratio in 2022 was below the EU-27 average, the country’s VAT-to-GDP ratio stood at 9.4%, surpassing the EU average of 7.5%. Notably, VAT and other indirect taxes are the primary sources of revenue for the Portuguese tax system, deviating from the norm observed in the EU. This substantial reliance on more regressive indirect taxation measures raises equity concerns. These taxes impose a higher effective tax rate on the poorest individuals, as they constitute a larger share of their income. Increasing indirect taxes while decreasing direct taxes, as has happened in recent years, has led to a reduction in the overall progressivity of the tax system.
A recent study suggests that Portugal’s tax system places a relatively low burden on wealth, in contrast to higher taxation on labor and consumption. This system positions Portugal as the third OECD country with the most significant disparity between the taxation of wages and dividends, underscoring its lack of effective measures to address the nation’s pronounced wealth inequality (Mergulhão, 2023). Despite the high progressivity of the Personal Income Tax (PIT) system, its impact is substantially diminished due to various “non-inclusion” options (“não englobamento”) and the multitude of available tax benefits.
Citations:
Eurostat. 2023. “Main National Accounts Tax Aggregates.”
https://ec.europa.eu/eurostat/databrowser/view/gov_10a_taxag/default/table?lang=en
Mergulhão, Alexandre. 2023. “A fiscalidade em Portugal.” https://causapublica.org/estudos/a-fiscalidade-em-portugal/
Eurostat. 2023. “Main National Accounts Tax Aggregates.”
https://ec.europa.eu/eurostat/databrowser/view/gov_10a_taxag/default/table?lang=en
Mergulhão, Alexandre. 2023. “A fiscalidade em Portugal.” https://causapublica.org/estudos/a-fiscalidade-em-portugal/
Netherlands
Regarding horizontal equity, income taxation adheres to a principle of progressivity (“draagkrachtbeginsel”). However, concerning vertical equity, the overall outcome of the system is regressive, though less visibly so. Pre-tax incomes and benefits have become more unequal, but government tax policies have effectively adjusted them to achieve greater equality in outcomes. The Gini index for net incomes, adjusted for household size, sits just below the European average of 0.3 and has remained stable for the past two decades. In contrast, the Gini index for wealth has consistently hovered around a high 0.8 for decades.
The crux of the issue lies in the differential treatment of capital and labor within the tax system. Labor income is subject to progressive taxation, while income from shares and investments is subject to regressive taxes. This segmented tax structure has widened the gap between the wealthiest and middle-to-lower income groups. Despite corporations generating about 68% of labor- and consumption-related tax revenues, they contribute only 10% to total state revenues. This disparity primarily stems from the contrasting tax treatments of labor and capital. Consequently, 61% of wealth is concentrated among the wealthiest 10% of households, leaving 25% of households in net debt.
Recently, the Senate approved a “tax reform” package aimed at modestly enhancing vertical tax equity within the existing framework. Notably, the system used to treat labor and investment income differently remains unchanged. However, implementation faces delays until 2026 or later due to operational challenges and issues within the BD, despite a judiciary directive to reform the investment income system promptly.
The crux of the issue lies in the differential treatment of capital and labor within the tax system. Labor income is subject to progressive taxation, while income from shares and investments is subject to regressive taxes. This segmented tax structure has widened the gap between the wealthiest and middle-to-lower income groups. Despite corporations generating about 68% of labor- and consumption-related tax revenues, they contribute only 10% to total state revenues. This disparity primarily stems from the contrasting tax treatments of labor and capital. Consequently, 61% of wealth is concentrated among the wealthiest 10% of households, leaving 25% of households in net debt.
Recently, the Senate approved a “tax reform” package aimed at modestly enhancing vertical tax equity within the existing framework. Notably, the system used to treat labor and investment income differently remains unchanged. However, implementation faces delays until 2026 or later due to operational challenges and issues within the BD, despite a judiciary directive to reform the investment income system promptly.
Citations:
Hoppe, et al. 2021. Taxes. STI.
Rijksoverheid. 2023. “Belangrijkste belastingwijzigingen per 1 januari 2024.” https://www.rijksoverheid.nl.
Open Overheid.nl. 2022. “Interdepartementaal Beleidsonderzoek, 1 July. Licht uit, spot aan: de vermogensverdeling.”
Platform O, Soons. 2023. “Herverdeel vermogen om bestaanszekerheid te verhogen.” March 14.
Hoppe, et al. 2021. Taxes. STI.
Rijksoverheid. 2023. “Belangrijkste belastingwijzigingen per 1 januari 2024.” https://www.rijksoverheid.nl.
Open Overheid.nl. 2022. “Interdepartementaal Beleidsonderzoek, 1 July. Licht uit, spot aan: de vermogensverdeling.”
Platform O, Soons. 2023. “Herverdeel vermogen om bestaanszekerheid te verhogen.” March 14.
4
Estonia
Estonia has a simple and transparent tax system. The income tax rate for individuals is low, with a standard rate of 20%, and is only slightly progressive. More precisely, the deductible amount for individuals with a monthly income of €1,200 – €2,100 decreases incrementally, and individuals with a monthly income above €2,100 receive no exemptions at all. Introduced in 2018, the system was intended to benefit low- and medium-income earners, but with the increase in the average salary (to €1,812 in 2023), it fails to deliver the expected effect.
The current government coalition, which has been in power since March 2023, intends to return to the pre-2018 fully proportional income tax system starting in 2025. This decision is set in the Coalition Agreement 2023 – 2027. Despite intense political criticism from the opposition, the minister of finance (Reform Party) has insisted that this debate will not be formally reopened.
Following recent policy reforms, Estonia has returned to the fully proportional income tax system, which is more favorable for high-income classes.
Retained and reinvested profits are exempt from corporate income tax in Estonia. Dividends, taxable at the corporate level at a 14% tax rate, are subject to a 7% withholding tax. Taxing dividends instead of corporate profits complicates national budget planning, as firms can decide the amount and timing of dividends, which do not necessarily occur every year. Capital is not taxed at all, except for a very marginal land tax, further violating the principle of horizontal equity.
Tax exemptions for raising children currently exist, and taxpayers can also deduct their mortgage interest up to 50% of their taxable income. However, both measures will be abolished in 2024. Heated debates have continued throughout 2023 about introducing a car tax, with the main controversies revolving around balancing equity and environmental goals. Parliamentary parties have not yet reached a consensus.
The current government coalition, which has been in power since March 2023, intends to return to the pre-2018 fully proportional income tax system starting in 2025. This decision is set in the Coalition Agreement 2023 – 2027. Despite intense political criticism from the opposition, the minister of finance (Reform Party) has insisted that this debate will not be formally reopened.
Following recent policy reforms, Estonia has returned to the fully proportional income tax system, which is more favorable for high-income classes.
Retained and reinvested profits are exempt from corporate income tax in Estonia. Dividends, taxable at the corporate level at a 14% tax rate, are subject to a 7% withholding tax. Taxing dividends instead of corporate profits complicates national budget planning, as firms can decide the amount and timing of dividends, which do not necessarily occur every year. Capital is not taxed at all, except for a very marginal land tax, further violating the principle of horizontal equity.
Tax exemptions for raising children currently exist, and taxpayers can also deduct their mortgage interest up to 50% of their taxable income. However, both measures will be abolished in 2024. Heated debates have continued throughout 2023 about introducing a car tax, with the main controversies revolving around balancing equity and environmental goals. Parliamentary parties have not yet reached a consensus.
Citations:
Coalition agreement 2023-2027. https://valitsus.ee/en/coalition-agreement-2023-2027#majandus
Coalition agreement 2023-2027. https://valitsus.ee/en/coalition-agreement-2023-2027#majandus
Switzerland
The redistributive effect of taxes (calculated by comparing income inequality before and after taxes and social benefits) is comparatively limited – that is, tax policy does little to correct for market income inequality.
A tax issue with constitutional implications involves tax rates for married couples which, under certain circumstances, may be higher than those of unmarried couples. The Federal Council planned to submit a new bill on this issue in March 2024 (FDF 2023a) (for details see the discussion in P5.1).
Given the available evidence on tax evasion, wage incomes are arguably treated less favorably than income from property (Baselgia 2023). It is much harder to evade taxes on income than taxes on property.
The fact that specific cantons attract certain companies and wealthy foreigners by offering them preferential tax advantages is another instance of differential treatment in tax policy. Although the share of taxpayers that benefit from this rule is very small (less than 0.1% of all taxpayers), it is a contentious political issue that very rich foreigners – who are not gainfully employed in the country – pay very moderate taxes (FDF 2023b).
The bulk of tax revenue goes to cantons and municipalities. Cantons and municipalities decide on their tax rates, and these rates vary widely. Therefore, the fiscal quotas of cantons and municipalities also vary, and by implication, so does their provision of public services (see also P5.1). In the Swiss political discourse – particularly among center-right politicians – this lack of horizontal equity is intentional. In a strongly decentralized political system, citizens decide democratically, frequently in a popular vote, on their local tax rate. Additionally, center-right politicians argue that different tax burdens create competition between local and regional units for attracting firms and individual taxpayers.
A project aimed at imposing micro-taxes on electronic transactions, mainly targeting the finance sector, was unsuccessfully launched by finance professor Marc Cheney of the University of Zurich. Finally, a major reform project – with implications for horizontal equity – concerns the abolition of taxes on owner-occupied rental value. For decades, the Homeowners Association sought to eliminate this tax while retaining as many of the concurrent tax deductions for renovations and debt service as possible. Despite support from some politicians in the political center and on the right, this campaign ultimately failed. Recently, another similar reform attempt has been launched. Caught in a complex web of different political forces – cantonal ministries of finance, the political left, craftsmen in the construction sector, banks and insurance companies that issue mortgages, homeowners, and some center-right politicians – the fate of the reform is not yet clear (FDF 2023c, FFA 2023).
A tax issue with constitutional implications involves tax rates for married couples which, under certain circumstances, may be higher than those of unmarried couples. The Federal Council planned to submit a new bill on this issue in March 2024 (FDF 2023a) (for details see the discussion in P5.1).
Given the available evidence on tax evasion, wage incomes are arguably treated less favorably than income from property (Baselgia 2023). It is much harder to evade taxes on income than taxes on property.
The fact that specific cantons attract certain companies and wealthy foreigners by offering them preferential tax advantages is another instance of differential treatment in tax policy. Although the share of taxpayers that benefit from this rule is very small (less than 0.1% of all taxpayers), it is a contentious political issue that very rich foreigners – who are not gainfully employed in the country – pay very moderate taxes (FDF 2023b).
The bulk of tax revenue goes to cantons and municipalities. Cantons and municipalities decide on their tax rates, and these rates vary widely. Therefore, the fiscal quotas of cantons and municipalities also vary, and by implication, so does their provision of public services (see also P5.1). In the Swiss political discourse – particularly among center-right politicians – this lack of horizontal equity is intentional. In a strongly decentralized political system, citizens decide democratically, frequently in a popular vote, on their local tax rate. Additionally, center-right politicians argue that different tax burdens create competition between local and regional units for attracting firms and individual taxpayers.
A project aimed at imposing micro-taxes on electronic transactions, mainly targeting the finance sector, was unsuccessfully launched by finance professor Marc Cheney of the University of Zurich. Finally, a major reform project – with implications for horizontal equity – concerns the abolition of taxes on owner-occupied rental value. For decades, the Homeowners Association sought to eliminate this tax while retaining as many of the concurrent tax deductions for renovations and debt service as possible. Despite support from some politicians in the political center and on the right, this campaign ultimately failed. Recently, another similar reform attempt has been launched. Caught in a complex web of different political forces – cantonal ministries of finance, the political left, craftsmen in the construction sector, banks and insurance companies that issue mortgages, homeowners, and some center-right politicians – the fate of the reform is not yet clear (FDF 2023c, FFA 2023).
Citations:
Baselgia, Enea. 2023. “The Compliance Effects of the Automatic Exchange of Information: Evidence from the Swiss Tax Amnesty.” EU Tax Observatory Working Paper No. 19. https://www.taxobservatory.eu//www-site/uploads/2023/06/EUTO_WP19_Baselgia_AEOI_Compliance_June2023.pdf
FDF (Federal Department of Finance; Eidgenössisches Finanzdempartement) 2023a. https://www.efd.admin.ch/efd/de/home/steuern/steuern-national/reform-der-ehe–und-familienbesteuerung.html
FDF (Federal Department of Finance; Eidgenössisches Finanzdempartement) 2023b. “https://www.efd.admin.ch/efd/en/home/taxes/national-taxation/lump-sum-taxation.html”
FDF. 2023c. https://www.efd.admin.ch/efd/de/home/steuern/steuern-national/wohneigentumsbesteuerung.html
Baselgia, Enea. 2023. “The Compliance Effects of the Automatic Exchange of Information: Evidence from the Swiss Tax Amnesty.” EU Tax Observatory Working Paper No. 19. https://www.taxobservatory.eu//www-site/uploads/2023/06/EUTO_WP19_Baselgia_AEOI_Compliance_June2023.pdf
FDF (Federal Department of Finance; Eidgenössisches Finanzdempartement) 2023a. https://www.efd.admin.ch/efd/de/home/steuern/steuern-national/reform-der-ehe–und-familienbesteuerung.html
FDF (Federal Department of Finance; Eidgenössisches Finanzdempartement) 2023b. “https://www.efd.admin.ch/efd/en/home/taxes/national-taxation/lump-sum-taxation.html”
FDF. 2023c. https://www.efd.admin.ch/efd/de/home/steuern/steuern-national/wohneigentumsbesteuerung.html
3
Hungary
Vertical equity in Hungary is shaped by the flat tax, which is measured as a share of income and strongly benefits higher-income deciles (Paulus et al. 2017). The high standard value-added tax (VAT) rate of 27% exacerbates the problem, as low-income families cannot avoid consumption and lack the ability to save money or invest. Regarding horizontal equity, all individuals with the same income level are subject to the same tax rate, irrespective of the source of their income. In terms of businesses, sectoral taxes discriminate against some companies. While this may be justified for the internalization of costs, such as with environmental taxes, discrepancies in Hungary do not align with this rationale. Rather, sector-specific taxation is employed by the government to target companies and branches that do not align with its ideology, such as foreign-owned businesses. Withholding taxes, as well as taxes on dividends, interest and royalties for companies, are set at 0%. Property taxes are low and contribute only 2.7% to state revenues (OECD average: 5.6%). This benefits a relatively broad segment of society, as the government’s family policy strongly encourages young families to buy property through several programs.
Citations:
Paulus, A., Lelkes, O., Čok, M., Kump, N., Hegedűs, P., Võrk, A., and S. Kralik. 2017. “Flat Tax Reform in Eastern Europe: A Comparative Analysis of Alternative Scenarios in Estonia, Hungary and Slovenia, Using EUROMOD.” In Tax and Benefit Policies in the Enlarged Europe, Routledge, 91-123.
Paulus, A., Lelkes, O., Čok, M., Kump, N., Hegedűs, P., Võrk, A., and S. Kralik. 2017. “Flat Tax Reform in Eastern Europe: A Comparative Analysis of Alternative Scenarios in Estonia, Hungary and Slovenia, Using EUROMOD.” In Tax and Benefit Policies in the Enlarged Europe, Routledge, 91-123.
The tax system is not at all aligned with the goal of ensuring equity.
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