How long can the European tax cartel last?

While Germany struggles with inflexible labour laws and high taxation, Austria has pushed through tax reforms that will bring rates down close to east European levels, to run alongside already business-friendly employment measures.

The results have been dramatic. Since January this year, when the first phase of Austria’s two-step reforms kicked in with big income tax cuts and some relief for small and medium-size companies, the country has enjoyed a rash of high-profile investment.

Businesses have been enticed not just by the current reforms but by the prospect of corporate rates falling from 34 to 25 per cent, or less than 22 per cent including allowances, from January next year as part of the second stage.

However, Austria’s success has been at Germany’s expense, as companies relocate from the German border region of Bavaria.

Here is the full story.

Iceland also has been defecting from the high-tax cartel:

After years of economic stagnation, unemployment and fiscal disarray, an Icelandic government led by Prime Minister David Oddsson implemented a series of Reaganesque reforms that have turned the economy around. In the 1990s, he reformed the income tax moving it towards a simpler and flatter structure. He also lowered the corporate marginal tax rate from 48 percent to 30 percent. And he also managed to contain spending, got rid of inflation, privatized large public companies and got the government out of the banking industry.

The results were astonishing. Unemployment dropped, the deficit disappeared, as did inflation, and Iceland is now one of the fastest growing countries in Europe–5 percent a year on average for the last 10 years. According to Mr. Oddsson, “This success has been achieved not in spite of extensive tax cuts but, to a great degree, because of them.”

In 2002, the corporate rate was cut again, from 30 percent to 18 percent. Today, Iceland has the third lowest corporate income tax rates of all the OECD countries behind Ireland 12.5 percent and Hungary 16 percent. And according to the Prime Minister, personal income tax will be reduced again this year by four percentage points, the income tax surcharge on the highest incomes will be removed and plans are formed to cut the corporate income tax rate further down to 15 percent.

Here is a previous MR post on the EU as a tax cartel.