Tax and Economic Growth in Austria

Konrad Pesendorfer ()
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Konrad Pesendorfer: Oesterreichische Nationalbank

Monetary Policy & the Economy, 2008, issue 3, 21–40

Abstract: Taxation influences the behavior of economic agents and, as a consequence, a country’s economic activity and growth. The nature and size of this impact depends on the object or activity taxed as well as on the tax rate and the design of the tax. In a recent survey of 21 countries, the OECD sets up a ranking of tax categories based on their effects on wealth and GDP growth. This study investigates to what extent this ranking reflects the taxation-growth relationship in Austria. To this end, we compare the Austrian tax structure against the tax structure in the countries posting the highest GDP per capita levels and growth rates. Moreover, we assess the individual tax categories’ impact on the key explanatory variables of economic growth. The investigation is based on the central assumption that tax revenues are kept constant and that reducing the revenues from one tax category requires increasing those from another tax source. The analysis shows that the high level of labor taxes, including social security contributions, negatively affects the growth potential in Austria. The relative share of revenues from property taxes, which, according to the OECD survey, hamper economic growth least, is lower in Austria than in almost all other OECD countries. Although the share of revenues from consumption taxes in Austria is comparable to that in the countries posting the best GDP per capita figures, tax rates are necessarily higher because the Austrian VAT system grants numerous exemptions and has a set of reduced rates. The substantial reduction of the tax burden on businesses brought about by the 2004/2005 tax reform improved the conditions for economic growth. The low degree of progressivity of taxes on labor income fosters productivity and economic efficiency rather than the redistribution of income.

Keywords: taxation; economic growth; Austria (search for similar items in EconPapers)
JEL-codes: E62 H20 O43 (search for similar items in EconPapers)
Date: 2008
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