Highest Income Taxes In The EU

In this article, I propose to look at some aspects of taxation in the European Union. Even though we want to be placed in high-quality hospitals, drive on flawless roads, enjoy modern infrastructure, retain national sovereignties, and enjoy various public goods, taxes are a very painful topic, since even reasonable people are sometimes not willing to part with their money. However, high taxes are not always about reaping off citizens. In this writing, I will look into the most heavily taxed countries in the EU from the personal income tax perspective. To make things a bit more interesting, I will demonstrate tax rates for the US where relevant. Enjoy the ride!

When we understand what EU counties have the largest individual income taxes (also known as “tax burden”), we will also check corporate income taxes and a Value-Added Tax (VAT) for those countries. So we cover income and consumption taxes. For OECD countries, the third significant stream for state revenue is social contribution taxes. However, the topic of social contribution taxes in the EU is too wast to be covered here.

First, let’s look at the individual tax rate which is expressed as a percent of the gross wage earnings in a country. I decided to start with that tax since it comprises one of the most widely used means to fund governments across the countries of the Organisation for Economic Co-operation and Development (OECD). As of December 2021, the highest personal income taxes in the EU were in Finland, Denmark, and Austria with approximately 57%, 56%, and 55%, respectively. The EU countries with the lowest personal income taxes were Romania, Bulgaria, and Hungary with 10%, 10%, and 15%, respectively.

In Finland, the individual tax rate is imposed on a progressive basis. Residents with income below or equal to EUR 18,100 are free from the tax liability. People with high salaries given up almost 32% of their salary. Non-residents pay a flat tax rate of 35% or a progressive one depending on the working period in Finland. (6 months period needed for one to be treated as a resident for tax purposes). Such a massive tax rate in Finland enables the country to have one of the most advanced social security systems. The country is almost a leader in the absence of poverty due to formidable social spending relatively Gross Domestic Product. In 2021, the corporate tax rate composed 20% which is almost the same as that for an average EU country (20.7%), and lower than the taxation rate for a corporation in an average Asian country (21.4%) and OECD on average (22.8%). For comparison, the US corporate tax rate was reduced from 35% to 21% in 2017 under Trump’s reign. Today, it is 21% plus state corporate tax rate which may be as low as 0% and as high as almost 12%. In Switzerland, for another reference, the rate is below 15%.

In the US, seven personal tax brackets are depending on one income level which means that the tax rate is progressive. The tax rate for the lowest income levels is 10% while earners of the highest salaries pay as much as 35% of their taxable income. Everyone in the US is liable to the individual income tax.

For Denmark's citizens, taxes are huge but the Danes appear not to be upset about that. Denmark is well-known for its welfare state programs. Huge amounts of funds that the Danish government manages to collect every year are used to fund massive social security programs which enable people to enjoy high-quality public goods such as education, the majority of healthcare services; retirement payments are also big in the country. 70% of childcare is funded by the state. Danes enjoy an even smaller rate of people living in poverty than Finns. Each Dane is liable to personal income tax. The corporate tax rate in Denmark is 22% which is higher than in Finland (20%). Nevertheless, the corporate tax climate is still considered business-friendly as the rate is lower than the OECD’s average.

As already mentioned, the third-highest rate of personal income tax in the EU is imposed in Austria. The tax rate is progressive for many years now (since 1988). It represents 8 tax brackets depending on income. A person earning less than or equal to EUR11,000 per year is free from any sort of income tax. The corporate tax rate is 25% which makes the country less business-friendly than Finland or Denmark.

Now, let’s look at VAT. VAT is an indirect tax which means that it is paid not by producers who add value, but by consumers who purchase the item with the added value. VAT implies that after each stage of production of good or service development the incremental contribution rendered to the product/service should be taxed. VAT makes salable goods/services more expensive to the end-users and the incremental price increase, hence, the revenue of producers is directed to government funds. The incorporation of VAT in the national tax structure is a must criterion to join the EU. For example, Finland adopted VAT in 1994 before joining the EU on January 1, 1995. When it comes to VAT – arguably the main consumption tax in OECD - in Finland, the rate is set at 24%. This is higher than the average rate in OECD (about 20%). In 2018, VAT ensured over 20% of all tax revenue in OECD. For comparison, the highest VAT rates in the EU are in Hungary, Sweden, and Denmark with 27%, 25%, and 25%, respectively.

The US tax system has no VAT and this has been a topic of very serious debate in US policymaking. Proponents of VAT implementation claim that it would not only bring quite big and much-needed funds to the federal budget (the debt to GDP is record-high since WW2), but it would also make the entire US corporate landscape more transparent and compliant. This is assumed to be the case because companies subject to VAT indirectly report on their peers’ activity to be taxed fairly without excessive VAT liabilities. It would make matters way clearer with the US corporations. Last but not least, VAT would enable the US government to enjoy stable tax revenue streams without big shocks and unexpected developments. Arguably, the biggest obstacle for VAT implementation in the US is the Democrats’ argument that VAT is regressive since it results in the same increase of the price of a product regardless of the income level of the consumer. Also, it may motivate businesses to engage in tax evasion as we move to the right on the Laffer curve. This argument finds validation in China.

As noted above, VAT is higher in Denmark than that in Finland. Despite the old observation of VAT being a constant stream of revenue to the state, the Covid-19 significantly challenged that fact. In Denmark, as in Finland, the government allowed to take VAT loans which effectively postpones VAT payments for the companies suffering from the economic impacts of the pandemic. Moreover, the state offers R&D tax credit which means that R&D expenses – or a portion of such expenses – are not part of VAT. This is designed to cultivate and accelerate innovations. In 2020, the country increased its R&D tax credit rate. Finland does not offer such tax incentives yet.??

The standard VAT for Austria is 20%. However, the country reduced VAT to 5% on a very wide range of goods as a response to the pandemic. For example, the reduction is designed to support the production of food, beverages, cultural event, books, newspapers, rent, art, etc.

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