Celebrating Tax Freedom Day
In Luxembourg, Tax Freedom Day fell on 20 May 2012, according to a study by PwC and the Catholic University of Leuven in Belgium. Tax Freedom Day is the symbolic date on which the taxpayer stops working for the state treasury and begins earning for himself. Luxembourg fares better than its neighbouring countries, but its tax burden is higher than that of the USA, Hungary and Cyprus.
The financial crisis and Governments’ decisions in many countries to raise taxes undoubtedly had an impact on the overall tax burden borne by households and companies. Belgium, which had its Tax Freedom Day on 14 June, tops the list with an overall tax burden as high as 45% of GNP. In Germany, the day fell on 3 June, while in France it fell on 12 June. The Netherlands and Luxembourg held their Tax Freedom Day at roughly the same time, i.e. on 23 May and 20 May, respectively.
This study raised questions about the right for both citizens and companies to receive adequate compensation in the form of a competitive economy and efficient government in exchange for the tax burden. Wim Piot, Tax Leader at PwC Luxembourg says that it is important to keep an eye on the tipping point. “If your corporate tax base is too high, you will not encourage people to come to Luxembourg; you will drive them away and your tax revenue will fall; this means that both the revenues for corporate tax and for personal income tax will drop.
Even though it is quite difficult to achieve, a balance must be struck between the two. You need to charge enough to support the delivery of public goods, but at the same time you need to make sure that you do not charge too much, which would make Luxembourg rather unattractive and cause people and companies to leave the country”.
Stability is not a boring concept
Mr Piot adds that one of Luxembourg’s strengths is that there have not been many tax reforms over recent years, and this stability is widely appreciated by investors and companies. He personally thinks that it is very important that Luxembourg policymakers do not increase taxes, but continue to attract business. But there is a lot more to it, because tax is only one of many criteria that make a country attractive.
“We also have to work on our infrastructure. For instance, the International School is now expanding. This also plays a crucial role in attracting foreigners and their families to Luxembourg. The problem that remains is the lack of connections: we have no intercontinental flights and we also don’t have high-speed trains to cities like Frankfurt, for instance. So there is room for improvement”.
Countries like Norway, Denmark or Sweden hold their Tax Freedom Day only in June. Paying more taxes while benefiting more from public services is widely accepted by Scandinavian citizens; this is referred to as “the price of our collective comfort” in the study. Mr Piot is doubtful about replicating the Scandinavian tax model to a small and open economy like Luxembourg.
“If you tell investors: listen, you are going to pay 70% tax but you will get good hospitals and good schools, this is not going to attract them, especially not American investors. We have to tell investors that we have a 35% tax contribution and that there is good access to public services. We have to take this into account to promote our financial marketplace to investors”.
According to a separate PwC study on Total Tax Contribution, Luxembourg companies carry an average tax rate of 34% in an OECD context, including social security and personal income taxes, but also corporate taxes to a lesser extent. These figures make it abundantly clear that Luxembourg has an effective tax rate, which is comparable to other countries. The real difference is that Luxembourg tax law has remained stable over the last decade compared to other countries. Currently, there is a lot of animosity in the press and among politicians around taxation in Europe.
“A lot of countries were heavily indebted before the financial crisis even started. It was evident that if a shock were to occur some countries would not have enough buffers to weather a crisis. Then, the banking crisis worsened their predicament. Some countries have not had a budget surplus in several decades. Governments should build up reserves in good times much in the same way as every household or company does. Why shouldn’t the same principles apply to government budgets?”
Luxembourg has done a good job in this respect. Mr Piot suggests that countries need to look carefully at what they can do at home to attract business and investment and to encourage successful businesses instead of discouraging them.
The best tax policy is to keep public accounts in check. Luxembourg has done well so far in this area. A well-balanced fiscal policy and wise investment in infrastructure should help ensure that the country remains on investors’ radar. CW