438 LABOUR TAXATION IN THE EUROPEAN UNION Sab ău-Popa Claudia Diana University of Oradea, Faculty of Economic Sciences Kulcsar Edina University of… [613144]

438 LABOUR TAXATION IN THE EUROPEAN UNION
Sab ău-Popa Claudia Diana
University of Oradea, Faculty of Economic Sciences
Kulcsar Edina
University of Oradea, Faculty of Economic Sciences
Sab ău-Popa Liviu Mihai
University of Oradea, Faculty of Economic Sciences

This article proposes an analysis, which we conside r extremely useful in the current economic
context, of the evolution of labour income fiscalit y, more precisely, the effect of the public debt
growth on the tax wedge for the labour income.
The share of fiscal revenues from direct taxes, ind irect taxes and social contributions is relatively
close in the old member states of the European Unio n in comparison with the new member states,
which register a lower level of income from direct taxes. The low level of income from direct
taxes is compensated by more significant shares of the social contributions or indirect taxes.
The main motivations of cross-border migration are: a successful career in a multinational
corporation, high variations of the tax rate, of th e salary income between states and, last but not
least, the level of the net salary. To this day, th ere are no plans to harmonize across the
European Union the legislation regarding the taxes wages and the social security contributions.
Still, the European Union had in view the coordinat ion of the national tax systems to make sure
that the employees and the employers do not pay sev eral times the social contributions in their
movement across the community space.
Despite the fact that some states tax the labour in come at a low level, the labour fiscality remains
high in the European Union in comparison with other industrialized economies, probably also
due to the fact that the majority of the member sta tes have social market economies. The increase
of the fiscality level for the labour income determ ines the decrease of the employment rate and
the raise of the unemployement rate.
The solution to guarantee a higher employment rate, which is a target of the European Union
Strategy „Europe 2020” could be the relaxation of t he labour income fiscality by transferring the
tax wedge on the labour income towards property or energy taxation.

Keywords: labour income, social contributions, tax quotas, taxes

JEL Codes: F22, G28, H2

1. Introduction
The mechanism of the Single European Market is base d on the four freedoms acknowledged by
the European Community legislation: the free moveme nt of goods, people, services and capital.
The main motivations of cross-border migration are: a successful career in a multinational
corporation, high variations of the tax rate, of th e salary income between states and, last but not
least, the level of the net salary. According to so me research realized in Switzerland
(Kirchgassner, Pommerehne, 2001) and (Feld, Kirchga ssner, 2001) we can notice that the level of
payroll tax and the level of social contributions h ave an important influence on the dispersion of
the labour force with high income (Peter Egger and Doina Maria Radulescu 2008: 2).
To this day there are no plans to harmonize across the European Union the legislation regarding
the social security contributions. Still, the Europ ean Union had in view the coordination of the
national tax systems to make sure that the employee s and the employers do not pay several times
the social contributions in their movement across t he community space.

439 If we analyze the structure of budgetary income col lected by the European Union, according to
the economic classification, the labour taxation an d the compulsory social contributions are the
most important source of revenue, representing an a verage of 50% of the budgetary income
collected in the European Union. Thus, the labour t axes collected by ten member states: Hungary,
Slovenia, Czech Republic, Holland, France, Belgium, Finland, Denmark, Greece and Italy
represent between 50-55% of the total income; the l abour taxes collected by four states: Sweden,
Austria, Germany and Estonia exceed 55% of the tota l income.
Concerning the rates of labour taxation, the follow ing figure proves that these are the highest of
the European Union, amounting to 34%-36% in compari son with the lower rates of capital gain
tax and consumption tax.

Figure 1. The tax rates of capital, labour and cons umption

Source: Eurostat

During the period before the crisis, in the Europea n Union, generally speaking, the tax wedge
increased especially concerning the labour taxes an d the social contributions as a result of the
need to finance the government expenditures.
During the period after the crisis, the fiscal meas ures to support the employment offer adopted in
the majority of the European Union states visible i n the reduction of the fiscality for labour
income led to a decrease of the share of the direct fiscal incomes. The tax wedge on the salary
income, especially for the low incomes decreased in almost all member states. Instead, the level
of social contributions, which increased during the period 2008-2009 registered an asymmetrical
evolution. (European Commission, Taxation Papers, 2 010: 18).

2. Aspects regarding the taxes wages in the Europea n Union
The labour tax rates in the EU increased continuall y from 28% in 1970 to approximately 42% in
1997. The continual growth of labour fiscality was due to the tendency of excessive increase of
the unemployment rate at the beginning of the 1990s , as a result of the recession. Thus, at the end
of the 90s the concerns aiming to decrease the exce ssive employment costs in order to stimulate
the employment rate became more important. While so me measures could be generally applied
like: the decrease of labour tax rates or of the so cial contributions rate, others aimed at certain
target groups: the decrease of the contribution rat es for the unskilled workers.
Regarding the fiscal reforms adopted by the member states, the national governments preferred
measures in order to narrow the taxable base or to grant allowances for the low income
households rather than to reduce the tax rate. Thus , measures meant to increase the labour tax rate

440 were adopted by Greece, France, Latvia, Portugal, S lovenia, Great Britain, Ireland; measures
meant to decrease the labour tax rates were adopted by Austria, Germany, Denmark, France,
Finland, Hungary, Latvia, Lithuania, Romania. Measu res meant to increase the taxable base were
adopted by states such as Denmark, Greece, Estonia, Spain, Ireland, Hungary, Portugal; measures
meant to decrease the taxable base were adopted by Austria, Belgium, Bulgaria, Germany,
Denmark, Finland, Hungary, Luxembourg, Holland, Pol and, Portugal, Romania, Sweden. Fewer
fiscal measures were adopted regarding the social c ontributions. The states which chose to apply
measures meant to increase the social contributions rates were: Cyprus, Estonia, Portugal,
Slovakia, Finland; the states which chose to decrea se them were: Bulgaria, Czech Republic,
Sweden. The enlargement of the taxable base was ado pted by the following states: Bulgaria,
Czech Republic, Estonia, Latvia, Lithuania and the narrowing of the taxable base was adopted by
Finland.
The series of changes occurred during the period 20 00-2008 had a very different effect upon the
labour fiscality in the member states. The states o f Central and Eastern Europe which joined the
European Union in 2004 and 2007 faced a decline str onger than 4.4% of the labour tax rates, a
decrease of 4.4%, while the average decrease of tax rates in the European Union was of 1.7%.
The strongest diminution of these rates, of 11.1% w as registered in Bulgaria and an increase of
the rates was registered in Portugal (2.4%, Greece (2.5%), Spain (1,9%), Luxembourg (1.6%),
Cyprus (2.9). During the period 2000-2008, in Roman ia, the labour tax rates decreased by 4%.
(European Commission, Taxation trends in European U nion, 2010: 107).
The international economic and financial crisis did not determine a decrease of the labour
fiscality. If we analyze the situation in the membe r states, we can notice that the most significant
decrease of the labour tax rates was registered in Denmark, Estonia, Romania, Ireland, Sweden,
Bulgaria, Latvia and Lithuania. We can also notice that the taxation level in the three northern
states is closet o the European Union average. The labour tax rates increased significantly in
Cyprus, Portugal, Greece, below the European averag e in the case of the first two. The lowest
labour tax rates are registered in Malta (20.2%), C yprus (24.5%), Ireland (24.6%) and the highest
labour tax rates are Italy (42.8%), Belgium (42.6%) and Hungary (42.4%).
If we analyze the salary tax evolution, we can noti ce that the decline of the tax wedge on the
labour income is due to the decrease of the social contribution rates, as well as of the tax rates of
the natural persons’ income. The tax wedge is calcu lated by dividing the payroll tax, the social
contributions paid by the employee and by the emplo yer and other taxes to the total labour cost.
The tax wedge supported by the employee and bt the employer for the labour force is quite high
in the European Union and this represents one of th e main causes for the poor performance
concerning employment in the European Union.

441 Figure 2. The structure of the tax wedge – the leve l of labour taxation in 2008
(Implicit tax rate on Labour)(%)

Source: European Commission, Taxation trends in Eur opean Union, “ Data for the EU member states,
Iceland and Norway”, 2010, p. 110
If we analyze the structure of labour taxation in t he European Union, we can notice that its largest
share is represented by the employer’s compulsory s ocial contributions, closely followed by the
payroll taxes and the employee’s social contributio ns.
Thus, in Denmark, Ireland and Great Britain, the la rgest share of the tax wedge on the labour
income is represented by the payroll taxes and in s tates like Romania, Slovakia, Greece, the
largest share is represented by the social contribu tions, the payroll tax representing less than 20%.
The labour tax and the social contributions attenua te the economic fluctuations by decreasing the
available income volatility. In many member states, the progressive character of the payroll taxes
is often compensated by the regressive system of co mpulsory social contributions. The
diminution of the tax wedge for the low wages incre ased the progressiveness of the tax wedge in
the member states. The majority of the member state s collect taxes on the natural persons
progressive income. Seven member states apply progr essive tax rates on the natural persons’
income: Czech Republic, Bulgaria, Estonia, Latvia, Lithuania, Romania, Slovakia.

Table 1. The tax wedge on labour income – single wo rker with average income (% of the
labour cost) in 2009

Source: European Commission, Taxation Papers, Monit oring tax revenues and tax reforms in EU Member
States 2010,” Tax policy after the crisis”, Working Paper nr. 24, 2010, pp. 84

442 A research conducted by the World Bank in eight mem ber states: Czech Republic, Estonia,
Latvia, Lithuania, Poland, Slovakia and Slovenia co ncerning the relationship between the tax
wedge on labour income and the employment level rev ealed that there is an inverse relationship
between the tax wedge and employment. Is was also r evealed that the labour force structure –
with many unskilled workers, compulsory minimum wag es, high level of labour taxation and
progressive fiscal systems have worse effects on em ployment than in the rest of the European
Union member states. (World Bank, EU-8 Quarterly E conomic Report, 2005:12).
In the case of low-wages category, it is important to analyze the stimulants offered by the
employees. In this respect, two indicators were dev eloped: the effective marginal tax rate and the
effective average tax rate , in order to study the effect of wage modification s. If the first rate takes
into account the marginal modification of salary in come, the second takes into account the salary
changes implicit to the transition from unemployed to employed. The effective average tax rate is
a specific concept of unemployment or inactivity; i t is used to monitor the labour market
distortions, especially regarding financial constra ints in order to gain access to a job.
It is also obvious that an increase of the tax wedg e has a stronger negative effect on the
employment level in the case of workers with a lowe r qualification level. A research conducted in
Belgium, Holland and France confirms this observati on since a decrease of fiscality for the low-
income workers led to a considerable increase of th e employment level.

3. Aspects regarding the importance of compulsory s ocial contributions to the formation of
public income in the EU
The share of fiscal revenues from direct taxes, ind irect taxes and social contributions is relatively
close in the old member states of the European Unio n in comparison with the new member states,
which register a lower level of income from direct taxes. The low level of income from direct
taxes is compensated by more significant shares of the social contributions or indirect taxes.
While in some states such as Bulgaria, Romania, Mal ta and Cyprus the most significant share of
the budgetary income is represented by the income f rom indirect taxes, in other states like Czech
Republic, Slovakia, Germany and France, the income from social contributions is high. At the
opposite side are Denmark, Ireland and Great Britai n, states which collect relatively low income
from social contributions. The motivation for the v ery low level of social contributions in
Denmark is the fact that its social expenditures ar e not financed by the social insurance budgets,
but by income from general taxes. This explains the very high level of direct taxes, one of the
highest in the European Union.
If we analyze the evolution of the budgetary income , we can notice that in time most of the states
changed the structure of he budgetary income. For e xample, in case of Latvia and Slovenia, the
increase of the share of the direct taxes was compe nsated by a decrease of the social contributions
and of indirect taxes. In Sweden, the increase of t he share of indirect taxes meant a decrease of
the share of direct taxes and social contributions in the total income. In Greece, the decline of
direct and indirect taxes was completed by an incre ase of the social contributions rates.

443 Figure 3. The share of social contributions in the total tax wedge (%) in 2008

Source: European Commission, Taxation trends in Eur opean Union, “ Data for the EU member states,
Iceland and Norway”, 2010, p. 68

In Austria, the most important share of the tax wed ge is represented by the social contributions.
The social contributions rate supported by the empl oyees is approximately 18%, the social
contributions rate supported by the employer is 21. 5%, and in case of income earned out of
independent activities, the social contribution rat e is 25%.
In 2010, the total social contributions collected i n Bulgaria reached almost 28.5% of the income,
out of which the most important part was represente d by the contributions to social insurances –
pensions – which decreased in 2010 from 18% to 16%, decrease compensated by an increase of
the direct tax rates.
In Czech Republic, the most important source of bud getary income is represented by the social
contributions (44.9% of the total collected income) . The level of income from social
contributions is the highest of the European Union, followed by Slovakia and Germany. Taking
into account this aspect, the income from direct an d indirect taxes is under the European Union
average. The social contribution rate owed by the e mployees is 11%, out of which 6.5% for the
social insurances – pensions and 6.5% for social he alth insurances. The social contributions rate
owed by the employer is 34% of the gross income. In Finland, the social contributions level owed
by the employer is 28%.
The level of social contributions owed by the emplo yer registered in France in 2008 was the
second in the European Union after Czech Republic. The social contribution rate owed by the
employer is high in France, amounting to 35%-45% of the income in comparison with the
contributions owed by the employees which amounts t o 14% (European Commission, Taxation
trends in European Union, 2010: p. 160-272).
In Sweden, the social contributions have the lowest share in the total budgetary income. In
Sweden, most of the social contributions is paid by the employers (31.42%). The employees pay
an additional rate of 7% for the social insurances. In order to facilitate youth employment, the
employers benefit from a reduced rate of social ins urance for people under 26.
In Ireland, the share of social contributions to th e total income is not significant – only 18.2%
because of the very low level of labour taxation in comparison to the European Union average.
The increase of labour tax rate starting with 2000 was balanced by the decrease of the social
contributions level. The contribution paid by the e mployers is 10.75%, with a reduced rate of
8.5% for those with low income (lower than 352 euro s per week) and the contribution supported
by the employees is 4% of the gross income. Given t he very low level of social contributions rate
in Great Britain, the income from this source repre sents a small share of the total budgetary
income.

444 In Malta, the level of social contributions os very low, much under the European Union average.
The income from this source had a declining evoluti on during the period 2000-2008, registering
the lowest level of all the member states. The work ers of Malta, the employers and the
government contribute equally to the social securit y fund with 10% of the basic salary.
In Holland, the three important sources in the inco me formation have equal shares. The social
security system is composed of the public insurance and the employees’ insurance. The first
category is financed by all the members of the soci ety, while the second category is supported by
the employers according to the economic sector in w hich they work. The employees’ social
contributions rates are identical to those of the e mployers.
Romania is the fourth country in terms of the impor tance of income from direct taxes to the total
budgetary income after Bulgaria, Cyprus, Malta. In 2008, the level of budgetary income
increased with almost 29% in comparison with 2007. This increase of public income came from
the increase of income from: income tax -23.6%, nat ural persons’ income tax – 27.8%, VAT –
30.8%, excizes – 8.7% and social contributions – 24 .7% (Mara Eugenia Ramona, Inceu Adrian,
Cuceu Ionu ț, Achim Monica Violeta, 2009: 3). This confirms the importance of social
contributions to the formation of public income. Th e obligation to pay the rate of social insurance
belongs to the employer (20.8%) and to the employee (10.5%) in normal working conditions. If
the employee develops his activity in higher risk c onditions, the contribution rate paid by the
employer increases by 5%; for particular working co nditions the total contributions rate is 36.3%
and for special working conditions, the total contr ibutions rate is 41.3%.
Examining in general the main sources of budgetary income formation in the European Union in
2008, we can notice a quite balanced situation, the social contributions having the smallest share
in the total income (12.6% of GDP), in comparison w ith the direct taxes (13.5% of GDP) and the
indirect taxes (31.4% of GDP).

4. Conclusions
In the current context of the financial crisis it i s absolutely necessary to compare the evolution of
labour fiscality and the effect of the growth of pu blic debts on the tax wedge on labour income.
In a research conducted by the European Central Ban k, it was revealed that in the majority of the
states which registered an increased of the public debt, the labour taxation increased – Greece,
Italy and France being relevant examples in this re spect.
Despite the fact that some states have low labour t axes, the labour fiscality remains high in the
European Union in comparison with other industriali zed economies. The increase of the fiscality
level for the labour income determines the decrease of the employment rate and the raise of the
unemployment rate. The solution to guarantee a high er employment rate could be the relaxation
of the labour fiscality. Some specialists consider that fiscal neutrality in the field of labour
fiscality could be realized by transferring the tax wedge on the labour income towards property or
energy taxation.

5. Bibliography:
1. Boglea Vanina Adoriana, Iacob Mihaela Ioana, “La bour Taxation in EU Countries.
Comparative Analysis”, Ovidius University Annals, E conomic Sciences Series, Volum 10, May
2010
2. Petre Brezeanu Finan țe europene , Colec ția Oeconomica, Editura C.H.Beck, Bucure ști, 2007
3. European Central Bank,”The response of labour ta xation to changes in government debt”,
Working Paper 1307, March 2011
4. European Commision, Taxation Papers, Monitoring tax revenues and tax reforms in EU
Member States 2010,” Tax policy after the crisis ”, Working Paper nr. 24, 2010
5. European Commission, Taxation trends in European Union, “ Data for the EU member states,
Iceland and Norway”, 2010

445 6. European Commission- Annual growth survey, Annex 3,“Draft joint employmen t report”,
2011
7. Francesco Daveri, “Labor taxes and unemployment: A survey of the Aggregate evidence”,
Second Annual CeRP Conference, June 2001
8. Mara Eugenia Ramona, Inceu Adrian, Cuceu Ionu ț, Achim Monica Violeta, “The impact of
economic crisis on the fiscal revenues”, The Journa l of the Faculty of Economics – Economic-
Volum 3, Oradea, 2009
9. Peter Egger, Doina Maria Radulescu, „ The Influence of Labor Taxes on the Migration of
Skilled Workers ”, CESifo Working Paper no. 2462, november 2008
10. World Bank, EU-8 Quarterly Economic Report, “L abor Taxes And Employment in the Eu
8”, Part II, April 2005