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Taxes on Capital

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Taxes on capital are a complex class that includes a variety
of taxes paid both by enterprises and households: stamp
taxes, taxes on financial and capital transaction; car
registration taxes paid by enterprises; taxes on land and
buildings; the part of personal income paid on earnings
from capital, taxes paid on income or profits of
corporations and taxation of capital transfer such as inheritance taxes. It should be noted that under the
definition used in this chapter, taxes raised on selfemployment
income are booked as taxes on capital,
although stricto sensu earnings from self-employment
include a return to labour as well as to capital. Given this
complexity, one should be cautious in interpreting the
available figures as the concept covers many sources of
revenues that are of a different nature, and are earned by
different recipients.

In recent years, growing policy attention has been
paid to the taxation of capital and in particular
of GDP on average for the EU, taxes on capital can
be split up into those on corporate income (3.1%),
capital income of self-employed (2.0%),
households (1.0%) and the stock of capital
(wealth) (2.8%). Corporate income tax (CIT), although
usually considered the main tax on capital, is not a
major source of revenue in any of the Member
States. In 2008, it was less than 4% of GDP in all
countries but four: Cyprus (7.1%), Malta (6.8%),
Luxembourg (5.1%), and Czech Republic (4.4%).
Compared to 2007, the EU-average decreased by
0.3 percentage points, partly attributable to the
deterioration of the economic situation in 2008.
After the inclusion of all other capital taxes, the
revenue from overall capital taxation reaches more
than 10% of GDP in some Member States.
In the European Union, countries moved towards
lowering CIT rates and in one case (Estonia) even
abolished the tax on retained earnings altogether.

Taking local taxes and surcharges into account, the (arithmetic) average of the general corporate tax
rate in the EU27 was reduced by 12.1 percentage
points in the period 1995 to 2010. This reduction is, however, not a new
phenomenon, as cuts in corporate tax rates started
as early as in the 1980s. A similar trend towards lower statutory corporate tax rates
also occurred — albeit less dramatically — in many third
countries. This policy was
usually part of a tax-cut-cum-base-widening
strategy. For example, the scope and scale of
deductions and exemptions were reduced. Many
Member States in recent years indeed enlarged the
corporate tax base via less generous depreciation
rules and deductions. This trend was also partly
due to the Code of Conduct for business taxation
(which has played a role in limiting preferential tax
regimes) and to the necessity to conform to EU
rules limiting state aid to enterprises (as some state
aid is in the form of tax breaks).

The taxes on capital ratio

The ITR on capital is the ratio between taxes on capital and the
aggregate capital and savings income.
In terms of levels, in 2008 the UK tops the ranking
with an ITR on capital of 45.9%. (26) The values
for Denmark, France, Portugal, Cyprus and Italy
are above 35%. At the other extreme of the scale,
Estonia at 10.7%, Lithuania at 12.4% and Ireland
at 15.7% display very low levels of ITR on capital.

The computation of the entire time series 1995–2008 for
the ITR on capital is possible only for nine of the NMS-12,
namely the Czech Republic, Estonia, Cyprus, Latvia,
Lithuania, Hungary, Poland Slovenia and Slovakia. Partial
data are available for Bulgaria.

The ITR on capital for the EU27 increased
dramatically between 1995 and 2001, before
showing a three-year decrease and a new rise since
2003. From 2007 to 2008, the indicator declined
again. Interestingly, this
evolution corresponds closely to the one of the
business cycle. (24) Comparing 2000 and 2008, the
overall ITR on capital decreased in six Member
States: Sweden (-15.3 percentage points), Finland
(-7.9 percentage points), Slovakia (-6.2 percentage
points), Germany (-5.3 percentage points), the
Netherlands (-3.7 percentage points), and Austria
(-0.3 percentage points). The ITR on capital rose
(25) in all other countries, with some very large
increases recorded for example in Cyprus (12.9
percentage points) and Denmark (7.1 percentage
points).

A more pronounced increase could be observed for the
overall indicator when using a simplified denominator
referring to the net operating surplus of the whole
economy. Carey and Rabesona (2002) who used a similar
(biased) denominator also reported increases in the implicit
tax rate on capital. Factors, which could affect/bias
comparisons between Member States differs between Member States according —
for instance — to a different share of financial companies
making capital gains. Data limitations prevent the
computation of the ITRs for Luxembourg, Malta and
Romania.