The tax burden of highly qualified and skilled employees as location factor
The traditional way of comparing fiscal attractiveness of regions competing with each other internationally is to concentrate on the tax burdens borne by mobile capital and mobile companies. Lately this approach has been broadened by paying increasing attention to the mobility of employees, especially those with high and highest qualifications. Employees will be willing to put up with higher taxes and social insurance contributions at a given location only if these are offset by being paid higher gross salaries than elsewhere. The goal of this project has therefore been to quantify the tax burden on skilled and highly qualified employees so as to permit international and interregional comparisons. For that purpose, a new concept has been developed suitable for measuring the tax burden of highly skilled employees. This concept differs from existing, simpler approaches by carefully modelling the specific tax treatment of various compensation components such as cash, perquisites, stock options, and contributions to old-age provisions. In addition, by applying an intertemporal approach, the model can keep track of the dates of taxation of these compensation components. This also permits to integrate the expected pension benefits earned by social security contributions and the taxes levied upon these. The concept has been applied to twelve cantons of Switzerland, to Germany, France, Ireland, Italy, Austria, the Netherlands, the UK, and the US-state of Massachusetts. The results show a wide international variation in effective tax burdens on highly skilled employees: Considering the standard case of a single employee earning a disposable income of Euro 100,000 p.a., the Swiss cantons Schwyz and Zug have the lowest tax burdens with effective average tax rates of 25.7 per cent and 25.9 per cent, respectively. These cantons are followed in the ranking by the other cantons analysed, the United States, and the United Kingdom with effective average tax rates between 28 per cent and 39 per cent. The highest tax burdens with effective tax rates between 40 per cent and 50 per cent occur in the other European countries considered, namely Ireland, Austria, the Netherlands, France, Germany, and Italy. Additional results have been obtained by varying the level and the composition of the employee’s compensation package as well as the family situation. In all countries, the effective average tax burden increases if the income is increased but the degree of progressivity differs substantially among countries. Moreover, among the countries analysed, Germany by far grants the largest tax relief for families compared to single persons. Finally, granting stock options instead of cash salary reduces the tax burden in all countries except Germany and the Netherlands. The study was prepared for the «IBC BAK International Benchmark Club»®, which evaluates and compares economic performance and location factors across European regions. The headline figures represented the IBC Taxation Index.
Duration: 01.11.2001 - 31.12.2003
Monographs, Articles in Anthologies
Elschner, Christina and Robert Schwager (2005), The Effective Tax Burden on Highly Qualified Employees, ZEW Economic Studies, Bd. 29, Mannheim.
Elschner, Christina and Robert Schwager (2003), The Effective Tax Burden on Highly Qualified Employees - An International Comparison, Studie im Auftrag des IBC BAK International Benchmark Club von BAK Basel Economics, Mannheim.
Elschner, Christina, Lothar Lammersen and Robert Schwager (2003), Der IBC Taxation Index - Die effektive Steuerbelastung von Unternehmen und hoch qualifizierten Arbeitskräften / The IBC Taxation Index - An International Comparison of the Effective Tax Burden of Companies and on Highly Skilled Manpower, Executive Summary, Studie im Auftrag des IBC BAK International Benchmark Club von BAK Basel Economics, Mannheim. Download