[ D] Main Navigation
- 4.0: Home .
- 5.0: Research .
- 6.0: Publications .
- 7.0: Events .
- 8.0: Professional Training .
[ D] The Centre for European Economic Research developed a simulation model in order to measure the effective average tax burden on the employment of highly qualified employees. It allows consider several components of the remuneration package, the family status, and varying levels of compensation and is applicable both in a domestic and in a cross-border context. This concept parallels established methodologies for the quantification of company tax burdens by calculating the effective average tax rate (EATR) as an indicator of the tax burden. The basic idea of our approach is that employers compete for highly qualified employees and therefore have to compensate these for taxes on labour income and tax-like social security contributions. As a consequence, the tax burden of different regions is compared for a given disposable income after taxes which the employee can obtain at all locations.
The simulation model determines the tax burden in two steps. At first the tax assessment of a typical qualified employee's income before taxes (the total remuneration) is conducted. If the resulting income after taxes falls short of (exceeds) the required disposable income, in a second step, the assessment is repeated for a higher (lower) total remuneration. The model then iterates until the total remuneration necessary to obtain the predetermined disposable income is found. The effective average tax rate is calculated by dividing the difference between total remuneration and disposable income (the tax wedge) by the total remuneration. The EATR thus expresses how much the employer has to expend in addition to the predetermined disposable income. For example, if an employee with a disposable income of € 100,000 faces an EATR of 25 %, this means that the tax wedge (€ 33,333) amounts to a quarter of the total remuneration (€ 133,333).
Taxes in this context are all income taxes including surcharges and state and municipality taxes, as well as payroll taxes paid by the company. Social security contributions are part of the tax burden inasmuch as the employee does not earn a specific, individual benefit by paying them. According to the basic idea of competition, there is little risk of unemployment for the kind of qualified employees considered here. Hence contributions to unemployment insurance, and by a similar reasoning also contributions to accident insurance, are defined as taxes. Health premiums, on the other hand, are not considered to be taxes since they are deemed to provide a genuine insurance.
Contributions to public pension schemes are considered to be partly taxes. The first pillar of old-age insurance is usually organised as a pay-as-you-go system involving redistribution between generations and between high and low earning workers. In as much as contribution payments do not result in actuarially fair pension entitlements, they constitute an implicit tax rather than an insurance premium. To account for this implicit tax, entitlements earned by the highly qualified employee are computed according to the legislation currently in force and offset against contributions.
Our model distinguishes between four kinds of compensation: (1) cash compensation, (2) contributions to old-age provisions, (3) stock options and (4) perquisites. These components are taxable in different periods. Cash compensation and perquisites are taxable income in the year of payment whereas stock options are either taxable when the options are granted or when they are exercised. Contributions to old-age provisions are either excluded from taxable income and thus pension benefits are subject to taxation, or contributions are paid out of taxed income implying that pensions are non-taxable income during retirement. Our model explicitly deals with the timing of tax and pension payments by using an inter-temporal approach.
The model already provided a basis for various studies on behalf of the IBC BAK International Benchmark Club, PricewaterhouseCoopers, as well as the Thyssen-Stiftung.
cel 07.05.2007
