"Tax oases" for the highly skilled?

After the nations agreed on a global minimum tax for companies, this could be the start of a new tax competition: one for highly skilled workers. This is the finding of a study in which business professor Jost Heckemeyer is involved.

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Until now, the rule that applied to finance was that capital is mobile, the workforce is not. According to Heckemeyer, the workforce is tied to a location and is therefore forced to accept the local fiscal burden of taxes and social security contributions. "But this applies less and less in a global world: the highly skilled are actually very mobile and can look for companies to employ them and pay their desired net income all around the world," said Professor Jost Heckemeyer from the Institute of Business, explaining this possible new future trend. He added that professional footballers are obvious examples of this. "If Cristiano Ronaldo demands a certain amount of money for his disposable income, the club also bears the entire tax burden for that, added on top of the net income." And depending on the country where the club is based, very different sums of money are added – based on the level of tax rates and social security contributions. For this reason, in future the motto could be that countries with low tax rates are advantageous for the highly skilled because they allow their companies to attract the best workers at a relatively low cost.

"Last year, following years of negotiations, 136 countries agreed to a global minimum tax of 15 percent for companies and we expect that as a result this tax competition will lose its significance," explained Jost Heckemeyer, who has been Professor of Business Accounting and Corporate Taxation at Kiel University since 2017. He also conducts research at the ZEW – Leibniz Centre for European Economic Research in Mannheim, where the scientist and three other researchers have now for the first time compared the tax burden for companies and for workers on an international scale. The Kiel-based professor regularly takes part in similar studies for the EU Commission.

The research team examined the tax burdens in 18 member states of the European Union (still including the UK), as well as in the USA, Japan, Switzerland, Norway and the four emerging markets of Russia, Brazil, China and India. In the comparison period from 2009 to 2019, the average tax burden for companies fell from 25.2 to 22.7 percent. It ranged from a low of 14.4 percent in the "tax haven" of Ireland to a high of 41.7 percent in Japan. In 2019, Hungary was the most fiscally attractive country at 11.1 percent, while companies in India had to pay the highest rate of 40.8 percent.

Most nations in the European Union have also reduced their taxes. In Germany tax burdens were disproportionately high, business tax was still increasing in some local authorities. By contrast, the two other heavyweights of France and Spain have reduced their taxes. "We assume that with the global reform, the tax burdens of companies will become more aligned. It will become less attractive for corporate groups to invest in former low-tax countries," explained the researcher.

When comparing the tax costs for highly skilled workers, however, the countries perform completely differently, Professor Heckemeyer has now discovered. "For our comparison programme, we have developed an algorithm that takes account of the very different rules in the 26 countries. Most recently, the average tax burden was 40.3 percent." Here the researchers took as their example a single person without children who earns a net income of €100,000. Companies in countries with the lowest taxes have to pay €130,000 gross for this employee, whereas employers in high-tax countries have to pay more than €170,000 – sometimes even more than €200,000.

Each country follows a different tax philosophy, reported the scientist. For instance, in Scandinavia, income tax is traditionally high, but business taxes are low, he said. In the USA this tends to be the other way round. In Germany, the tax burden for high earners is slightly below average at 39.8 percent. Whether this is a good foundation for competing for highly skilled workers will become apparent over the next few years.

Author: Joachim Welding

The current study "Tax Policies in a Transition to a Knowledge-Based Economy. The Effective Tax Burden of Companies and Highly Skilled Labour" by Leonie Fischer, Jost Heckemeyer, Christoph Spengel and Daniela Steinbrenner will be published soon in the specialist journal Intertax.

It is already available online as a discussion paper in English.