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Tax and social policy reform: Some lessons from new EU member states

Explore the impact of tax reforms and social policy changes in new EU member states, including the introduction of flat taxes and their implications on social welfare and labor markets. Learn about the performance criteria for assessing the success of these reforms and their implications for reducing poverty and inequality.

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Tax and social policy reform: Some lessons from new EU member states

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  1. Tax and social policy reform: Some lessons from new EU member states Ben Slay Senior economist UNDP Bureau for Europe and CIS 12 January 2000

  2. Presentation topics • Tax reform and: • EU accession • Links to social policy, labour market reform • Initial lessons from 5 new member states that have: • Combined these reforms • Introduced flat taxes • Tentative conclusions: • Reforms have been successful • Useful experience for Turkey?

  3. GDP in the EU NMS: How does Turkey compare? 2008 per-capita GDP (in PPS terms, EU average = 100), Eurostat data

  4. Which countries? Estonia

  5. What’s a flat tax? • Key feature: A single, proportionate tax rate • Other common features: • Fewer exemptions, deductions • Same rate for different taxes (PIT, CIT, VAT . . . ) • Attempt to align de jure tax systems with de facto capacity

  6. Are flat taxes “fair”? • “It depends”—differing normative views • Literature says: • “Vertical equity” may be violated . . . • . . . But a high taxable income threshold can protect low-income taxpayers . . . • . . . And better compliance increases de facto progressivity • For a flat tax to work, taxpayers have to believe that rates on “legalised” incomes won’t be raised

  7. “Flat tax” countries examined here Source: Business Eastern Europe, 22 January 2008, pp. 1-2.

  8. Social policy reform • Restructure social service provision to improve quality, reflect trends in: • Demographics • Labour markets • State budgets • Social protection: • Reduce benefit dependency • End ”poverty traps” • “Make work pay” • Better target social assistance

  9. Labour market • Labour code reform, to: • Make redundancies easier, to strengthen employer hiring incentives • Promote “non-standard” employment • Support new “public private partnerships” • “Welfare to work” programmes • Allow private job placement firms to compete with state employment offices • Get links to social, tax policies right • Goal: Reduce high marginal tax rates for low-income workers (“unemployment traps”)

  10. Performance criteria for assessing reforms’ impact • Output (GDP) • Labour market: • Employment • Unemployment • Fiscal trends • Poverty and inequality

  11. Performance: Good on GDP growth . . . Average annual GDP growth 2005-2008 % points above NMS average

  12. . . . And on employment Average annual employment growth 2005-2007 % point difference from NMS average

  13. Reforms have not upset fiscal balance . . . General government budget (% of GDP), annual averages for 2002-2007 period. Eurostat data.

  14. . . . Or produced large public debts General government debt, % of GDP, 2007

  15. Unemployment rates fall, both overall . . . Average annual unemployment rates % deviation from average NMS decline

  16. . . . And for youth unemployment Average annual youth unemployment rates % deviation from average NMS decline

  17. “Unemployment trap” revisited • Example: Family of four • 2 parents, two children • 1 parent works, earns 33% of average wage • Benefit eligibility: • Unemployment benefits (for other parent) • Child allowance (for children in low-income families) • Supplement for low-income families

  18. Question: Do benefits fall as earned income rises?Answer: Yes, a lot Effectivetax rate on additional earned income, in form of lost benefits Q: Why take the work? (Unemployment trap)

  19. “Unemployment trap”: Getting weaker? Marginal tax rate on income earned by worker supporting family of 4 at 33% of national wage

  20. Absolute poverty rates correlate with GDP 2005 World Bank, UNDP data, based on PPP exchange rates, $4.30/day poverty threshold

  21. Relative poverty: Do Ginis point to problems? Gini coefficients, World Bank data

  22. Conclusions • Tax reform: Not only about growth • It’s also about poverty reduction, social inclusion • Key questions—Links between taxes and: • Labour, social policy • Joint inclusion memorandum (in accession negotiations) • When “done right”, flat tax reform can: • Reduce poverty • Support social solidarity • Perhaps at the cost of higher inequality

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