OECD Report Argues New EU States Must Continue To Reduce Tax

by Ulrika Lomas, Tax-News.com, Brussels

13 May 2004

The OECD has entered the politically charged debate on European tax levels in the expanded EU by suggesting that the new intake of countries, especially the four largest, should lower their labour taxes and reduce the burden of regulation.

Focusing on the Czech Republic, Hungary, Poland and Slovakia, the OECD’s (Organisation for Economic Development and Cooperation) bi-annual world economic outlook, released on Tuesday, noted that the gap in economic wealth between these states and the former EU15 countries remains ominously large, and suggested that further measures to stimulate growth are required.

Although the OECD observed that growth rates in the four countries were almost double those of the old EU15 between 1995 and 2003 at 4%, the report claimed that it would still take up to forty years to close the gap in terms of GDP per capita by just a half without additional measures to accelerate the process.

Holding up the Republic of Ireland as an example, the report stated that the former Eastern bloc countries need to drastically reduce the tax wedge on labour in order to create more incentives for employment and investment in general. In Poland for example, taxes make up 42.9% of labour costs, almost double that of Ireland at 24.5%.

The OECD also pointed to inflexible labour laws and excessive regulation as a disincentive to employment creation and a drag on economic growth.

However, the organisation’s recommendations are unlikely to be well received in many quarters of the EU, particularly Germany, whose leader Gerhard Schroeder has been an outspoken critic of tax cuts implemented recently in many Eastern and Central European states.

Schroeder is angry that Germany, as the largest net contributor to the EU’s budget, appears to be indirectly subsidising tax cuts in the new EU states that may ultimately lure German firms to transfer their operations to Eastern Europe.

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