Tax in central Europe. Too high everywhere

Tax levels in the new EU members are higher than some critics claim

IF SIMPLE extrapolation holds, then happy Slovaks may soon pay no taxes at all. As a share of GDP their tax burden fell by one-quarter, or almost ten percentage points, between 1995 and 2003, according to the 2003 figures just released by Eurostat, the European Union's statistics office. Slovakia vies with the Baltic states for the title of the EU's most lightly taxed country. Taxes took 30.9% of GDP in 2003, less even than in Estonia, but still a tad more than the 29.1% in Latvia and 28.7% in Lithuania.

The Baltics and Slovakia have been forced to adopt radical strategies for economic growth, because they are the poorest countries in the EU. They have chosen well. According to Eurostat, the Baltics were the fastest-growing EU countries last year, and they should repeat that achievement both this year and next, with Slovakia close behind.

The worry is that other new EU members have not been similarly bold in cutting taxes and public spending. Slovenia's tax burden in 2003, at 40.3% of GDP, was not far short of Germany's. And Germany's tax burden was going down, while Slovenia's was going up. Hungary's government soaked its citizens for 39.2% of GDP, a bigger tax burden than Britain's. The Polish and Czech governments taxed a little less, though Czech taxes have crept up from 34.6% of GDP in 2001 to 36.2% in 2003.

If nothing else, these figures give the lie to claims by France and Germany that the EU's new members are irresponsibly indulging in “harmful tax competition”. On the contrary, most are not cutting taxes enough, especially payroll taxes, which act as a tax on employment. The central Europeans are shrewdly advertising low rates of corporate tax to attract foreign investors. But they make up for it with high rates of income tax, indirect tax, and social-security contributions. Hungary has one of the lowest corporate-tax rates in the EU, at 16%, but one of its highest value-added taxes, at 25%. Canny investors who make money there may then spend it in Germany, where VAT is just 16%.

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