Personal Income Taxation in Austria: What do the Reform Measures Mean for the budget, Labour Market Incentives and Income Distribution?

In Austria, a comprehensive tax reform came into force on 1 January 2016. The stated aim of the tax reform was to noticeably reduce personal income taxation. The reform package included an increase in the number of brackets in the personal income tax system from four to seven, an increase in the amounts of several allowances and tax credits, and an increased reimbursement of social security contributions for low-income earners. A simulation with EUROMOD, a microsimulation model encoding the tax-benefit systems of all EU Member States in a harmonised way, estimates the impact of the changes in personal income taxation that were a major part of the reform and thereby covers almost the whole tax relief part of the reform package. It addresses the effect of the reform measures on the government budget, labour market incentives (implicit tax rate) and income distribution. It does not consider behavioural changes and therefore does not include second-round effects. Given all this, the simulations suggest a revenue loss of EUR 4.8 billion for the year 2015, which equals 15.8% of personal income tax revenue or 1.4% of GDP, due to the change in personal income tax. The impact on mean equivalised disposable income of households is positive for all income deciles. It is increasing across all deciles as an absolute value and increasing up to the eighth decile as a percentage of the baseline income. The reform significantly decreases the implicit tax rate in all income deciles, particularly in the first five deciles. It is only marginally less redistributive and the risk of poverty slightly decreases.