Functions of Taxes

governments get revenue from tax
- in Austria 40% - 45% of total GDP (high tax country)
- large amounts of GDP are taken by the government
business / taxpayers have a cost of living/existing
- e.g. Income Tax
society pays a price for Civilization (Oliver Wendell Holmes)
- e.g. VAT
- budgetary foundation for Fiscal System
- taxes are not a donation (i.e. hard requirement)
- black market → outside of taxed domain
  - the worse the tax system, the larger the black markets

Tax is the Price we pay for Civilization.

& Oliver Wendell Holmes

Tax to GDP ratio
“high” and “low” tax countries
- low tax countries also spend less (can’t spend more than you earn)
is there a “right” or “fair” level of tax

Definition of Tax

only one of them
- compulsory
- imposed by legislation / levied by the government
- under the Rule of Law
- for a public purpose
- not paid in exchange for specific service
  - e.g. paying into welfare system even though you are not sick at the moment
  - if taxes are too high for the “value” one receives
    - more inclined to vote for tax reduction
    - try to commit Tax Evasion
who is imposing the taxes?
- federal government
- subnational government (Laender)
- municipal (Gemeinde)

some people pay a lot of taxes
- businesses
- high income people
- etc
some people pay a little to almost no taxes
- students
- children
- etc
but all people get comparable support from the state
- streets can be used by everyone equally
- public schools are equal for everyone
- public welfare system is equal for everyone
- etc
heavy tax payers are overpaying
light tax payers are underpaying
that is just how it is
- but balancing can and should (and is) happening

Income Tax
Corporate income tax
Value added tax (VAT) / goods and services taxes (GST) / sales taxes
Wealth taxes
- Inheritance and gift taxes
- Real estate transfer taxes
Consumption taxes
- Energy taxes
Etc. etc. etc.
Is there a perfect tax mix?
- e.g. US relying mostly on Income tax, Europe mostly based on VAT
- there is not one perfect tax mix, depending on country, culture, climate, next election, trends, etc
- corporate tax payers do not vote → not natural persons
- income tax payers do vote → will hit you back next election
What actually guides the policy design of a tax system?

fiscal justification can justify anything → pointless in this discussion
influence behavior
- e.g. tobacco tax → more expensive tobacco results in less consumption
  - tobacco tax: conflicting interests
    - health reasons: perfect tax rate would be infinite → no tobacco products at all
    - fiscal reasons: making money with it
    - equilibrium: what is the highest price I can ask so people still smoke, so I make money (avoids black markets)
price-in external cost (Externalities) (Pigouvian Taxes)
- e.g. fuel tax → more expensive fuel leads to less driving
  - causing external costs (polluting the environment)
  - should be priced into the product (fuel)
pursue non-tax goals
- e.g. tax exemptions, non-deductions

The power to tax is the power to govern

Taxes are politics converted into money

tax sovereignty could lead to tax competition
- e.g. most online businesses in US registered in Delaware
international agreements (tax treaties)

VAT - fully harmonizes (except tax rate 15%-27%)
- makes sense for harmonized market
income tax → not harmonized
corporate income tax
- Hungary has <10% corporate income tax, Austria has 23%
- corporates can move easily, people not so much
anti tax avoidance directive → against Tax Evasion
EU fundamental freedoms → non-discrimination
prohibition of state aid