Comparing EU countries’ top income tax rates, unemployment rates, and employment protection

 

PRIME has looked at the most recent Eurostat figures to see whether, for all EU countries, there is any meaningful correlation between top income tax levels and unemployment rates.  We have also drawn up the European ‘league table’ of employment protection from the data of the Organisation for Economic Cooperation and Development (OECD), and compare this with unemployment rate rankings.  Among PRIME’s conclusions:

  • there is no evidence from these comparisons that higher top rates of income tax are correlated with higher rates of unemployment
  • the UK has the lowest overall employment protection in the EU, but this does not correlate to a lower comparative level of unemployment

We have first 'ranked' countries by reference to (a) their top rates of income tax, and (b) their recent (mainly March 2012) unemployment rates.

One set of countries comes out as having a high ‘top’ level of income tax (49+%), whilst having a relatively low rate of unemployment (under 8%).  These are Austria, Belgium, Finland, Netherlands and Sweden.

A second set of countries has a low ‘top’ income tax rate (35% or less), whilst having a relatively low unemployment rate (under 8%). These are the Czech Republic and Romania.

A third set has a low ‘top’ income rate, whilst also having a relatively high unemployment rate.  These are Bulgaria, Estonia, Hungary, Latvia, Lithuania, and Slovakia.

A fourth set has a high ‘top’ rate of income tax, and a higher level of unemployment.  These are Greece, Portugal and Spain.

Our conclusion from this – having a higher indeed a lower  'top' level of income tax does not appear to be correlated with levels of unemployment in any meaningful way.  Depending on many other factors, a country can have a high top rate of income tax and a lower unemployment rate, or the opposite.  The 'right' top rate of tax is a political choice for each country, with no a priori 'correct' answer from economists.

The UK, with the current (but to be reduced) top tax rate of 50% comes out at 6th=, whilst our rate of unemployment (using January 2012 UK figures, the latest in the comparative Eurostat table) was 12th out of 27.

Here are the tables and figures, taken from Eurostat:

tax and unemp rates table
tax and unemp rates table

Next, we have looked at the OECD table giving its ‘scorecard’ assessment (as at 2008) of the overall level of employment protection, where 0 = no protection, and 6 = extremely protected. Also included for ease of comparison are the countries' rankings for income tax top rates and unemployment, from the previous table.  Since the latter data are from 2012, the comparisons are indicative only, though overall employment protection systems are unlikely to have changed greatly in most countries.

Again, from the above statistics, there is no clear pattern that emerges between rankings by level of employment protection, by level of unemployment, and by top levels of income tax.

Here is the table showing the rankings, from the OECD scorecard:

employment protection from oecd table
employment protection from oecd table

Conclusions from our analysis

  •  There is no observable correlation among EU member states between higher top rate of income tax and rates of unemployment
  • There is no clear correlation shown between the degree of employment protection (per the OECD) and current rates of unemployment, and different sets of countries show different pattens (see below)
  • The UK has long had the lowest level of employment protection amongst all EU countries, from the OECD data, but only the 12th "lowest" unemployment rate at January 2012.
  • Compared to the UK, Germany – the EU’s strongest performing economy of recent years – has a higher overall level of employment protection and a lower rate of unemployment.  Its top income tax rate, at 47.5%, is slightly lower than the UK’s 50%, but higher than the level of 45% which is to be reintroduced in the UK.
  • Some countries combine a relatively higher level of employment protection with high rates of unemployment (e.g. Spain, Greece, Lithuania), but for example Ireland combines a low level of employment protection (and a lower top rate of income tax) with one of the highest rates of unemployment
  • Several other comparable countries of northern or central Europe (Sweden, Denmark, Netherlands, Austria) have a higher overall level of employment protection than the UK, combined with relatively high top rates of income tax, and lower current rates of unemployment.