A pilot study shows that the equivalent of more than one quarter of EU GDP was spent on social protection benefits, but some of these benefits were liable to taxes and social contributions paid by the recipients to general government so that the net expenditure was less. Eurostat has completed a first pilot data collection based on 2005 data in order to measure the effective rates of taxes and social contributions applied to each different type of benefit in order to evaluate the net value of expenditure on social protection benefits. The results must be treated as provisional but indicate that across the EU 7% of the gross expenditure on social protection benefits was clawed back through the fiscal system. More than half of the benefits issued in the EU were liable to taxes and/or social contributions. The majority of old age and survivors benefits were subject to some form of obligatory levy whilst only a small proportion of benefits in case of sickness or social exclusion were affected. The effective combined rate of taxes and social contribution applied to liable benefits averaged around 13% in the EU as a whole compared to 7% on all benefits.
Net social protection expenditure is less than 90% of gross expenditure in six countries (the Netherlands, Denmark, Sweden, Poland, Finland and Italy) and less than 95% in a further five EU countries (Austria, Germany, Belgium, Luxembourg and Greece) and in Norway and Iceland. The sheer scale of social protection expenditure means that recouping part of the total amount disbursed through the fiscal system can
have a significant impact on the net costs as a share of GDP (Fig.2).
In Denmark, the Netherlands and Sweden, the value of taxes and social contributions paid on benefits amounts to just over 4.7% of GDP and the difference between gross and net expenditureas a share of GDP is between 2 and 3 percentage points in a further six countries (Finland, Italy, Austria, Poland, Norway and Iceland). In general, the impact of taxes on gross expenditure is higher in those countries that spend more (as
% GDP) on social protection so that the differences between high and low spending countries are reduced. Furthermore, by comparing countries in terms of their net rather than gross social protection expenditure, the
ranking by level of expenditure is significantly altered. In 2005, Sweden had the highest level of gross expenditure on social protection benefits in the EU (30.9% GDP) but only the fourth highest in terms of net expenditure behind France, Germany and Belgium. Indeed, France (28.1%) now stands out with net expenditure on social protection benefits higher than any other country. The Netherlands moves down the
rankings of EU countries by six places and Denmark by four, whilst the UK rises from 9th to 6th.
The difference between gross and net social protection expenditure depends on the proportion of gross benefits that are liable to taxes and/or social contributions and the effective rates at which these levies are applied (1). A little more than half of all social protection benefits in the EU (54.5% by value) were potentially liable to some form of obligatory levy. Benefits are more commonly liable to taxes on income (52.8% of gross benefits) than to social contributions (35.8%).
In all countries except Greece, Luxembourg and Hungary, a higher proportion of benefits is liable to taxes on income than to social contributions (Fig.3). In fact there are eight countries where no recipients of social protection benefits are liable to pay social contributions on the benefits that they actually received (Bulgaria, Czech Republic, Lithuania, Malta, Romania, Slovenia, Slovakia, Sweden). In some cases this is because the gross benefits are effectively already net of social contributions, which are deducted at source and reroutedwithin the benefit system and not paid out to recipients. An example might be where contributions for sickness insurance based on the value of unemployment benefits are paid by the unemployment benefit scheme directly to the sickness scheme to ensure continued coverage for the affected workers. In the ESSPROS system rerouted contributions appear as an expenditure of one scheme and a receipt of another and therefore balance out so that the amount does not contribute towards gross expenditure on social protection benefits.
Although more than half of all social protectionbenefits are potentially liable to taxes and/or social contributions, this does not mean that all recipients of those benefits pay taxes – many will have an income that is below the threshold at which taxes become payable and will therefore enjoy the full value of the benefits disbursed. The data collected by Eurostat attempts to take this into account and measure the effective rate of tax and social contributions that apply to the total value of gross benefits paid out and, therefore, the net cost of those benefits. Across the EU, the effective combined rate of taxes and social contributions applied to those benefits that are taxable was 13.0% but there were considerable variations between countries (Fig.5).
Effective combined tax rates exceed 25% in three countries - Sweden (28.9%), Denmark (28.6%) and the Netherlands (27.4%) and are also over 20% in Lithuania (23.7%), Hungary (24.1%), and Iceland (20.2%). However, the value of taxable benefits is impacted by less than 5% in Portugal (4.5%), Cyprus (3.7%), Estonia (3.5%), Latvia (3.3%) and Malta (2.3%) and by less than 1% in Romania (0.5%) and the Czech Republic (0.01%). In general, social protection benefits that are taxable are cumulated with other income to form part of the tax base for regular taxes on income and are not subject to special rules (although a few exceptions exist). Low effective tax rates therefore may imply that a large proportion of the benefit recipients
have income levels below or only just above the thresholds at which taxes become payable.