For many Europeans, the Grand-Duchy is a great question mark in the Western European landscape. It’s quite possible that if you’ve ever heard of it, people might have told you some very counterfactual things. I’m here to help.
“Luxembourg is a tax haven”
Every time I hear that I’m apparently living in a tax haven I need to double-check if people are talking about the same Luxembourg. It even gives me a good reason to go home to check out this mystical land in which nobody pays their taxes.
What do we really pay?
When it comes to income tax, the Luxembourgish government recently concluded a fiscal reform. The old system contained 19 different tax brackets, the maximal tax rate being 40 percent. In Luxembourg, the middle class consists of considerably more than half of the population, resulting in most households being taxed at a rate of 39 percent. Those believing that a Luxembourgish salary assures a comfortable life by definition should attempt to pay rent in the Grand-Duchy first: the average rent rate for a flat is €1.359. The fiscal reform has raised taxes on the highest incomes by adding two brackets of 41 and 42 percent, in order to enhance “solidarity”.
This reform has also performed changes when it comes to corporation tax, by bringing down corporate income tax to 18 percent (15 percent for “young and innovate companies”) and by raising the minimum wealth tax for companies.
Adding to that you’ve got municipal business taxes, which vary between cities, and can go from 6.7 percent in Luxembourg-City, 8.25 percent in Esch-sur-Alzette to 9 percent in Troisvierges in the North of the country.
We’ll be getting to tax rulings a bit later.
VAT: general rate of 17 percent, reduced rate (with exceptions like: children’s clothes, public transport, water distribution, etc.) of 3 percent. Countries like France, the United Kingdom or Germany are with their respective rates of 20 and 19 percent still below European average.
On top of that you’ll get numerous other taxes, including excise tax, capital gains tax (raised by 20 percent with the fiscal reform), property tax, wealth tax, and social security contributions (which aren’t any different from taxes at all).
Is Luxembourg a tax haven? Anything but. Is Luxembourg an advantageous area to do business? Quite evidently. Those who criticise the Grand-Duchy for a “non-excessive level of taxation” are probably also those who accused those who performed better than them in school of cheating. If we were to give the definition of what constitutes a tax haven to a country such as France (where people are particularly keen on using the word), then there’s but one essential question to ask: is it possible that once we look at the ranking of the Tax Freedom Day, and we notice that France is the very last country on the calendar – as it has the highest burden of taxation in Europe – we might conclude that some countries are actually tax hells?
“But LuxLeaks, that was trickery”
Ever since the Vodafone story a few years ago was reported on so poorly, one should have some constructive scepticism towards the understanding of tax systems by journalists. The tax rulings practiced in Luxembourg are not a question of “if” taxes are being paid, but “when”: the value which has been taxed less in Luxembourg will be forwarded as money to the shareholders in the form of dividends, through which the latter will be taxed on added value. That means that the tax is paid, just later as expected. So if you’re a socialist and were frightened that these people weren’t overtaxed, rest assured they have been.
I could of course go on about how tax rulings are not only perfectly legal, but also practiced on an even larger scale even in countries like France, but that’s not really the question here. What taxpayers in highly taxed countries should be inquiring is: how is it possible that low-tax countries who take very little from companies continue to be able to afford their expenditures? The answer’s very simple: companies don’t pay taxes.
This should be a no-brainer, but let’s explain it nonetheless. A company is not an entity that is able to pay taxes, only people can pay taxes, as it’s beautifully outlined by Milton Friedman in this video:
A report by the Adam Smith Institute revealed that 57 percent of corporation taxes are actually paid by the employees (by adapting their salaries), the rest is, quite evidently, paid by the consumer through prices or by the shareholder. Since businesses aren’t able to pay taxes, reducing corporation tax overtly reduces the burden of taxation on households. It’s this conclusion that manifests why the Luxembourgish strategy to attract businesses isn’t necessarily the right solution: the important factor isn’t attracting capital, but the added value created by these companies.
“Luxembourg is a neoliberal country”
I’ve heard this term several times, and even if in comparison to the French term “ultra-liberal”, this one at least has some meaning, it’s not true at all.
Getting a business started in Luxembourg isn’t any more or less complicated than it is elsewhere in Europe. We have the same permits, the same authorisations, the same paperwork, environmental regulations and bureaucrats are just as sluggish as anywhere else.
The following things are run publicly: a majority of schools, the only university, all streets, healthcare, the national retirement fund, the postal service, the national football stadium, all museums, distribution of water, the railway system, local bus services, the only airport and the company that runs it, the airline LuxAir (which also owns the transport company CargoLux), 28 percent of the biggest energy supplier, 34 percent of the bank BGL BNP Paribas.
If neoliberalism is indeed alive and well in Luxembourg, it’s doing a tremendous job at masquerating as socialism.
Bill Wirtz is a Law student at Université de Lorraine in Nancy (Eastern France). After starting off in centrist politics in his home country Luxembourg, he changed his mind on the role of government and is now a Local Coordinator for European Students for Liberty and co-editor of ESFL’s blog. On his own blog (www.wirtzbill.wordpress.com), he blogs in four languages, and his articles have been published in daily Luxembourgish newspapers, the Foundation for Economic Education, the Mises Institute, Newsweek, Yahoo News, the Washington Examiner or CapX.
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