A Simulation Method to Measure the Tax Burden on Highly Skilled Manpower

A model is presented for simulating the tax burden on highly skilled manpower. The effective average tax rate, defined as the relative wedge between employment costs and disposable income, is computed. Income and payroll taxes and social security contributions not yielding an equivalent benefit are taken into account. The compensation package consists of cash payments and old-age provision. To integrate retirement benefits and their tax treatment, an intertemporal approach is used. The results indicate a wide dispersion of tax rates across Europe and the US. Slovakia, Switzerland and the US tax highly skilled manpower low. Scandinavian countries, Belgium and Slovenia turn out to be high tax countries. 1 This paper is a strongly revised and updated version of the ZEW Discussion Paper No. 04-59. It was presented in the CeGE Workshop at the University of Göttingen on May 25th, 2005. We are indebted to the «IBC BAK International Benchmark Club» by BAK Basel Economics for financing this research. We also thank the steering committee of the IBC taxation module as well as the module’s panel of experts in personnel management for advice and encouragement. Special thanks go to Lothar Lammersen and Christoph Spengel for very helpful discussions. All remaining errors are our own. 2 L7,1, D-68161 Mannheim, phone: +49/621/1235162, fax: +49/621/1235215, email [email protected] 3 Volkswirtschaftliches Seminar, Platz der Göttinger Sieben 3, D-37073 Göttingen, phone: +49/551/397293, email: [email protected] Christina Elschner / Robert Schwager CeGE