This paper examines two macro-economic tax challenges at Member State level, namely the potential need and scope for: (i) shifting taxes away from labour; and (ii) increasing revenue to help fiscal consolidation.
The consequences of the financial and economic crisis are, and will be, deeply reflected in Member States' government revenues. Having implemented a wide range of measures to stimulate the economy over the period 2008-10, the focus has clearly shifted towards a much needed consolidation of public finances. Large and differentiated fiscal adjustments are underway across EU countries. These require credible strategies to restore the sustainability of public finances while creating the basis for lasting growth.
Recommendations to EU Member States under the EU policy framework aim at promoting a growth-friendly approach to consolidation design and at making the tax structure more growth-friendly. This involves considering the structure of taxation and the composition of the budgetary adjustment between taxes and spending. In line with a literature survey and based on a cross-country analysis, the paper examines two macro-economic tax challenges at Member State level, namely the potential need and scope (i) for shifting taxes away from labour and (ii) for increasing revenue to help fiscal consolidation.
In a first analysis, the paper identifies which Member States have a particular need to reduce labour taxes (either overall or for specific labour market groups) and at the same time have room for increasing those taxes that are considered to be less distortive for growth, namely consumption, recurrent property and environmental taxes. This analysis shows that around one third of the Member States could in particular consider shifting taxation away from labour to other tax bases.
A second screening aims at identifying Member States that might consider using taxation – in addition to expenditure control – to consolidate their public finances and steer them on a sustainable path. According to this screening, a limited number of countries is found to face particular consolidation challenges and, at the same time, have reasonable room for tax revenue increases.
To test how far the results depend on the specific approach used, robustness checks are carried out. These checks overall confirm the outcome of the central analysis, especially for the analysis of the tax shifts. However, both screenings need to be complemented with in-depth country analysis before being able to draw firm policy conclusions.
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