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EU Direct Tax Burden


Overall, there was indicative of a continued common strategy of
Member States towards reducing the fiscal burden
in order to foster labour supply and labour demand
incentives, and increase participation and
employment. Such policies have become
particularly important in the course of the
recession in order to counteract the negative
repercussions of product market developments on
labour market conditions.
Similar to developments in personal income
taxation, several Member States also reduced
corporate income tax rates to some extent, thereby
continuing the process of steady downward
convergence in tax rates on corporations over past
years in the European Union. This possibly reflects
increasing pressures from fiscal competition,
particularly from the recently acceded Member States.

But the debt problems in countries like Ireland, Grece, Portugal, Spain, Italy and Belgium is changing this dramatically. The Irish Prime Minister announced the 24 November 2010 a punishing rise in the VAT and income tax rates.

Given the sensitivity of capital flows to tax
rates, the fiscal burden on mobile tax bases might
have been constantly reduced in order to prevent
relocation of physical capital and book profits.
Against this background, the quest for higher
revenues in order to curb budget deficits has
typically resulted in increases in indirect taxation.

The fiscal burden on consumption has been
increased through hikes in VAT and excise rates as
well as the introduction of base broadening
measures. In addition, Member States’
governments have increasingly tried to resort to
alternative sources of financing, such as
environmental taxation. This policy stance has
often been part of more comprehensive strategies,
endorsed also by actions taken at the EU level,
aimed at promoting economic and environmental
objectives in order to put national economies on a
sustainable long run growth path. This strategy has not always been
successful when it comes to additional revenue

Among the measures introduced to boost aggregate
demand, there has been a widespread use of
provisions to directly support disposable income.
Reductions in the rates applicable to the lower
personal income brackets and increases in
allowances have both been used as instruments to
protect the purchasing power of low-income
households. In some cases, in accordance with the
redistributive goals of taxation and the need for an
equitable distribution of the fiscal burden, these
measures have been accompanied by the
introduction of higher rates on high-income
earners (for instance, in Greece and Ireland), with
the combined effect of increasing progressivity.

Special levies have also been imposed on certain
income sources, such as bonuses granted by banks
and financial institutions (in France, Greece, the
UK and – at the corporate level – in Portugal),
which would serve the additional purpose of
reducing rewards for short term risk-taking
behaviour in the financial sector. A few
countries characterised by a high tax burden on
physical persons (Finland, Denmark, and Austria)
have implemented generalised reductions in rates.

In a few cases where governments were left with
extremely limited room for fiscal manoeuvre, rates
on personal income were instead increased,
reversing previous reductions (Latvia). Due to the crisis, this is the case of other countries and probably will the case in countries like Italy.
Direct support to low-income earners and other
social strata that have been hit harder by the
economic crisis appears particularly important –
both for equity considerations and for the
economic effect on private consumption – in the
light of the shift towards indirect taxation put in
place in several Member States. Generalised
increases in VAT rates have been introduced in
Greece, Hungary, Latvia, Lithuania, Portugal and
Spain, often together with base broadening
measures such as narrowing the scope for
application of the reduced rates. Reductions in
rates to boost consumption have been extremely
rare – typically only temporary (in the UK) or
targeted at specific sectors (in Belgium and
France). Amendments in the area of excise duties
have in general mirrored the changes in VAT.
Thus, rates have been commonly increased and, in
some cases, previously exempted products have
been included in the excisable base.

A number of measures have been taken also in the
area of environmental taxation, ranging from the
introduction of carbon taxes (in Ireland) to levies
on motor vehicles determined on the basis of their
environmental impact (for instance in Greece, the
Netherlands, Latvia). Higher revenues have also
been sought from property taxation in some
Member States, for instance reducing exemption
thresholds for the real estate tax (in Bulgaria) or
introducing progressive taxation schemes to
replace flat rate systems (Greece and Latvia).

The interventions to reduce the corporate income
tax rate (for instance in the Czech Republic,
Greece, Luxembourg and Sweden) are presumably
to be ascribed to the already long-standing policy
towards taxation of mobile bases in Europe,
particularly as in some cases they were not linked
to the cyclical development but had been
introduced in the context of previous reforms. In
fact, these measures would have no significant
effect on the corporate sector in the presence of
losses during the downturn. Measures to directly
support the supply side focused on the reduction of
the corporate tax base, by introducing new
deductions. For instance, in Italy part of the IRAP (a regional tax on
productive activities) payments became deductible from
the base. Similar measures were aimed at
fostering investment capacity in the short run
through the introduction of accelerated
depreciation rules and investment tax credits. In a
few cases, special provisions were targeted
towards SMEs and towards R&D outlays.

On the other hand, several Member States
introduced measures to improve tax collection,
stepped up efforts to fight tax evasion and
implemented other revenue-raising measures,
partly to mitigate the impact of narrowed corporate
tax base