Tax Policy part 2

Tax policy challenges

Jean-Pierre De Laet

1
 Plan of part 2
• Introduction: the role of EU tax policy
• What makes a fair and efficient tax system, supportive of sustainable
development?
• Encouraging investment and removing tax distortions to financial
policy
• Taxation and growth
• Shifting taxes away from labour
• Property and housing taxation
• International aspects of corporate taxation
• Taxation of the financial sector
• Correcting inequality and supporting social mobility

2
 The role of EU tax policy
• The EU has no responsibility for the choice of the tax mix or the level of direct
tax rates

• In the indirect tax area, the Treaty gives the EU more important powers as the
most important taxes are harmonised in so far as is necessary for the
establishment and functioning of the Internal Market, but once indirect tax
minima are satisfied, Member States have substantial freedom of action on tax
rates (subsidiarity principle)

• Moreover, the Treaty states clearly that while the subsidiarity principle must
be respected, the Internal Market is key – leading to the principle of
approximation of domestic laws (including on direct taxes) directly affecting
the establishment or the functioning of the Common Market

• The Treaty also prohibits discrimination on grounds of nationality which is

relatively frequent in the tax domain. A high number of cases have been dealt
with by the European Court of Justice
3
Consequences for the conduct of EU tax policy

• The Treaties do not allow the EU to impose the conduct of

one specific tax policy over another but require that the
Member States’ tax policies are compatible with the Internal
Market

• So the European Commission needs to address elements of

the current tax policy set-up which are least compatible with
the Internal Market

• The most acute problems are linked with corporate taxation

and the challenge of cross-border tax fraud, which demands
coordinated solutions 4
 What makes a fair and efficient tax system,
supportive of sustainable development?
• “Sustainable development is development that meets the needs of the
present without compromising the ability of future generations to meet
their own needs.” (World Commission on Environment and
Development, (Brundtland Commission). It assumes the conservation
of natural assets for future growth and development

• To what extent does the tax system encourage investment and job
creation, correct inequalities, support social mobility, achieve high-
levels of compliance, encourage the protection of the environment and
the sustainable use of natural resources?

• There are sometimes but not always trade-offs between the goals of
efficiency and fairness or more generally between the different
dimensions of sustainable development illustrated on the next slide
5
6
 Taxation and social welfare (I)
• In the absence of market failure, most forms of taxation
distort otherwise efficient economic decisions, leading to
sub-optimal outcomes. The distortion can affect , among
others:
• the scale, location and sector of investments,
• how to finance investment,
• factors affecting the supply and demand of labour,
• the nature and timing of consumption
• Tax systems should therefore be designed to minimise
these distortions and the resulting ‘deadweight loss’, which
would imply raising taxes on price-inelastic goods and
services

7
 Taxation and social welfare (II)
• Social preferences: depending on social preferences and policy goals,
redistributive taxes can be welfare enhancing
• OECD findings suggest that high inequality can be detrimental to
growth (e.g. by hindering human capital accumulation), so that
redistributive policies can be justified from a growth angle
• when market failures are present, economic decision-making may be
neither efficient nor fair
• For example, events or actions with associated negative externalities
which are not internalised by consumers or businesses can be
detrimental to society’s welfare
• In such cases, taxation can play a role in correcting the economic
inefficiencies to the benefit of the society as a whole. For instance,
where there is: too much activity harming others or too little activity
that benefits others 8
 Taxation and social welfare (III)
• Market failure occurs where a market, when left to its own leads
in allocations that do not maximise social welfare. The causes
include
– positive externalities (e.g. from education),
– negative externalities (e.g. pollution),
– incomplete/asymmetrical information (e.g. in health markets) and
– need for public goods (e.g. infrastructure, police and national defence)
• Public goods are characterised by the fact that: Consumption by
one individual does not preclude consumption by another (non
rivalry). It is economically or technically impossible to restrict
consumption by anyone or it is impossible for anyone to refuse
its consumption
9
 Taxation and social welfare (IV)
• Tax incidence needs to be taken into account
• The economic agent who makes the payment of the tax
may, depending market conditions shift the economic
burden of the tax on other agents
• As an example, several studies show that part of the
burden of corporate income taxation may fall on workers
or that an increase of social security contributions paid by
employers can lead to a reduction of net wages earned by
workers

10
 Reducing compliance costs (I)
• By reducing tax compliance costs, Member States can encourage
business activity and productivity
• Tax compliance costs such as the time and money needed to fill in tax
returns or accounting and legal support can discourage businesses,
notably SMEs and start- ups, as these costs account for a relatively
higher share of their total costs than for large companies
• Compliance costs can also incentivise the informal economy and
damage businesses’ and countries’ competitiveness and attractiveness
(as compliance costs are a factor in determining the ease of conducting
business)
• Compliance costs can be minimised through simple, stable tax systems
and efficient, effective tax administrations

11
 Reducing compliance costs (II)
• This means being organised in a way that encourages
voluntary compliance and ensures that non- compliant
behaviour is likely to be detected. This involves making
paying taxes as easy and simple as possible and requires
high taxpayer ‘morale’ (willingness to pay taxes)
• This in turn is easier where people perceive the tax system
as fair and have a high level of trust in government
• Legal and tax certainty, stability, predictability and the
simplicity of tax rules also affect businesses’ and
investors’ decisions

12
employment taxes (wages and social contributions), etc. This can serve as a proxy for tax
compliance costs.

GRAPH 20. HOURS PER YEAR NEEDED TO ENSURE TAX COMPLIANCE (MEDIUM-SIZED
COMPANY), 2008-2018

Source: World Bank, 2019

13
Companies also face compliance costs after they have filed their tax returns, e.g. in
 Encouraging investment and removing tax
distortions to financial policies
• Taxation is one element of a well-functioning business environment that
supports investment
• Designing a tax system that does not discourage profitable investment from
taking place is important
• Empirical evidence demonstrates that keeping marginal effective tax rates low
promotes investment. This can be achieved by deductibility of equity financing
and faster depreciation schedules
• Legal certainty, stability, predictability and simplicity of tax rules matter for
business and investor’s decisions
• Taxation is one of the tools to empower entrepreneurship and innovation
• High tax compliance costs can reduce the creation of new business, encourage
underground economy and reduce the country’s competitiveness

14
better analysed at industry- and firm-level, as substantial heterogeneity can mask the channels of
interest when looking at the country-level EMTRs.

GRAPH 14. (FORWARD-LOOKING) EMTRS (%), 1998-2020

Source: ZEW, 2020

Notes: The indicator is based on a version of the Devereux-Griffith model, which considers five types of asset and three sources
of finance at corporate and shareholder level. This methodology has been used to calculate (forward-looking) effective tax rates
in the EU every year since 1998. The full dataset is available at:
https://ec.europa.eu/taxation_customs/publications/studies-made-commission_en

15
 Tax distortions to financial policies
• Widespread practice of countries to allow interest payments but not the
cost of equity finance as a deduction against corporate income taxes
• The consequence is a bias towards debt finance which is greater if the
effective corporate income tax rate is higher
• Personal taxes on interest, dividends and capital may also affect the
choice between debt and equity finance
• According to the IMF, empirical evidence suggests that tax distortions
have caused leverage to be substantially higher than it would have
been under a neutral tax system
• Devereux et al (2015) using UK firms data find a sizable and positive
long-run corporate tax effect on firms’ leverage ratio. Corporate tax
incentives affect the external leverage of both domestic and
multinational firms

16
 The debt equity bias reduction allowance
• Tax systems in the EU allow companies to deduct interest payments on
debt when calculating the tax base for corporate income tax purposes,
while costs related to equity financing, such as dividends, are non-tax
deductible in the majority of Member States
• This asymmetry favours the use of debt over equity for financing
investments and could contribute to an accumulation of debt for non-
financial corporations. Over-indebtedness may threaten the stability of the
financial system and increase the risk of bankruptcies
• This initiative aims to encourage companies to finance their investment
through equity. The impact assessment assesses the possible introduction of
an allowance for equity-financed new investments to mitigate debt bias.
The proposal also aims to incorporate a number of anti-tax avoidance rules
to ensure tax fairness

17
 Advantages of tackling the debt-
equity bias
• Addressing the debt-equity bias could contribute to the re-equitisation
of companies, making them stronger and more resilient to shocks.
Equity is also particularly important for fast-growing innovative
companies in their early stages and for companies that wish to expand
globally
• The green and digital transitions require new investments in innovative
technologies. More than 50% of green investment in the coming years
is estimated to come from new technologies, requiring more risk
financing
• Equity will therefore have an important role in fostering the
sustainable transition towards a greener economy and in Europe’s
overall growth and economic stability

18
GRAPH 15. DEBT-EQUITY TAX BIAS IN CORPORATE FINANCING, 2010 AND2020

Source: ZEW, 2020.

Notes:
(1) The cost of capital measures the required minimum pre-tax return of a real investment (the ‘marginal investment’) to
achieve a 5% after tax real return. 19
(2) To reflect the allowance for corporate equity in Belgium, Cyprus, Italy, Malta, Poland and Portugal, the assumption is that the
rates of these allowances equal the market interest rate in the model. For Belgium, the debt-equity bias could be non-zero due
 Possible policy responses (I)
• No sound reason to give a systematic tax advantage to debt finance
• One possibility is to limit the extent of interest deductibility e.g. through thin
capitalization rules or comprehensive business income tax
• The alternative is to keep interest deductibility and allow a deduction for the
notional cost of equity finance (Allowance for corporate equity – ACE - or
notional interests)
• The Cost of Capital Allowance has been proposed by Kleinbard. This system
provides for a notional risk-free return to capital for both debt and equity
financing. The COCA base is in addition adjusted for depreciation and
revaluation of assets. This system aims at removing comprehensively the tax
distortions to investment
• ACE and COCA lead to a revenue loss but also to efficiency gains expected to
benefit not only equity holders

20
 The debt equity bias reduction
allowance (DEBRA)
• On 11 May 2022, European Commission proposed a debt-
equity bias reduction allowance, or DEBRA, to help
businesses access the financing they need and to become
more resilient
• This measure will support businesses by introducing an
allowance that will grant to equity the same tax treatment
as debt. The proposal stipulates that increases in a
taxpayer's equity from one tax year to the next will be
deductible from its taxable base, similarly to what happens
to debt

21
 The DEBRA in practice (I)
• The equity allowance would be computed based on the difference
between net equity at the end of the current tax year and net equity at
the end of the previous tax year, multiplied by a notional interest rate.
This means that the allowance would be granted only for the sum of
equity increases over a specific year
• The notional interest rate is the 10-year risk-free interest rate for the
relevant currency, and increased by a risk premium of 1% or, in the
case of SMEs, a risk premium of 1,5%
• The allowance on equity is deductible for 10 consecutive tax years, as
long as it does not exceed 30% of the taxpayer's taxable income

22
 The DEBRA in practice (II)
• Moreover, if the allowance on equity is higher than the
taxpayer’s net taxable income, the taxpayer may carry
forward the excess of allowance on equity without a time
limitation
• Taxpayers will also be able to carry forward their unused
allowance on equity which exceeds the 30% of taxable
income, for a maximum of 5 tax years
• Lastly, the proposal introduces a reduction of debt interest
deductibility by 15%, so to better mitigate the debt-equity
bias, not only from the equity side but also from the debt
side
23
Impacts of the DEBRA proposal
• Impacts computed with the use of a general
equilibrium model « CORTAX »
• Reduction of the EU average debt share by
3.03 to 3.27 percentage points
• Reduction of the CIT rate, cost of capital,
increase of investment, wages and GDP
• Small decrease of CIT revenues and
increase in total tax revenues
24
 The impact of ACE on
investment in Belgium
• The ACE corporate tax reform came into effect in Belgium in 2006
and is now being phased out in spite of the new EU proposal
• Nils aus dem Moore (2015) has analysed the impact of this reform on
the investment level of SMEs
• The results provide highly significant and robust estimates that
correspond to an increase in investment activity by small and medium-
sized firms of about 3 percent in response to the ACE reform.
• This may be surprising as the majority of deductions went to large
companies. However supply side and trickle down effects may explain
the result. The large firms having witnessed an improvement of their
economic situation would have increased their orders from SME’s

25
 Issues analysed in the OECD study
on taxation and growth
• Do tax structures independently from the
total tax burden have an impact on GDP per
capita and rate of growth?
• To what extent do tax systems affect
investment and productivity?
• Does industry and company structure matter
as far as the impact of taxation is
concerned?
26
 Empirical results
• Econometric analysis suggests that taxes can be
ranked as follows in increasing order of negative
impact on growth: 1. taxes on real estates 2.
consumption taxes 3. Personal income tax 4.
Corporate income tax
• Corporate income taxes have a more negative
impact on dynamic and profitable companies
• Income tax progressivity seems to reduce GDP per
capita
27
 Tax policy implications
• Growth can be increased at least in the short
to medium term by reducing income tax and
increasing taxes on real estate and
consumption
• Reducing corporate income tax can increase
investment and productivity
• Reforming labour taxation matters more for
economies with high labour intensity
28
 The equity efficiency trade off
• A shift from income to consumption taxes is
generally considered as regressive (increasing
income inequality)
• Reducing marginal tax rates of income taxes is
also regressive
However:
• Real estate taxes are not necessarily regressive
• The economic incidence of corporate income taxes
may to some extent fall on workers
29
 Shifting tax away from labour
• Economic research suggests that income taxation is one of the most
growth-distortive types of tax.
• Taxes on labour (including social security contributions):
(i) reduce incentive to take up jobs or to work longer
hours, or to invest in education and training
(ii) reduce competitiveness due to pressure on labour
costs

• To enhance growth, productivity and employment rely more on:

(i) taxes on immovable property
(ii) consumption taxes
(iii) environmental taxes

30
in Graph 2.4. in
br
Graph 2.4: Need and scope to reduce labour taxation by means th
of a shift to less distortive taxes
re
co
in
Se
ta
de

A
fri
of
sc
re
pe
th
St
Source: Commission services.
in
31
fo
As most of the data used in this section was not re
 Effectively targeting the
reduction in labour tax (I)
• Given the public finance constraints, need to design the tax reduction
so as to ensure the best possible effect on employment
• The first step is to identify the source of the employment problem
(demand or supply, cyclical or structural )
• The effectiveness of the reduction in tax labour in reducing the
unemployment depends on the interaction of the demand and supply
sides of the market, which is related to the behavioural responses of
businesses and workers, measured in terms of elasticities
• It is important to consider the economic incidence of the tax change
which can be different from the legal incidence
• The cost of legal security legally borne by the employers can in
practice be borne by employees in the form of lower net wages

32
 Effectively targeting the
reduction in labour tax (II)
• Labour demand and supply problems can affect specific groups (low
skilled, young people, elderly, migrants, second earners)
• Changes in labour taxation are unlikely to be the most effective tool in
mitigating cyclical unemployment or structural problems of
mismatches between supply and demand
• Reducing labour taxation can be effective in addressing problems
resulting from insufficient incentives and wage rigidities
• The empirical literature provides estimates of labour supply elasticities
in the range of 0.4 to 0.3 and labour demand elasticities in the range of
0.3
• This confirms that demand and supply are responsive to taxation and
that taxation can be used as a tool to address labour market problems

33
 Elasticity of labour demand
• Elasticity of labour demand measures the responsiveness of demand
when there is a change in the wage rate
• Factors affecting the wage elasticity of demand for labour:
– Labour costs as a % of total costs: When labour expenses are a high % of
total costs, then labour demand is more wage elastic
– Ease and cost of factor substitution: Labour demand is more elastic when
a firm can substitute easily and cheaply between labour & capital inputs
– Price elasticity of demand for the final product: This determines whether a
firm can pass on higher labour costs to consumers in higher prices. If
demand is inelastic, higher costs can be passed on
– Time period – in the long run it is easier for firms to switch factor inputs
e.g. bring more capital in perhaps replacing labour and is higher for those
on fixed-term contracts and low-skilled workers

34
 Elasticity of labour supply
• Elasticity of labour supply measures the extent to which labour supply
responds to a change in the wage rate in a given time period
• Factors influencing the elasticity of labour supply
– The elasticity of labour supply is affected by the specific skills and educational
requirements: the more complicated the skills and the higher, or longer to achieve,
the qualifications required, the more inelastic the supply
– If the role has a significant vocational aspect, such as nursing, individuals are less
sensitive to changes in pay making the supply less elastic
– The elasticity of supply is higher for specific groups (women , single mothers, men
at the beginning or end of their careers)
– The elasticity of labour supply is mainly determined by the elasticity at the
extensive margin (decision whether to work or not) rather than at the intensive
margin (how many hours to work)

35
 The inactivity trap
• The inactivity trap - or the implicit tax on returning to work for
inactive persons - measures the part of additional gross wage that is
taxed away in the case where an inactive person (not entitled to receive
unemployment benefits but eligible for income-tested social
assistance) takes up a job
• This indicator measures the financial incentives to move from
inactivity (and social assistance) to employment. The 'trap' indicates
that the change in disposable income is small and, conversely, the
work-disincentive effect of tax and benefit systems is large
• Taxation is one element that contributes to the total inactivity trap;
other factors include the withdrawal of benefits

36
pronounced traps are in the Netherlands, Slovenia and Finland. It is worth noting however, that
whilst this ranking might be attributed to their generous out-of-work welfare systems, inactivity in
these Member States is well below EU-27 average. Well-designed welfare systems providing
adequate support to unemployment people to find work may speed up labour market re-entry, as

Inactivity trap for low income

will good skill levels and robust labour demand. The contribution of taxation to the inactivity trap is
greatest in Romania and it is lowest in Denmark followed by Spain and Cyprus.

a)
earners, 2020 (I)
GRAPH 48. INACTIVITY TRAP FOR LOW INCOME EARNERS, 2020
50% of average wage (AW) and b) 67% of average wage (AW)

37
 Inactivity trap for low income
earners, 2020 (II)

Source: European Commission, DG ECFIN, Tax and benefits database, based on OECD tax/benefit model (updated 05 Mar
2021).

38
(137)
A person not entitled to receive unemployment benefits, but eligible for income-tested social assistance.
proportions are found in Cyprus (8.8 %), Germany (11.6 %) and Spain (16.7 %).

GRAPH 46. TAX WEDGE COMPOSITION FOR A SINGLE EARNER ON THE AVERAGE WAGE,
2020

Source: European Commission, DG ECFIN, Tax and benefits database, based on OECD tax/benefit model (updated 05/03/2021).
Notes: (1) Member States are ranked in descending order by the level of the employer SSC.
(2) Family allowances do not influence the data as the data is for a single earner with no spouse or children.

39
 Decreasing tax pressure on second
earners
• Second earners in couples which are very often female are
a group of particular importance
• In some Member States of the Euro Area, the gap in
employment rates exceeds 15 percentage points
• This is at least partly due to very high negative incentive
effects embedded in the tax and benefit systems for second
earners
• Female workers are more responsive to financial incentives
as regards their labour supply
• Need to move away from joint taxation of couples where
applied
40
GRAPH 49. INACTIVITY TRAP FOR SECOND EARNERS, 2020

Source: European Commission, DG ECFIN, Tax and benefits database, based on OECD tax/benefit model (updated March
2021).
Notes: (1) The data are for a second earner on 67 % of the average wage in a two-earner family with two children; the
principal earner is on the average wage.
(2) ‘Contribution of taxation (including SSCs)’ refers to the percentage of additional gross income that is taxed away
41
due to taxation and SSCs (other elements contributing to the low wage trap are withdrawn unemployment benefits,
 Low-wage trap
• A ‘low-wage trap’ can arise from the rate at which taxes are increased
and benefits withdrawn as earnings rise. For second earners, as with
the inactivity trap, taxation plays a key role in determining the level of
the low-wage trap in most Member States. Many low-wage second
earners are women working part-time. Graph 34 shows the percentage
of additional earnings ‘taxed away’ when second earners increase their
earnings from one third to two thirds of average wage, e.g. by working
longer hours
• Other factors, such as the availability of affordable, high-quality
formal care services (including childcare) and well-designed work-life
balance policies, can influence people’s decisions as to whether to
work longer hours.

42
GRAPH 50. LOW WAGE TRAP FOR SECOND EARNERS, 2020

Source: European Commission, DG ECFIN, Tax and benefits database, based on OECD tax-benefit model (updated Mar 2021).
Note: A second earner whose wages increase from 33 % to 66 % and the principal earner is on 100 % of AW, with two children
43
 Property and housing taxation (I)
• The end of the price bubble in the US housing
market has been an important factor triggering the
financial crisis
• With decreasing house prices, credits and
securitized financial products incorporating them
became assets leading to a worldwide credit
crunch
• Taxation of housing is therefore a potentially
relevant issue
44
 Property and housing taxation (II)
• Housing is frequently subject to special tax
treatment
• Imputed rents and capital gains on primary
residence are rarely taxed
• Mortgage interest relief generates distortions by
providing an incentive to leverage against housing
and invest own funds in other assets
• Favourable tax treatment likely to be capitalized in
house prices, at least in the short term and can
increase housing price volatility

45
 Property and housing taxation (III)
• No evidence however that taxation was the main driver of
house prices (e.g. strong price increases also in countries
with unfavourable tax treatment)
• There is evidence that favourable tax treatment for home
ownership leads to higher ratios of mortgage debt
• Reducing tax distortions would help avoid macroeconomic
imbalances and increase efficiency
• Timing needs to be carefully considered taking into
account economic developments in the housing sector

46
 Property and housing taxation (IV)
• Reliance on property taxation varies considerably
between euro area Member States
• Transaction taxes discourage transactions that
would allocate properties more efficiently
• The tax also negatively impact labour mobility
• No evidence that transaction taxes help to reduce
the risk of housing market bubbles
• Room to shift overall tax burden as well as
transaction taxes on recurrent taxes on real estate

47
Tax reforms in EU Member States

User-cost of owner-occupied housing and the

Graph 3.5:
contribution of various taxes to this cost
User cost of owner-occupied housing and the contribution made by various taxes to this cost

2.5 8.0

7.0
2.0
6.0
1.5
5.0
percentageHpointsH

1.0
4.0
%
0.5 3.0

2.0
0.0
1.0
!0.5
0.0
!1.0
!1.0

!1.5 !2.0
BE BG CZ DK DE EE IE EL ES FR HR IT LV LT LU HU MT NL AT PL PT RO SI SK FI SE UK
transferHtax recurrentHtax mortgageHtaxHrelief capitalHgainsHtax currentHtaxHonHimputedHrent tax!adjustedHcostH(rhs)

Notes: The tax-adjusted user cost is expressed as a percentage of an additional euro of house value (scale on the right-hand axis). The bars (scale on the
left-hand axis) show the contribution made to this cost by various types of tax. No data is available for Cyprus. The data is based on the tax rules in
place in each Member State in May 2015 that would apply to the purchase of an existing dwelling. For the underlying assumptions and methodology,
see the 2014 Tax Reforms report.
Source: Commission services.
48
The benefits of environmental tax
reforms (I)
• The concept of environmental tax reforms is
based on the idea that environmental tax
revenues can be used to reduce taxes
generating distortions in the economy such
as labour taxes
• This could generate a double dividend:
improve the environment while increasing
employment or economic efficiency
49
the polluter pays.

GRAPH 26. OVERVIEW OF ENVIRONMENTAL POLICY INSTRUMENTS

Environmental policy instruments

Non-market based
Market based policies
policies

Revenue Awareness
Subsidies Command &
based raising and
control
instruments Information
regulation

Quantity Indirect
Price based Direct E.g. E.g.
based subsidies (tax
instruments instruments Subsidies • Standards • Information
incentives) • Emission limits, • Labelling
• Best available • Environmental
E.g. E.g. E.g. E.g. technology education
• Taxes • Emissions • Tax allowance • Investment
• Charges Trading (with • Tax credit subsidies
• Fees auctioning

Source: European Commission, 2020

Note: Some policies, such as feebates, are revenue-neutral and do not fit in this overview.

Environmental taxation (taxes on energy, transport, pollution and resources(79)) can

50
encourage behavioural change and help meet environmental targets, in addition to
raising revenue. Environmental taxes are considered to be among the least economically
The benefits of environmental tax
reforms (II)
• Already advocated in 1993 in the White Paper on Growth,
Competitiveness and Employment, and again in the
context of the EU 2020 strategy. Taxation is likely to play
an important role in the new European Green Deal
• Implemented during the 90s by several Member States.
However, decrease of environmental taxes since 2000
• The double dividend assumption is controversial and the
outcome can be affected by imperfections on the labour
market
• Revenue recycling is an advantage of environmental taxes
as compared with regulation
51
 Political economy aspects of
environmental taxation (I)
• Member States’ experience of using environmentally-
related taxes has demonstrated that this type of taxation
can offer an effective and efficient way of helping to
achieve environmental policy objectives
• Governments often, however, face political economy
obstacles when implementing environmental taxes, and
therefore have to convince citizens in order to make use of
these taxes successfully

52
 Political economy aspects of
environmental taxation (II)
• The potentially regressive nature of environmental taxes as well as
more generally environmental policies, and energy taxes in particular,
is seen as a major barrier to increasing their use
• However improving the environment can in itself have a progressive
impact as low income households are often living in areas more
affected by pollution
• There is, furthermore, substantial empirical evidence suggesting that
not all environmental taxes have a regressive distributional effect
• Taxes on domestic heating fuels and electricity are found to be
regressive in almost all studies, while transport-related taxes (taxes on
fuels and vehicles) are demonstrated to be less regressive, or even
progressive, depending on the country considered

53
 Political economy aspects of
environmental taxation (III)
• The distributional effects of many environmental and climate policies can be
managed by: compensating low income households for any adverse effects,
designing the policies in a way that reduces adverse effects, favouring policies
having a progressive effect. Providing support for insulation of social housing
is an example of a policy having a progressive effect
• The use of tax reductions or exemptions on domestic heating fuels mitigates
the regressive character of these taxes, but reduces their effectiveness in
achieving environmental objectives. These reductions and exemptions create
additional distortions and increase the cost of achieving environmental
objectives
• Giving targeted support to those who genuinely need assistance allows the
standard tax rate to be maintained, and is a more efficient solution
• It does not affect the influence of the tax on behaviour while reducing the
negative effect of the tax on household income

54
 Political economy aspects of
environmental taxation (IV)
• Another common barrier to more widespread use of environmentally-
related taxes is concern about the potentially harmful effect on the
competitiveness of the sectors concerned
• Governments face especially strong opposition to resource taxes from
sectors whose use of resources is highly inelastic, and from the interest
groups representing them
• Environmental taxes can cause shifts in production in certain industrial
sectors, especially where the commodity is standardised and
internationally traded (e.g. copper and aluminium), and equivalent
taxes are not levied in other countries. International coordination is
important in order to prevent these shifts in production

55
 Political economy aspects of
environmental taxation (V)
• The administrative and enforcement costs of implementing
environmentally-related taxes should be taken into account when
deciding to use this type of taxation, and when designing the tax
• The public needs to understand the reasons for introducing the tax, and
its desired effect. Experience shows that in cases where environmental
problems were visible to a large proportion of the population,
environmental taxes could frequently be implemented without major
problems. Recent cases demonstrate however public opposition to
increased fuel taxes
• Environmentally-related taxes are not always sufficient to address a
particular environmental problem on their own. They are most often
applied alongside regulatory instruments. Taxes on emissions are,
similarly, applied in conjunction with air quality standards
56
 Environmental taxation and the
European green deal
• The Communication of 11.12.2019 on the European green deal notes
that:
– Well-designed tax reforms can boost economic growth and resilience to climate
shocks and help contribute to a fairer society and to a just transition
– They play a direct role by sending the right price signals and providing the right
incentives for sustainable behaviour by producers, users and consumers
– At national level, the European Green Deal will create the context for broad-based
tax reforms, removing subsidies for fossil fuels, shifting the tax burden from labour
to pollution, and taking into account social considerations
– There is a need to ensure rapid adoption of the Commission’s proposal on value
added tax (VAT) rates currently on the table of the Council, so that Member States
can make a more targeted use of VAT rates to reflect increased environmental
ambitions, for example to support organic fruit and vegetables

57
 Revision of the energy taxation directive (I)
• The Energy Taxation Directive (2003/96/EC) (ETD) lays down EU rules
for the taxation of energy products used as motor or heating fuels and
electricity. It sets minimum rates to avoid harmful energy tax competition
among Member States. The Directive also aims to allow Member States to
use energy taxation to support other policies, such as environmental
protection, climate objectives, energy efficiency, etc

• An evaluation of the Directive in 2019 found that it is no longer fit for

purpose, given changes in energy markets and technology, and the
strengthened EU commitments on climate and environment. The proposed
revision of the Energy Taxation Directive is part of the European Green
Deal. It will form part of the ‘Fit for 55 Package’ of proposals to deliver on
the EU’s enhanced climate ambitions

58
 Revision of the energy taxation
directive (II)
• The current situation of the ETD raises several problems:
– Persistence of fossil fuel subsidies: Highly divergent national rates are applied in
combination with a wide range of tax exemptions and reductions
– The ETD is not in line with EU policy objectives: There is a lack of alignment
between the ETD and, among others, the EU Emission Trading System, the
Renewables Directive and the Energy Efficiency Directive. The Directive does not
adequately promote greenhouse gas emission reductions, energy efficiency, or
alternative fuels
– The ETD does not achieve anymore its primary objective in relation to the proper
functioning of the internal market, as the minimum tax rates have lost their effect.
In the absence of an indexation mechanism, their real value has eroded over time
and they no longer have a converging effect on national rates

59
 Revision of the energy taxation
directive (III)
• The main objectives of the review of the ETD are:
– i) Aligning taxation of energy products and electricity with EU energy and climate
policies with a view to contributing to the EU 2030 targets and climate neutrality
by 2050 in the context of the European Green Deal
– ii) Preserving the EU internal market by updating the scope and the structure of
rates as well as by rationalising the use of optional tax exemptions and reductions
by Member States
– iii) preserving the Member States’ revenue raising capability
• The impact assessment shows that the proposed revision would further
decrease emissions of greenhouse gases whilst mitigating to a large
extent the decrease of energy tax revenues that would result from the
expected decrease of consumption of fossil fuels in the context of the
EU green deal

60
 Revision of the energy taxation
directive (IV)
• Positive but small positive impacts on investment, GDP and employment can
be expected depending on the scenario of revenue recycling. The revenue can
be recycled for instance through reductions in labour costs, reduction of the
cost of capital, subsidies for the purchase of clean capital goods
• The measures could have possible direct social impact because of possible
revision of rates and of the exemptions and reductions for households and
industry
• While tax increases for fossil fuels in the transport or heating sector are
powerful incentives towards behavioural change, in the short term, consumers
may not be easily able to change their consumption patterns when an
important share of their income is involved
• The final impact depends on the way in which the redistributive effect is
compensated via accompanying measures through social policy and welfare
systems

61
Figure 1: Logic for Intervention

62
2.1 What are the problems?
GRAPH 29. NOMINAL TAX RATES ON PETROL AND DIESEL USED AS PROPELLANTS
(PRIVATE USAGE), 2019

Source: European Commission, DG Taxation and Customs Union calculations.

Notes:
(1) Marginal tax rates show the excise duty rates applicable in Member States in January 2019; they exclude VAT, but include
any applicable carbon taxes. 63
(2) The amount of EUR/t CO2 emitted is calculated based on emissions per 1 000 l of fuel burnt (2 371 and 2 664 t CO2 per
1 000 l of petrol and diesel, respectively) and therefore not well-to-wheel emissions (which also take account of emissions from
International aspects of corporate
taxation
• International aspects of corporate taxation have recently attracted
considerable attention at G20, OECD and EU level
• The main focus has been on base erosion and profit shifting (BEPS):
Gaps and mismatches in the current international tax rules can make
profits disappear for tax purposes or allow the shifting of profits to low
or no-tax jurisdictions where the business has no or little economic
activity
• Profit shifting can be implemented through different channels: transfer
pricing among parts of the same multinational group, the location of
intangible assets, adjustments in the financial structure of the
subsidiaries of the multinational

64
 Base Erosion and Profit Shifting
(BEPS)
• BEPS refers to tax planning strategies that exploit gaps and
mismatches in tax rules to artificially shift profits to low or no-tax
locations where there is little or no economic activity or to erode tax
bases through deductible payments such as interest or royalties
• Although some of the schemes used are illegal, most are not. This
undermines the fairness and integrity of tax systems because
businesses that operate across borders can use BEPS to gain a
competitive advantage over enterprises that operate at a domestic level
• Moreover, when taxpayers see multinational corporations legally
avoiding income tax, it undermines voluntary compliance by all
taxpayers

65
 Empirical evidence about BEPS
• Research carried out by the OECD leads to estimates of 4 to 10% loss
of corporate tax revenues or USD 100 to 240 billion annually.
Effective tax-rates paid by large multinationals are estimated to be 4 to
8,5 percentage points lower than taxes paid by purely domestic
companies
• In a study comprising 51 countries, the IMF concludes that the
(unweighted) average revenue loss is about 5 % of current CIT
revenue – but almost 13 per cent in non-OECD countries
• A study commissioned by the European Parliamentary Research
Service finds that the revenue loss from profit shifting within the EU
amounts to about EUR 50-70 billion, equivalent to 17-23 per cent of
corporate income tax (CIT) revenue in 2013
• Many academic papers confirm empirical evidence in relation to
various profit shifting mechanisms 67
 Main actions under the OECD
BEPS action plan
• Addressing the tax challenges of the digital economy
• Neutralising the effects of hybrid mismatch arrangements. (Hybrid mismatch
arrangements exploit differences in the tax treatment of an entity or an
instrument under the laws of two or more jurisdictions to achieve double non-
taxation)
• Strengthening CFC (Controlled foreign corporations) rules which are designed
to prevent taxpayers with a controlling interest in a foreign subsidiary from
stripping the tax base of their country of residence by shifting income into a
CFC
• Limiting base erosion involving interest deductions and other financial
payments
• Preventing the granting of treaty benefits in inappropriate circumstances
• Aligning transfer pricing outcomes with value creation

69
 Main objections against the
OECD BEPS approach
• The OECD tries to repair the international tax system created in the
1920s. Under this system, source countries were allocated primary
taxing rights to the active income of the business, and residence
countries the primary taxing rights to passive income, such as
dividends, royalties and interest. This system is inappropriate in the
globalised environment of the 21st century
• The objective of aligning taxing rights with real economic activity will
not be achieved in a comprehensive and coherent way
• Additional unnecessary complexity is introduced
• The BEPS action plan may exacerbate tax competition for real
economic activity, which will lead to additional distortions as real
investment can be relocated for tax reasons rather than according to
comparative advantage
70
• What did recent discussions on international tax
reform focus on?
– Members of the Organization for Economic Co-operation and
Development (OECD) / G20 / Inclusive Framework worked on a global
consensus-based solution to reform the international corporate tax
framework
– The discussion focused on two broad work streams: Pillar One, the
partial re-allocation of taxing rights, and Pillar Two, the minimum
effective taxation of profits of Multinational Enterprises (MNEs)
– Pillar One aims to adapt the international rules on how the taxation of
corporate profits of the largest and most profitable MNEs is shared
amongst countries, to reflect the changing nature of business models,
including the ability of companies to do business without a physical
presence
– Pillar Two will set a floor to excessive tax competition. It aims to ensure
that multinational businesses are subject to a minimum effective level of
tax on all of their profits each year

71
• Members of the OECD/G20 Inclusive Framework on BEPS (the Inclusive Framework) agreed
on 8 October 2021 to the Statement on the Two-Pillar Solution to Address the Tax Challenges
Arising from the Digitalisation of the Economy.

The Two-Pillar Solution will ensure that multinational enterprises (MNEs) will be subject to
a minimum tax rate of 15%, and
will re-allocate profit of the largest and most profitable MNEs to countries worldwide.

Digitalisation and globalisation: challenges to the rules for taxing international business income,
which have prevailed for more than a hundred years and resulted in MNEs not paying their fair
share of tax despite the huge profits many of these businesses have garnered as the world has
become increasingly interconnected.

136 countries and jurisdictions, representing more than 90% of global GDP, have joined the
Two-Pillar Solution establishing a new framework for international tax and agreed a Detailed
Implementation Plan that envisages implementation of the new rules by 2023.
 Economic impacts of pillars 1
and 2
• Main results of the impact assessment carried out by the OECD:
– Modest increase in MNEs investment costs (EATR + 0,3 pp and
EMTR + 1,4 pp)
– Reduction of global investment by 0,1% of GDP
– Reduction of tax competition
– Reallocation of taxing rights would reach 125 Billion USD
– Corporate Income Tax revenue increases by around 150 Billion
USD
– Likely increase in compliance costs for MNEs and governments
• Uncoordinated unilateral tax measures would yield worse outcomes

77
• How does this fit with EU goals?

• The international tax reform at OECD-level is complementary to the

EU's tax agenda, which offers solutions that Europe needs in order to
support its Single Market and accelerate the post-COVID-19 recovery

• In May 2021, the European Commission published the Communication

on Business Taxation for the 21st Century

• The Communication set out a long-term vision to provide a fair and

sustainable business environment and EU tax system, building on the
progress made and the principles agreed in the global discussions. It also
sets out a tax agenda for the next two years, with targeted measures that
promote productive investment and entrepreneurship and ensure
effective taxation

78
 Minimum corporate taxation: the
EU proposal
• On 22 December 2021, the European Commission has proposed a
Directive ensuring a minimum effective tax rate for the global
activities of large multinational groups. The proposal delivers on the
EU’s pledge to move extremely swiftly and be among the first to
implement the recent historic global tax reform agreement, which aims
to bring fairness, transparency and stability to the international
corporate tax framework
• The proposal follows closely the international agreement and sets out
how the principles of the 15% effective tax rate – agreed by 137
countries – will be applied in practice within the EU. It includes a
common set of rules on how to calculate this effective tax rate, so that
it is properly and consistently applied across the EU
• Agreement reached in principle in the Council on 12 December 2022
79
 To whom do the rules apply
• The proposed rules will apply to any large group, both domestic and
international, including the financial sector, with combined financial
revenues of more than €750 million a year, and with either a parent
company or a subsidiary situated in an EU Member State
• Which entities do not fall under the scope of the rules?
• In line with the OECD/G20 Inclusive Framework agreement,
government entities, international or non-profit organisations, pension
funds or investment funds that are parent entities of a multinational
group will not fall within the scope of the Directive on the OECD
Pillar 2. This is because such entities are usually exempt from
domestic corporate income tax in order to preserve a specific policy
outcome

81
 The Home Inclusion Rule
• The effective tax rate is established per jurisdiction by
dividing taxes paid by the entities in the jurisdiction by
their income
• If the effective tax rate for the entities in a particular
jurisdiction is below the 15% minimum, then the Pillar 2
rules are triggered and the group must pay a top-up tax to
bring its rate up to 15%
• This top-up tax is known as the ‘Income Inclusion Rule’.
This top-up applies irrespective of whether the subsidiary
is located in a country that has signed up to the
international OECD/G20 agreement or not
82
 The Undertaxed Payments Rule
• If the global minimum rate is not imposed by a non-EU country where
a group entity is based, Member States will apply what is known as the
‘Undertaxed Payments Rule’
• This is a backstop rule to the primary Income Inclusion Rule. It means
that a Member State will effectively collect part of the top-up tax due
at the level of the entire group if some jurisdictions where group
entities are based tax below the minimum level and do not impose any
top-up tax
• The amount of top-up tax that a Member State will collect from the
entities of the group in its territory is determined via a formula based
on employees and assets

83
 Exceptions
• The rules provide for an exclusion of minimal amounts of income to
reduce the compliance burden. This means that when the revenues and
the profits in a jurisdiction are under a certain minimum amount, then,
no top-up tax will be charged on the profits of the group earned in this
jurisdiction, even when the effective tax rate is below 15%. This is
known as the de minimis exclusion
• Moreover, companies will be able to exclude from the top-up tax an
amount of income that is at least 5% of the value of tangible assets and
5% of payroll. This is called a ‘substance carve-out’
• The policy rationale for a substance carve-out is to exclude a fixed
amount of income relating to substantive activities like buildings and
people

84
Which problems could be addressed
by taxation in the financial sector?
• Costs of the crisis and high commitments from
Member States to support the financial sector
• VAT exemption of financial services leading to a
tax advantage for the financial sector in the range
of 0,15% of GDP
• Market failure and systemic risks in the financial
sector
• Distortions of competition in the single market

85
 Towards a tax on financial transactions
(FTT) in the EU? (I)
• Proposal adopted by the European Commission on 28
September 2011
• Tax levied on all transactions on financial instruments
when at least one party to the transaction is located in the
EU
• Exchange of shares and bonds would be taxed at a rate of
0,1% (X 2, to be paid by each party to the transaction) and
derivative contracts at a rate of 0,01% (X 2)
• Everyday transactions and loans not subject to the tax
• Revenue estimate € 57 billion annually

86
 Towards a tax on financial
transactions (FTT) in the EU? (II)
• By mid-2012, EU Finance Ministers decided at ECOFIN that they could not
reach unanimous agreement on the proposal for an EU-wide FTT in the
foreseeable future
• By end-September 2012, the Commission had received a request to this end
from a group of 11 Member States. They asked to be allowed to introduce a
common system of FTT based on the scope and objectives of the
Commission's initial proposal
• On 23 October 2012 the Commission proposed to the Council to authorise the
enhanced cooperation requested by 11 Member States
• The European Parliament gave its consent on 12 December 2012 and the EU
Council adopted a decision authorising eleven Member States to go ahead with
the requested enhanced cooperation on 22 January 2013
• The negotiations have not yet been concluded. Deep divisions remain in the
Reinforced cooperation group of Member States and Estonia has in the
meantime left
87
 Economic impacts (I)
• A comprehensive impact assessment of the proposal was
prepared
• The introduction of transaction taxes will reduce asset
prices and increase the cost of capital
• Output losses estimated between 0,55% to 1,76% of GDP
in the long run, in case of a rate of 0,1% on the exchange
of shares and bonds. However not all the aspects of the
proposal can be modelled
• Expected impact on employment: -0,20%
• Effects on market volatility inconclusive and depends on
the market structure. Empirical studies more often
conclude to a positive relationship between transaction
costs and volatility
88
 Economic impacts (II)
• The tax would curb high-frequency trading and
highly leveraged derivatives
• The instrument does not address the distortions of
financing decisions and the incentives to excessive
leverage created by the different treatment of debt
and equity
• A large part of the burden would fall on direct and
indirect owners of traded financial instruments:
the FTT would likely be progressive, impacting
particularly on households in the highest deciles of
the income distribution
89
 Evidence from the introduction of FTTs in
France (2012) and Italy (2013)
• New studies applying natural experiment methods
comparing the behaviour of assets affected by these taxes
to the behaviour of similar unaffected assets
• Strong and significant decline in trading volumes in
France. A high tax elasticity is found for high frequency
trading. Mixed evidence in Italy due to the complex design
of the tax
• A majority of papers finds evidence of an increase in
volatility and a decrease in liquidity

90
 IMF views on FTT
• A FTT does not focus on the core sources of financial instability
• Both in theory and practice, an FTT does not necessarily reduce
volatility
• An FTT would increase the cost of capital for all firms issuing
securities
• Not the best way to finance a banking resolution mechanism and a
poor proxy for the cost of public intervention
• A FTT has a cumulative and cascading effect which may largely fall
on final consumers rather than financial institutions
• It is difficult to distinguish desirable and undesirable transactions
• FTT is vulnerable to avoidance by engineering

91
 Other possible instruments (I):
financial activities tax
• Rationale :Tax on profits and remuneration paid to staff. Compensate
for the VAT exemption
• Revenue: Example of 5% FAT rate; Revenue estimates from 9 to 30
Billion € for the EU depending on the scope and assumptions
• Efficiency: similar to extra-profit tax as it may be designed to fall on
economic rents of financial sector; could also reduce size of the sector;
tax avoidance: perimeter and relocation issues
• Incidence: depends on definition of tax base, if solely pure rents are
taxed incentives to shift to consumers is reduced. Otherwise parts of
the burden might be shifted to purchasers of financial services

92
 Other possible instruments (II):
Bank levy
• Rationale: Levy/ tax on certain balance sheets positions of financial
institutions, with the revenues being channelled either into a crisis
resolution fund (Commission initial proposal) or the general
government budget (U.S.); tackle excessive risk-taking
• Revenue: Depending on rate and base, e.g. extrapolation of Swedish
proposal with 0.036% tax rate: €13 billion
• Efficiency: can foster financial stability by slowing the build up of
excessive risk positions in balance sheets, especially if risk-adjusted;
risk of tax avoidance: less prone to re-location
• Incidence: tax might be partly shifted to clients. (depends on concrete
design and level of competition in markets)

93
 Experience with bank levies in
the EU (I)
• In the wake of the crisis a number of countries have introduced bank
levies with the dual objective of raising revenues and increasing
financial stability
• On 17 June 2010, the European Council agreed that EU Member States
should introduce levies and taxes on financial institutions
• By the end of 2012, 13 EU Member States had introduced levies with
different rates and progressivity structures
• The most common type of levy taxes bank liabilities excluding equity
and guaranteed customer deposits
• Devereux, Johannessen and Vella (2013) have studied the impact of
these levies

94
 Experience with bank levies in
the EU (II)
• European levies have led banks to increase their equity asset ratio by
1-1,5 percentage points, more by increasing equity than by reducing
assets
• Increasing equity is in theory expensive for banks but the social cost is
reduced by the reduced value of implicit bailout guarantees
• Levies have interacted with financial regulation in unintended ways:
banks have also increased the riskiness of their assets while still
complying with regulatory capital requirements which impose a
minimum capital in relation to risk-weighted assets. The effect is more
important for large banks more likely to be constrained by these
requirements

95
 Taxing bonuses
• In line with the view that excessive bonuses have encouraged short
termism and risk taking in the banking sector
• The level of bonuses in the financial sector is well above the levels in
other sectors of the economy (average bonuses of 450 000 € in the UK
in 2007 before the crisis)
• Temporary taxes on bonuses have been implemented in France and the
UK, permanent measures in Greece, Ireland and Italy
• A cap on banker’s bonuses has also been agreed at EU level in April
2013 (100% of the annual salary or max 200% if shareholders agree).
The limit entered into force in January 2014

96
 The effect of the tax on bonuses
in the UK financial sector
• The UK introduced a one-off 50% tax on bonuses exceeding £ 25000
for the period December 2009 - April 2010
• Von Erlich and Radulescu (2012) have analysed the impact of this
measure
• Cash bonuses awarded to directors have decreased by 40% following
the introduction of the tax. However other compensation components
have increased leaving total remuneration unchanged
• If stock options are increased as a result, risk taking could even be
enhanced
• In order to effectively reduce risk taking, the tax base should include
all aspects of variable compensation

97
 Conclusions on financial sector
taxation
• Different objectives – different instruments

Contributing to crisis cost/ fiscal consolidation – FTT or FAT); search for

“double dividend” Financing of resolution of failing banks - Bank Levy

• Better regulation and supervision remains paramount

• The importance of global coordination depends on the instrument
• No consensus so far at international level on financial sector taxation
• Additional taxes/levies introduced at national level in the last years
• The implementation of some instruments such as bonus taxes can easily be
circumvented
• Levies and regulation can interact in unintended ways: hence the need for
better policy coordination

98
 Correcting inequality and
supporting social mobility
• The increasing wealth accumulation and the rise of
inequalities has led to an intense debate about the fairness
of tax systems
• Tax and benefit systems reduce inequality in all Member
States, but the scale of the effect varies
• The progressivity of the personal income tax system is an
important redistributive element
• Lower tax wedges on low income earners can lead to
higher long term output
• Recurrent property taxation could serve as a redistribution
tool if designed progressively
99
 Correcting inequality and
supporting social mobility
• Greater reliance on environmental taxation can lead to behavioural
change, reduction of pollution and support intergenerational fairness
• Underprivileged households may benefit more than others from less
pollution, as they tend to be more exposed to pollution than higher
income households, especially in urban areas
• Wealth and inheritance taxes can reduce inequality in wealth and the
income from it
• Social transfers also play an important role
• Providing access to quality education is crucial for fostering social
mobility

100
GRAPH 51. INCOME INEQUALITY, 2019

Source: Eurostat, EU-SILC (online data codes: ilc_li02 and ilc_di12).

Notes:
(1) Lhs: Gini coefficients (scale of 0 to 100). The value 0 corresponds to perfect equality (same income for everybody), while 100
corresponds to maximum inequality (all income distributed to one person and the others have nothing);
(2) Rhs: ‘at risk of monetary poverty rate’ as percentage of the total population. The indicator shows the proportion of the
population earning less than 60% of the median equivalised income after transfers and taxes;
(3) EU-27 average is calculated as the population-weighted average of individual national figures.

Wealth inequality is also important as lack of wealth makes it more difficult to access 101
credit, which has implications for skills formation and consequently labour income.
However, wealth inequality is difficult to measure and analyse, as wealth data is not easily
GRAPH 53. INEQUALITY AND AT RISK OF POVERTY, 2018

Source: Eurostat, EU-SILC, 2018, (online data codes:ilc_di12 and ilc_li21).

Notes: EU-27 average is calculated as the population-weighted average of individual national figures;
102 to
(1) The scale of Gini coefficients ranges from 0 to 100. A value of 0 corresponds to perfect equality, while 100 corresponds
maximum inequality.
(2) The ‘persistent at risk of poverty’ rate is defined as the percentage of the population living in households where the
GRAPH 55. TAX PROGRESSIVITY: THE DIFFERENCE BETWEEN THE TAX WEDGE AT HIGH
(167 %) AND LOW (50) EARNINGS (AVERAGE OF SIX FAMILY TYPES), 2019

Source: European Commission services based on Eurostat and OECD data.

Notes: (1) The indicator is based on tax wedge data for a variety of family compositions (single person, one-earner
couple, two-earner couples, all three with two children and with none) weighted according to their prevalence in
each MS. 103
(2) A two-earner couple is assumed to be someone earning 67 % of the average wage and the other earning 50 %
or 167 % of AW.
 Definition of indicators
• Gini coefficients: The scale ranges from 0 to 100. The
value 0 corresponds to perfect equality (same income to
everybody) while 100 corresponds to maximum inequality
(all income distributed to only one person and all the
others have nothing)
• At risk of poverty rate as percentage of the total
population: The indicator depicts the share of the total
population earning less than 60 % of the median
equivalised income after social transfers .

104
indicates the policy choices of Member States made regarding the progressivity of labour income
taxation, including the level of social contributions and family allowances & benefits.

Graph 2.30: Degree of progressivity of labour income taxation in EU Member States, 2017

60

50

40

30
in %

20

10

-10

SE
ES
CZ

HR
HU
EE
AT
FR

EL

SK

EU-28
IE

SI
FI
IT
UK

DE
LU

MT

DK

LT
NL

LV
RO
BG
BE

PT
PL

Tax wedge 50% AW Tax wedge 167% AW Difference

Source: European Commission services based on Eurostat and OECD data.

Notes: (1) The indicator is based on tax wedge data for a variety of family compositions (single, one earner couple, two
earner couples, all three without and with two children). Those are then weighted according to their prevalence 105
in the
respective Member State (2) The setup of two earner couples combines a person earning 67 % of the average wage with
either a person earning 50% or 167 % of the average wage (3) Recent data for Cyprus is not available. (4) Countries are
 Conclusions
• Important new proposals of tax reforms at EU level in 2021-2022
• Tax policy can play a significant role in promoting investment,
entrepreneurship, innovation, economic growth and employment, and more
generally sustainable development
• EU competence in the field of taxation strongly linked to the internal market
• The 2008-2009 economic and financial crisis had an impact on the
international tax policy agenda by promoting issues such as combating tax
avoidance and financial sector taxation
• G20/OECD/EU cooperation led to some breakthroughs in particular in the
field of international corporate taxation. The agreement on minimum
corporate taxation is an important example
• The revision of the energy taxation directive will form part of the fit for 55
package and contribute to reaching the objectives of the EU green deal

106
 Sources used in this presentation
• European Commission and OECD websites
• European Commission, Tax policies in the European Union, 2020 Survey
• Hemmelgarn, T., Nicodème, G., Tasnadi B., and and Vermote, P., Financial
transaction taxes in the European Union, European Commission, Taxation
paper n° 62
• Johansson, A., Heady , C., Arnold, J., Brys, B. and Vartia, L. (2008), Taxation
and economic growth, OECD Economics Department, Working Paper 620,
OECD publishing
• Devereux,M., Maffini,G. and Xing, J. (2015): Corporate tax incentives and
capital structure, evidence from UK tax returns, Oxford University Centre for
Business taxation, WP 15/07
• Michael Devereux, Niels Johanneson, John Vella, Can taxes tame the banks,
Evidence from European bank levies, EPRU working paper series n°2013-05

107
 Acronyms (I)
• ACE: allowance for corporate equity
• AROP: at risk of poverty
• AW: average wage
• BEPS: base erosion and profit shifting
• CIT: corporate income tax
• DEBRA: debt equity bias allowance
• EATR: effective average tax rate
• EMTR: effective marginal tax rate
• ETD: energy tax directive
• FAT: financial activities tax
• FTT: financial transactions tax

108
 Acronyms (II)
• MNEs: multinational enterprises
• SMEs: small and medium sized enterprises
• PIT: personal income taxes
• SSC: social security contribution

109