Tax Systems and Tax Reforms in Europe

Luigi Bernardi, Paola Profeta

• Publisher: Routledge
• Year: 2004
• ISBN:
  9781134352760
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

The last decade has seen important changes taking place in the tax regimes of many European countries. A comprehensive picture of what is happening in European fiscal systems has not been easy to find - until now. This impressive book featuring contributions from leading scholars, will be of great interest not only to academics but also to those involved in the financial sectors across the world.

Part I
Main topics in European tax systems and tax reforms

1 A comparative view of selected European countries

Luca Gandullia¹

Introduction and main conclusions

The structure and evolution of the European tax systems over the past 30 years confirms the peculiarities of the EU area compared with the main international experiences outside Europe (US and Japan) and more generally compared with the OECD area ( Joumard 2001; van den Noord and Heady 2001; Cnossen 2002). In the EU area the tax burden is, on average, higher than in the OECD area; European countries rely more on social security contributions and less on consumption taxes; a higher share of tax revenues is allocated to the social security sector and a lower share to sub-national governments; taxes on labor and their contribution to total tax revenues are higher in Europe than in the OECD area. However the European averages conceal marked differences across individual countries. Tax ratios, tax structure by legal and economic categories and the allocation of revenues across levels of government differ markedly between the seven selected countries, even if some evidence shows that, more recently, a process of slow convergence is ongoing.

Up to the mid-1980s, country divergences within Europe increased considerably, while, over the last 15 years, the isolationism of individual countries has been largely reversed (Messere 1998), most likely as a consequence of some common pressures (growing globalization, international tax competition, the influence of the European Union at both macro and micro level). Looking at the seven selected European countries (France, Germany, Ireland, Italy, the Netherlands, Spain and the UK), some common trends in the recent evolution of tax systems or in reforms currently under way may be identified: a traditional rate-cutting, base-broadening reform both in the personal and corporate income taxes; efforts to strengthen the horizontal and vertical equity of the tax system at the lower end of the income scale; efforts to reduce the tax burden on lower-paid labor and to foster work incentives; the growing use of tax systems to deliver social benefits; the reorientation of business tax incentives to selective objectives and the use of the tax system to correct market failures (for instance R&D and environment).

No radical tax reforms occurred during the 1990s. Changes enacted were made mainly through continuous updates of the tax codes. The main non-marginal tax reforms occurred in Spain in 1998 (OECD 2000b), in Italy in 1997 (OECD 2000d) and in Germany in 2000 (Keen 2002a), but just the Italian reform can be seen as innovative, especially in the sector of capital income taxation (Guerra 1998; Bordignon, Giannini and Pantegh-ini 2001; Chapter 8, this volume).

Some common issues have arisen in the recent discussion of tax design. (i) Tax equity. After a period where tax reforms placed more emphasis on efficiency than on equity, in the recent years a number of tax measures have been introduced to achieve horizontal equity objectives and to strengthen progressivity at the lower end of the income scale. (ii) Competitiveness. A number of countries have planned reforms where competitiveness is one of the main motivations; tax measures specifically targeted to increase national competitiveness have been introduced with regard to financial capital, real capital and other production factors (mainly labor). (iii) Innovation. The broadening of tax bases have been followed by the reorientation of tax incentives to selectively stimulate innovation and growth, mainly in four areas (small firms, R&D investments, venture capital and stock options). (iv) Fiscal relations across levels of governments. The structure of fiscal relations across levels of government is changing in all the selected experiences, but the distribution of tax powers is still not definite; some recent evidences prefigure a lower redistribution pattern of the whole tax system in the future.

This chapter is organized as follows. First, some indicators of the macro structure and evolution of the selected tax systems over the period 1970–2000 are presented, focusing on tax ratios by legal and economic categories and on the allocation of revenues across sectors of government. Second, some common features of the current tax systems (personal and corporate income taxes and consumption-based taxes) are illustrated, presenting some indicators to measure and compare their equity and efficiency. Finally, some common micro-policy issues that have arisen recently in the discussion of tax design in the selected European experiences are discussed.

Tax systems: structure and developments

Even if it’s only a rough indicator of the tax burden across time and countries, the ratio of taxes to GDP is a useful scaling factor and a signal of the country’s preference for the size of the public sector (OECD 2000a). According to OECD (2002a)² in the past 30 years (1970–2000, see Table 1.1) tax ratios generally increased in OECD countries (by 9.1 percentage points) and 15 EU countries (by 11.2 percentage points). For the selected EU countries, the rise has been lower (about eight percentage points). More recent developments (2001) suggest the trend increase in the OECD area may be ending. Apart from France, the provisional data for 2001 show light decreases (Ireland, Germany, the Netherlands and Italy) or constant trends (Spain and the UK).

Table 1.1 Total tax revenue as a percentage of GDP

The trends have been different over time and between countries. In the period 1970–2000, the ratio increased in six countries (Spain, Germany, UK, Italy, the Netherlands and France) and stayed constant in Ireland. The figures for Italy and Spain are the highest (respectively, 61 and 116 percent); in these countries, the 1970 ratios were the lowest. On average, both in the OECD countries and in the 15 EU countries, the main portion of these changes occurred during the 1970s and, to a lesser extent, during the 1980s. The pattern of individual countries has been different. For instance, in Italy, the increase in the tax-to-GDP ratio was higher during the 1980s than in the previous decade. In the 1990s, up to 2000, while the ratios decreased markedly in Ireland and the Netherlands, in France, Germany and Spain they increased at an average rate of about 0.24 percentage points per annum. In the same decade Italy registered the highest increase in the tax-to-GDP ratio (from 38.9 percent to 42 percent).

At the end of the period (2001) the difference between the highest ratio (France) and the lowest (Ireland) still remains significant (16.2 percentage points), even if the figures suggest that the tax ratios of individual states moved closer to the average. The latest available data (2000) confirm that, in the EU area, the tax burden is on average higher than in the OECD area and the difference during the period 1970–2000 has increased from 2.1 to 4.2 percentage points.

As the total tax ratio has risen sharply, the tax structure by legal tax categories, measured as the distribution of tax revenue among major taxes (income taxes, taxes on goods and services, social security contributions and property taxes), has changed over time (see Table 1.2). Currently, the tax structure of the OECD area differs from that of the European area mainly in respect of two items: social security contributions (higher in the EU countries) and taxes on goods and services (lower in the EU countries). But in the last two decades, the differences between the two areas decreased. For instance, the difference between the relative importance of social security contributions in the OECD area and in the EU area has decreased from about seven percentage points (1980) to 2.7 percentage points (2000). This is the effect of two opposite trends registered in the two areas: while the ratio has risen on average in the OECD countries, it has decreased in the 15 EU states. Within Europe the main share of this reduction comes from the seven selected countries.

In Europe the current tax mix is composed of taxes on goods and services (30 percent), social security contributions (28.4 percent), personal income tax (25.6 percent), followed by corporate income tax (9.2 percent) and property taxes (5 percent). In the last two decades a shift has occurred from the personal income tax and social security contributions to the corporate income tax and the property tax.

The seven selected countries vary considerably in the relative importance of these main revenue sources. Table 1.2 shows clearly the peculiarities of the “Anglo-Saxon model” compared to the other countries. In the UK and Ireland, income taxes and consumption taxes account for a much higher share of total tax revenues, while social security contributions account for approximately half of the European average. Italy reflects exactly the average European model of taxation, while the remaining countries are all characterized by the fact that they rely heavily on social security contributions and less on the personal income tax (France, Spain and the Netherlands) or on corporate income tax and property taxes (Germany).

Table 1.2 also gives explanations about the different incidence of taxes on GDP between the OECD and the EU areas and between different countries within Europe. On average the higher tax burden on GDP in the European area (about four percentage points in 2000) is explained by the higher incidence of social security contributions and payroll taxes (1.9 percentage points), followed by the personal income tax (0.9) and taxes on goods and services (0.7). Both the corporate income tax and the property taxes are in line with the OECD average.

In 2000, within the EU some countries (Table 1.1) show higher tax burden than the European average (France, for example), while others are in the opposite situation (Germany, Ireland, Spain and the UK, for example). In France this is explained by the relatively higher incidence of social security contributions and property taxation, while both income and corporate taxes are under the European average. The lower tax burden in the Anglo-Saxon countries is mainly due to the incidence of social security contributions, while in Germany and Spain direct taxes and taxes on goods and services are under the European average.

Table 1.2 Tax structure: tax revenue of major taxes as a percentage of total tax revenue and GDP

In the countries that registered an increase in tax-to-GDP ratios during the 1990s (France, Germany, Italy and Spain), the largest part of the increases has taken the form of higher personal and corporate income taxes (France), social security contributions and consumption taxes (Germany and Spain), while Italy used a mix of increases in the personal income tax, property and consumption taxes.

Selected countries also differ in prevailing fiscal arrangements between the central and the sub-central levels of government. In particular, Table 1.3 illustrates the attribution of tax revenues to the three sub-sectors of general government (central, local and social security sectors).³ Taking into account only unitary countries, the tax allocation structure, that was different in the 1970s, currently appears to be very similar between OECD and EU unitary countries, with the largest part of tax revenues (63 percent) attributed to the central government, about one-quarter to the social security funds and just 12 percent to local governments.

Within the EU (excluding Germany) the selected countries show, on average, a higher share of revenues allocated to the security sector and a lower share to local governments. But this is the result of extremely different patterns of individual countries. The combined share of sub-central governments in total tax revenues in 2000 shows a wide variation from 1.8 percent in Ireland and 3.4 percent in the Netherlands to 11.4 percent and 16.9 percent in Italy and Spain respectively. In the last 25 years, two clear trends can be identified: a move to fiscal centralization in the UK and Ireland and an opposite move in Italy and Spain.

Table 1.3 Attribution of tax revenues to sub-sectors of general government

A variety of taxes are used by sub-national authorities in the EU. The pattern of taxes is illustrated by Table 1.4, that reports the percentage contribution to each country’s total sub-national tax revenue accounted for in four main sets of taxes used in OECD classifications. Figures don’t allow the drawing of general conclusions about the choice of taxes by local governments. On one side Ireland and the UK rely exclusively on property taxation; on the other side, Germany, Italy, Spain, the Netherlands and, to a lesser extent, France seem to use a composite mix of local taxes; apart from France, these countries make use of local income and profits taxes, even if a decreasing trend can be found in Germany, Italy and Spain.

Moreover it should be mentioned that two countries (France and Italy) have “other taxes” with significant yields. In each case this is explained by the presence of two local business taxes (the French “taxe professionnelle” and the Italian regional tax on productive activities – IRAP), whose tax base is some mixture of two or more different components (profits, payrolls, interest and property). Finally, looking at the structure of local tax systems over time, the only clear evidence (with the exception of Germany) seems to be the growing relevance of local property taxation.

A closer look at the incidence of individual tax revenues by economic categories (labor, capital and consumption) gives a more useful explanation about the structure of the European tax systems and their evolution.⁴ The economic structure of European tax systems, measured as the share of individual taxes in total tax revenue by economic category, shows that, on average, taxes on labor contribute for more than half the total tax revenue, consumption taxes for about one-third and taxes on capital for just about 15 percentage points (Cnossen 20...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Figures
• Tables
• Contributors
• Foreword: Common Pressures to Reform European Tax Systems
• Preface
• Acknowledgment
• Part I: Main Topics In European Tax Systems and Tax Reforms
• Part II: National Case Studies of European Tax Systems and Tax Reforms