Presentations – Gilles Mourre

1. Presentations – Gilles Mourre

2. Tax policy challenges in EU Member States2012 Commission Tax Reform Reportand the European Semester Gilles Mourre DG ECFIN, European Commission Dublin, 19 June 2013 The views expressed here are those of the author and should not under any circumstances be regarded as stating an official position of the European Commission.

3. Outline • I. Context • II. Recent tax reforms • III. Identifying tax challenges in EU countries • Consolidation and fiscal sustainability • Growth-friendly tax structures • Tax design and tax governance • Redistributive considerations • IV. Results of the European Semester 2013

4. I. Context • Tax issues are more and more prominent in the policy debate, both w.r.t its impact on fiscal sustainability and growth • European Semester, the cycle of integrated economic coordination within the EU, underlines: • the importance of the design and structure of tax systems to make them more effective, efficient and fairer • acknowledge that some MS may consider increasing taxes to put their public finance back on track • The ECFIN/TAXUD Tax Reform Report 2012 contributes to this discussion and served as an analytical input to the 2013 European Semester.

5. I. Context • The ECFIN/TAXUD Tax Reform Report presents: • the recent trends in tax reforms in EU Member States • a general – indicator-based – assessment framework … • … to identify the main tax policy challenges in EU countries. • … with a view to improving the contribution of taxation to macroeconomic performance • On 29 May 2013, the Commission presented its proposal for the European Semester 2013. • Many country-specific recommendations (CSRs) by COM relate to taxation: almost all MSs (bar DK, FI and programme countries) are concerned. Programme countries follow their own process (MoU, reviews) • CSRs currently examined by the Council

6. II. Recent tax reforms • Given public finances deterioration and turbulence in sovereign debt markets, fiscal policies in 2011-2012 were driven by the need to restore their long-term sustainability. • For most MSs, the need for more revenue to support consolidation effort was compounded by other difficulties: • the need to support recovery • restoring sustained growth over the medium/long term. • Tax revenue in the EU increased in 2011 and this upward trend is expected to continue until 2013… • … despite adverse cyclical conditions

7. II. Recent tax reformsDevelopment of the overall tax burden Tax-to-GDP ratio in EU-27 and euro area, 1995-2014 2013 Spring Forecast Source: Commission services.

8. II. Recent tax reformsGeneral trends over 2011-2012 • In the period 2011-2012, many MS have increased PIT, mainly through hikes in statutory rates, or social security contributions, while aiming at improving work incentives for specific groups. • Changes in the corporate tax (CIT) bases have been slightly more frequent than increases in CIT rates. • About half of the MS saw hikes in the VAT rates, both in the standard rate and the reduced ones. • Excise duties increased in most MS for environmental and energy products and for alcohol and tobacco.

9. II. Recent tax reformsOverview of tax reforms in 2011 and first half 2012 Source: Commission services.

10. III. Tax policy challenges in EU Countries • Focus on the wide-ranging macro-economic dimension of taxation through: • Sustainability of public finance/consolidation needs • Growth-friendly tax structures and tax shift • …and on a set of specific horizontal issues, related to the design of individual types of tax: • Broadening tax bases in direct and indirect taxation • Debt bias in corporate taxation • Issues related to housing taxation • Design of environmental taxation • …and on improving tax governance • …while keeping distributional effects in mind

11. III. Main tax challengesHorizontal screening principles • Benchmarking of MSs using Lisbon Assessment Framework (LAF) approach • MS considered to face a challenge in an area if it is among the worst performers, that is, in the bottom third of distribution (under normality assumption); EU-27 weighted average used as reference point for benchmarking. • Robustness checks underway (Wöhlbier et al. 2013) • Screening does not take country specificities into account. For programme MSs, MoU and reviews are the sole reference. • Need for in-depth analysis before policy conclusions are drawn

12. III. Main tax challengesTax policy in consolidation times • Consolidation effort requires extra tax revenue in some MSs • Identifying both need and … • …. scope for further tax hikes in the short term • Cutting expenditures in medium run to reduce gradually the weight of taxes in some countries • Broadening the tax bases (closing loopholes in direct and indirect taxation) rather than increasing tax rates

13. III. Main tax challengesScreening principles to identify a potential need for tax-based consolidation • Fiscal sustainability problems • Fiscal sustainability is considered problematic, if: • i) the indicator of fiscal sustainability gap in the medium term, "'S1" is high • OR • ii) the indicator of fiscal sustainability gap in the long term, "S2" is high • Availability of tax space • AND: 2) There is 'overall tax space' currently available (low tax burden) • AND EITHER: 2a) There is still scope for increasing the least distortionary taxes • OR: 2b) The tax burden has not increased substantially in the recent past.

14. III. Main tax challengesOverview on fiscal consolidation on revenue Source: Commission services.

15. III. Main tax challengesTax structure challenges 1995-2010 Labour taxes Forecast Capital taxes Consumption taxes

16. III. Main tax challengesScreening principles to identify a potential need, and room, for a tax shift • Need to reduce labour taxation • Labour taxation is problematically high if: • i) The 'overall tax burden on labour' is very high • OR • ii) The tax burden on specific labour markets groups, namely low-skilled workers and/or second earners, is considered very high • Scope for increasing the least distortionary taxes • AND EITHER: 2(a) consumption taxes • OR: 2(b) recurrent taxes on housing • OR: 2(c) environmental taxation.

17. III. Main tax challengesScreening results on tax structure challenges Source: Commission services.

18. III. Main Challenges:Tax design and tax governance • Broadening tax bases in direct taxation by reviewing tax expenditure • Reducing debt bias in corporate taxation • Increasing VAT efficiency • Improving tax governance • Issues of housing taxation • Design of environmental taxation

19. III. Main tax challengesOverview table Source: Commission services.

20. Broadening tax bases • Broad tax bases allow for lower rates and help reduce distortionary effects of taxation • Many Member States have cut tax expenditures in recent years • Member States need to regularly publish detailed information on the impact of tax expenditures on revenues (Council Directive 2011/85/EU of 8 Nov 2011 on requirements for budgetary frameworks of the Member States) • Tax expenditure data difficult to compare across countries.

21. Corporate tax expenditures • Several types of tax expenditure in CIT, in particular: • Reduced corporate income tax rates for small businesses • Reduced corporate income tax rates for regions/sectors • Accelerated depreciation • R&D incentives • Investment incentives • Some tax expenditures might find their rationale in achieving specific policy objectives, but questions remain on whether they are effective and the best instrument to reach their goals •  Need for the regular reporting and review of tax expenditures

22. Debt bias in corporate taxation • Tax-induced debt bias in corporate taxation; risk of high indebtedness Effective marginal tax rates on debt- and equity financed new corporate investment, 2011 Source: ZEW (2012).

23. VAT efficiency • An efficient VAT should be broad-based, apply a single rate and be collected effectively • Loss in VAT revenue due to policy gap + compliance gap • VAT 'policy' gap: Application of reduced rates and VAT exemptions; partly due to VAT directive • VAT 'compliance' gap: Indicator for level of fraud; measured by comparing actual VAT revenue with theoretical VAT liability (calculated by taking account of the various reduced rates, dependent on the quality of data) • VAT revenue ratio: Measure of sum of both gaps

24. VAT efficiency: The VAT revenue ratio Source: European Commission. Note: The ratio consists of the actual VAT implicit rate divided by the VAT standard rate. The implicit rate is the VAT revenues divided by net final consumption expenditure, i.e. final consumption expenditure minus VAT receipts.

25. Improving tax governance • A number of Member States face the challenge of improving tax governance: • a large shadow economy • high levels of potential VAT fraud and evasion • a particular potential to increase the efficiency of the tax administration. • Better tax administration identified as a challenge in a several MS: • high administrative costs per net revenue collected • non-utilisation of third party information to prefill tax returns • low extent of e-filing • the high administrative burden of tax systems for mid-sized companies.

26. Tax governance • Administrative burden of tax system for a medium-sized company Source: PwC et al. (2013).

27. Housing taxation (I) • Property taxes, in particular recurrent taxes on housing, have been found to be among the taxes least distortive and therefore least detrimental to growth. • Generally rather low. • Revenue from property taxes, 2011 (% of GDP) Source: European Commission.

28. Housing taxation (II) • Housing taxation is often based too much on distortive transaction taxes, thus some MS could consider a shift within property taxation in favour of the recurrent tax. • Tax rates on real estate transactions, 2012 • *denotes a progressive tax rate structure

29. Housing taxation (III) • Nearly half of the MS face the challenge to reduce the debt bias in housing taxation created by deductibility of mortgage interests. • In these countries, either imputed rents or recurrent property taxes on owner-occupied housing are too low compared to taxes on other capital investments: • rates are low • tax bases (cadastral values) are not up-dated and do not reflect current housing market values • Given the political difficulty to raise property taxes, a second-best option could be to gradually phase out the interest rate deductibility in order to remove this debt bias and levy a lower recurrent tax on housing.

30. Environmental taxation • Ensure that the policy instruments in place, including taxes, are sufficient to meet the agreed environmental objectives. • Energy taxes and other environmental taxes to be designed to provide appropriate incentives to reduce emissions over time, e.g.: • i) adjusting the structure of tax rates on fossil fuels according to their carbon and energy content, • ii) indexing environmental taxes, • iii) reconsidering reduced VAT rates on energy, • iv) reducing tax subsidies for company cars and • v) introducing CO2-related vehicle taxation.

31. Redistributive considerations • Beyond efficiency of national tax systems, the redistributive effects of the tax system can be equally important. • Some channels: • progressive tax scale for labour income (but also income replacing transfers, benefits and public consumption expenditure) • tax expenditures risk making the system regressive • reduce incentives to work

32. IV. 2013 European Semester outcome • Country-Specific Recommendations (CSRs): more specific and concrete this year • Principles (already applied last years) are set in the Annual Growth Survey • Evaluated using cross-country consistent indicators …. • … and country-specific evidence … • … also running consistency checks across countries

33. IV. 2013 European Semester outcome • These principles apply to the following dimensions: • Consolidation through tax measures • Tax shifts and reducing labour taxation • Housing taxation • Tax governance • Environmental taxation • Reduction in tax expenditure, broadening of VAT base • Reducing debt bias in corporate taxation • Deviation from the horizontal assessment framework when proposing CSRs might be justified due to: • special country specific circumstances, • spill-over effects on other Member States and the European dimension of tax policy reforms, • very recent measures not captured by indicators but representing a significant action to address a challenge, • existence of bigger challenges in other sensitive policy areas

34. IV. 2013 European Semester outcome • Reducing the tax burden on labour to favour job creation: CSRs for 11 MSs • 6 CRSs on specific groups (low income earners & low skilled, second earners). • Risk of undeclared work • Shifting taxation away from labour or specific labour groups: CSRs for 9 MS • Shift toward consumption, property or environmental taxes • Not sufficient implementation of 2012 CSRs

35. IV. 2013 European Semester outcome • Broadening tax bases: CSRs for 9 MSs • Numerous tax expenditures in personal and corporate income taxation • Reducing the scope for or increasing VAT reduced rates • Reducing debt bias in corporate taxation: CSRs for 5 MS • Reforms under way • Not sufficient in several MSs • Tax governance: CSRs for 13 MSs • Most CSRs: improving tax compliance and fighting against evasion and fraud • Improving the efficiency of tax administration

36. IV. 2013 European Semester outcome • Environmental taxation: CSRs for 11 MSs • 6 CRSs on tax shifting • 5 CSRs on raising green taxes to meet climatic or environmental objectives • Housing: CSRs for 9 MS • consolidation/increase and growth-friendly tax shift • reform the functioning of the housing tax (through reassessing base) • reduce the debt bias and household indebtedness

37. Some complementary info • The 2012 Tax Reform Report can be downloaded here: http://ec.europa.eu/economy_finance/publications/ european_economy/2012/pdf/ee-2012-6_en.pdf • The release of the 2013 Tax Reform Report is foreseen for end-September. • ECFIN annual workshop will be held on 23 October 2013 in Brussels and will focus this year on tax expenditures • Recent ECFIN economic paper: Princen, Mourre, Isbasoiu and Paternoster (2013). Discretionary tax measures: pattern and impact on tax elasticities. EP n°499, May http://ec.europa.eu/economy_finance/publications/ economic paper/

38. THANK YOU!