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European Tax Commissioner Algirdas Šemeta (pictured) has said that the latest Tax Trends report confirms concerns about high levels of labor taxation, and shows that environmental levies remain under-used in many member states. Nations could improve the efficacy of their regimes by hiking consumption tax burdens, it concludes.
The report contains a detailed statistical and economic analysis of the tax systems of European Union (EU) member states, along with those of Iceland and Norway. It reviews states' taxes on consumption, labor, and capital, and estimates the effective burden on each category. It also provides statistics on environmental and property tax burdens, and effective tax rates on personal and corporate income.
Labor taxes were the largest source of tax revenue in 2012 for 24 member states, accounting for more than half of total tax revenue in 13 countries. Implicit tax rates (ITRs) on labor continued to trend upward. Among the EU28 countries, 20 countries registered an increase in labor taxes in 2012. The largest hike was in Greece, where the rate on labor rose from 30.9 percent in 2011 to 38 percent in 2012, while Cyprus and Poland each recorded increases of two percentage points.
The labor tax burden varies substantially between member states. Belgium has the highest ITR (42.8 percent), followed by Italy (42 percent), and Austria (41.5 percent). Malta has the lowest (23.3 percent), with Bulgaria (24.5 percent) and the UK (25.2 percent) on its tail.
During 2010-2013 period, there were six or seven states each year raising their top tax rates. However, in 2014 only two have implemented hikes (Finland and Sweden). The EU28 median rate stood at 40.5 percent in 2009, and has increased to 46.6 percent in 2014.
The EU average tax wedge – the difference between labor costs to the employer and the corresponding net take-home pay of the employee – was 37.9 percent in 2002. This fell to 35.9 percent in 2009, but climbed again to reach 36.8 percent in 2013. In 16 member states the tax wedge was lower in 2013 than in 2002, but the reductions were particularly large in the Netherland, Sweden, Cyprus, and Slovakia. The largest increases over the same period were in Ireland, Luxembourg, Portugal, Italy, and France.
Top corporate income tax rates have leveled off since the economic crisis. The EU average has remained more or less stable since 2010, and currently stands at 23.1 percent. Adjusted statutory rates on corporate income vary between a minimum of 10 percent in Bulgaria to top statutory rates equal to or above 30 percent in Belgium, Germany, Spain, France, Italy, Malta, and Portugal. Since 1995, the gap between the minimum and maximum rates in the EU has decreased from 37.2 to 28 percentage points.
Three member states have cut their corporate tax rates in 2014. The largest reduction was made by the UK, where the rate fell from 23 to 21 percent, followed by Slovakia (23 to 22 percent) and Denmark (25 to 24.5 percent).
After falling between 2002 and 2008, environmental taxes as a percentage of gross domestic product (GDP) rose sharply in 2009. Since then they have remained relatively stable, at about 2.4 percent across the EU. The trend for the Eurozone has been broadly similar, but the level of environmental taxes is marginally lower for this group of countries at 2.3 percent of GDP.
Denmark (3.9 percent), Slovenia (3.8 percent), and the Netherlands (3.6 percent) have the highest level of green taxation, and Spain (1.6 percent), Lithuania (1.7 percent), and Slovakia (1.8 percent) the lowest. Ten member states saw growth in environmental taxes as a percentage of GDP between 2009 and 2012, while the remainder experienced a decline.
Consumption taxes have increased, from 10.7 percent of GDP in 2009, to 11.11 percent in 2010, and to 11.2 percent in 2012. The Commission attributes these figures mainly to hikes in value-added tax (VAT) rates giving rise to higher revenues, and to a resumption in domestic demand in most states.
VAT standard rates have been rising in most member states since 2009. The EU average VAT rate has risen by 2 percentage points since 2008, from 19.5 percent to 21.5 percent in 2014. Over this period, 20 member states registered a rate rise, and in 2014 alone, the rate has gone up in France, Italy and Cyprus. The highest rate is to be found in Hungary (27 percent) and the lowest in Luxembourg (15 percent).
Direct taxes fell from 13.7 percent of GDP in 2008 to 12.7 percent in 2009, but growth resumed in 2010. From 2011 to 2012, direct taxes across the EU went up from 12.8 percent of GDP to 13.2 percent. The Commission says that this could be primarily due to increasing corporate profits, rather than tax-raising measures.
The overall tax-to-GDP ratio (the sum of taxes and compulsory social contributions as a percentage of GDP) in the EU28 rose from 38.8 percent in 2011 to 39.4 percent in 2012. This figure stood at 40.4 percent in the Eurozone, up from 39.5 percent in the previous year. Eurostat estimates show that tax revenues as a percentage of GDP are to continue to rise in both areas.
The tax-to-GDP ratio in the EU is nearly 15 percentage points higher than in the United States and about 10 percent above that in Japan. It is also high compared with Russia (35.6 percent of GDP in 2011) and New Zealand (31.8 percent), while the ratios for Canada, Australia, and South Korea all remained well below 30 percent.
In 2012, the tax-to-GDP ratio exceeded pre-economic crisis levels in both the EU28 and the Eurozone. According to the report, this reflects the pro-active tax measures taken by countries to correct their deficits, as well as recovery in most member states. In 2012, the ratio was highest in Denmark (48.1 percent), Belgium (45.4 percent), and France (45 percent). The lowest ratios were in Lithuania (27.2 percent), Bulgaria (27.9 percent) and Latvia (27.9 percent).
Levels rose in 22 EU states, as well as in Norway, remained stable in one, and decreased in six. The biggest increases were in Hungary (up 1.9 percentage points), Italy (1.5 percentage points), Greece (1.3 percentage points), France (1.2 percentage points), and Belgium (1.2 percentage points). The tax burdens of Hungary and Greece remain below EU average, while Belgium, France, and Italy are among the countries with a consistently high tax burden.
Releasing the report, Šemeta commented: "The tax shift away from labor, which we have consistently called for to allow our businesses to regain competitiveness, still has to materialize. Tax rates do not necessarily need to rise to have stable revenues. In this respect, the steady increase in VAT rates across the EU, which the report reveals, could be curbed if VAT systems were more efficient. Many member states could even lower their standard VAT rate if they broadened their tax base and relied less on reduced rates."
"The statistical evidence in today's Tax Trends report should convince member states that our recommendations for tax reforms are the right ones, and that growth-friendly taxation must be put at the heart of their structural reforms."
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