Taxation Trends in European Union

• Author: Maria Grigore
• Position: Lecturer Ph.D., Faculty of Economic Sciences, “Nicolae Titulescu” University, Bucharest
• Pages: 306-323

Page 306

Introduction

Based for the most part on the information given from the reports “Taxation Trends in the European Union” edited each year by European Commission, this paper describes and evaluates developments with respect to tax systems of the European Union Member States over the last years and discusses selected structural reform initiatives that have been taken lately or are going to be taken in the communitarian space.

Tax systems are continuously changing as Member States align their tax systems with evolving economic, political, and administrative conditions. A central policy issue in recent years has been the implications for the stability of tax bases of economic integration and the ever increasing mobility of capital, labor, and goods and services. The specific policy challenges differ widely across countries: developing countries focus, in particular, on attracting investment and raising revenue to promote development and developed countries are predominantly preoccupied by safeguarding their tax bases to preserve the welfare state and to meet the challenges of ageing.

Having a complete view of the structure, level, and trends of taxation and of the reform initiatives taken and those that are likely to be important in the coming years is useful both for corporations (that helps its with finding solutions to emerging challenges in growing and maintaining tax function efficiencies and productivity) and governments (that helps its to elaborate appropriate macroeconomic policies).

The paper content is divided into three parts. Part I examined the level and the distribution of the overall tax burden by major type of taxes. Part II presents the economic classification of taxes and conducts a comparison of implicit tax rates between Member States. Part III discusses selected specific commonalities in actual tax reforms implemented around the European Union over the last ten years.

Literature Review

There are many publications with helpful background on tax-related issues. I will enumerate only ones that I used in my work:

Page 307

1. The annual report “Taxation Trends in the European Union”, edited by European Commission, contains statistics and an economic analysis of the tax systems of the European Union Member States. In the 2007 edition, the tax systems of each of the 27 Member States are compared within a unified statistical framework (the ESA95 harmonized system of national and regional accounts), at different levels of aggregation and classification of tax revenues. The framework utilized makes it possible to assess heterogeneous national taxation systems on a comparable basis.

2. Taxes in Europe Database (http://ec.europa.eu/taxation_customs/taxinv/welcome.do), a tool launched by European Commission on the internet, contains information on about 600 most important taxes in the EU Member States. Using a methodology agreed with the Member States, this database includes information about the main aspects of each tax, as well as economic and statistical data such as the revenue generated. The database allows comparison among Member States.

3. Taxation Paper No 10/2007 - A history of the “tax package”, written by Philippe Cattoir presents an overview of the EU "Tax Package", comprising the Code of Conduct for business taxation, the Directive on taxation of savings income and the Directive on taxation of interest and royalty payments. Its main objective is to offer a comprehensive view of the negotiation process, and a broad overview of the content of the package, as well as pending policy issues. This then allows drawing a number of lessons concerning the approach followed and the outlook for future European initiatives on direct taxation.

4. Tax Policy: Recent Trends and Coming Challenges, written by John Norregaard and Tehmina S. Khan and edited by International Monetary Found (WP/07/274), provides an overview of the key economic factors that shape tax policy reform in many high-income countries, developing countries, and/or transition economies. The paper describes global and regional developments with respect to tax rates and revenue ratios over the last some 20 years.

5. Activities of the European Union in the Tax Field in 2007, edited by European Commission, presents all the European Commission communications related to personal and corporate taxation, value added tax, excise duties and other indirect taxes, tax administration, tax avoidance and evasion measures.

Theoretical background

A Formulas

1. The overall tax ratio is the ratio between total tax revenues and GDP

2. The top statutory personal income tax rate reflects the tax rate for the highest income bracket without surcharges. For Denmark, Finland and Sweden the municipal income tax is also included.

3. Taxation of corporate income is not only conducted through the corporate income tax (CIT), but, in some Member States, also through surcharges or even additional taxes levied on tax bases that are similar but often not identical to the CIT. In order to take these features into account, the simple CIT rate has been adjusted for comparison purposes. Adjustments have been carried out for Germany, Estonia, France, Italy, Lithuania and Portugal.

4. Implicit tax rates (ITR) in general measure the effective average tax burden on different types of economic income or activities, i.e. on labour, consumption and capital, as the ratio between revenue from the tax type under consideration and its (maximum possible) base.

5. The ITR on consumption is the ratio between the revenue from all consumption taxes and the final consumption expenditure of households.

6. The ITR on labour is calculated as the ratio of taxes and social security contributions on employed labour income to total compensation of employees.

   Page 308

7. The ITR on capital is the ratio between taxes on capital and aggregate capital and savings income.

B Statistical dates

Table A. Total tax revenue (including social security contributions) in % of GDP

	1995	1996	1997	1998	1999	2000	2001	2002	2003	2004	2005	Average 1995-; 2005	Difference 1995-; 2005
Belgium	43,8	44,4	44,9	45,5	45,5	45,2	45,2	45,3	44,9	45,0	45,5	45,0	1,7
Bulgaria	x	x	x	x	x	33,1	32,1	31,0	33,6	35,3	35,9	33,5	x
Czech; Republic	36,2	34,7	35,0	33,3	34,0	33,8	34,0	34,8	35,7	36,8	36,3	35,0	0,1
Denmark	48,8	49,2	48,9	49,3	50,1	49,4	48,4	47,8	48,0	49,3	50,3	49,0	1,5
Germany	39,8	40,7	40,7	40,9	41,7	41,9	40,0	39,5	39,7	38,8	38,8	40,2	-1,0
Estonia	37,9	35,6	35,9	34,9	34,6	31,3	30,2	31,1	31,5	31,4	30,9	33,2	-6,9
Ireland	33,1	33,1	32,4	31,7	31,8	31,7	29,8	28,5	29,1	30,5	30,8	31,1	-2,3
Greece	32,6	33,0	34,3	36,3	37,3	37,9	36,6	36,7	35,5	34,3	34,4	35,4	1,8
Spain	32,7	33,1	33,2	33,0	33,6	33,9	33,5	33,9	33,9	34,5	35,6	33,7	2,9
France	42,7	43,9	44,1	44,0	44,9	44,1	43,8	43,1	42,8	43,1	44,0	43,7	1,3
Italy	40,1	41,8	43,7	42,5	42,5	41,8	41,5	40,9	41,3	40,7	40,6	41,6	0,5
Cyprus	26,7	26,4	25,8	27,7	28,0	30,0	30,9	31,2	33,1	33,5	35,6	29,9	8,9
Latvia	33,2	30,8	32,1	33,7	32,0	29,5	28,5	28,2	28,5	28,5	29,4	30,4	-3,8
Lithuania	28,6	27,9	31,0	32,0	31,8	30,1	28,7	28,4	28,2	28,3	28,9	29,4	0,3
Luxembourg	37,1	37,6	39,3	39,4	38,3	39,1	39,8	39,1	38,5	37,9	38,2	38,6	1,1
Hungary	41,6	40,6	39,0	39,0	39,1	38,5	38,9	38,5	38,4	38,6	38,5	39,2	-3,1
Malta	27,3	25,8	27,5	25,3	27,1	28,2	30,4	31,9	31,8	34,2	35,3	29,5	8,0
Netherlands	40,2	40,2	39,7	39,4	40,4	39,9	38,3	37,7	37,4	37,7	38,2	39,0	-2,0
Austria	41,3	42,6	44,0	44,0	43,7	42,8	44,7	43,7	43,1	42,8	42,0	43,2	0,7
Poland	37,1	37,2	36,5	35,4	35,3	34,0	33,6	34,3	33,4	32,6	34,2	34,9	-2,9
Portugal	31,9	32,8	32,9	33,1	34,1	34,3	33,9	34,7	35,1	34,2	35,3	33,8	3,4
Romania	x	x	x	x	x	x	27,8	28,2	27,6	27,3	28,0	27,8	x
Slovenia	40,2	39,1	38,0	38,8	39,2	38,6	38,9	39,3	39,5	39,6	40,5	39,2	0,2
Slovakia	39,6	38,0	35,0	35,6	34,2	32,9	31,6	31,9	30,9	29,7	29,3	33,5	-10,3
Finland	45,7	47,0	46,3	46,1	45,8	47,2	44,6	44,6	44,0	43,4	43,9	45,3	-1,8
Sweden	49,0	51,5	52,0	52,7	53,3	53,4	51,4	49,7	50,2	50,5	51,3	51,4	2,2
United; Kingdom	35,6	35,1	35,7	36,7	37,1	37,6	37,3	35,8	35,6	35,9	37,0	36,3	1,4
EU-27; weighted; average	39,7	40,4	40,7	40,5	41,0	40,7	40,0	39,3	39,3	39,2	39,6	40,0	-0,1
EU-27; arithmetic; average	37,7	37,7	37,9	38,0	38,2	37,7	36,8	36,7	36,7	36,8	37,4	37,4	-0,4
EA-13; weighted; average	39,9	40,9	41,3	41,1	41,6	41,3	40,4	40,0	39,9	39,6	39,9	40,5	0,0
EA-13; arithmetic; average	38,6	39,2	39,5	39,6	39,9	39,9	39,3	39,0	38,8	38,7	39,1	39,2	0,5

Source: European Commission

Note: x - data not available

EU-27 European Union (27 Member States)

Page 309

EA-13 Euro area (Belgium, Germany, Ireland, Greece, Spain, France, Italy, Lithuania, Netherlands, Austria, Portugal, Slovenia, Finland)

Table B. The structure of the tax revenues by major type of taxes (as% of Total Taxation)

	Indirect taxes		Direct taxes		Social; contributions
	1995	2005	1995	2005	1995	2005
Belgium	29,4	30,5	37,9	39,0	32,7	30,5
Bulgaria	x	52,8	x	17,9	x	29,3
Czech Republic	33,9	32,9	26,5	25,6	39,6	41,5
Denmark	34,9	35,6	63,5	62,5	2,2	2,2
Germany	30,2	31,3	27,5	26,6	42,3	42,1
Estonia	36,6	43,7	28,9	22,8	34,5	33,5
Ireland	43,9	44,2	41,2	40,3	15,0	15,4
Greece	44,1	37,4	23,8	27,5	32,1	35,1
Spain	32,6	35,1	31,4	32,0	36,0	34,1
France	37,6	36,0	19,7	27,1	43,5	37,2
Italy	31,0	35,8	37.5	33,2	31,5	31,0
Cyprus	42,7	48,1	32,9	28,7	24,4	23,2
Latvia	42,4	43,9	21,5	27,2	36,1	28,9
Lithuania	43,5	40,0	30,4	31,6	26,1	28,6
Luxembourg	31,9	35,0	41,6	36,9	26,5	28,1
Hungary	42,8	41,0	21,3	23,6	35,9	35,3
Malta	46,1	45,4	31,1	34,4	22,8	20,3
Netherlands	29,3	34,4	31,2	31,2	39,5	34,4
Austria	35,8	35,0

...