Fabrizio Balassone, Daniele Franco, Alessandra Staderini

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Fabrizio Balassone, Daniele Franco, Alessandra
Staderini ()
Tax Policy in EMU a Preliminary Assessment
() Banca dItalia - Research Department
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Aim of the paper
Analyse motivations of recent European tax
reforms to a) check consistency of design
b) assess influence of EU specific features
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Outline of presentation
1) Review motivations of reforms2) Discuss
expected effect of EU features3) Description of
reforms 4) Assess consistency of reforms with
motivations5) Examine evidence of EU features
effects
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Motivations (i) The timing of reforms
At the end of the 1990s almost all EU
Governments announced a reform Factors
accounting for clustering 1) Common
unemployment and growth problems (Lisbon
Council, 2000) 2) Cyclical upturn ? margins
for tax cuts 3) Elections (political
opportunism)
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Motivations (ii) Tax reforms and elections
2003
2002
2001
2000
announcement of reform
1999
1998
1997
1997
1998
1999
2000
2001
2002
2003
elections
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Motivations (iii) Policy arguments
Analyse Governments declared intentions
(Stability Programmes) Results 1) all use
supply-side arguments 2) low weight to equity
considerations
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Motivations (iv) Some examples
1) Spain reform designed to boost the supply
side ... 2) The Netherlands tax reform
expected to push up supply of labour 3)
Germany ... for promotion of growth and
employment 4) Greece to increase business
activity and labour supply
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Motivations (v) The tax burden in the EU
Motivations hardly surprising a) in the 1990s
EU growth is relatively low and unemployment
relatively high b) tax burden rising from the
1960s in the EU c) although empirical evidence
is ambiguous a link between the two was
suggested
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Motivations (vi) The tax burden in the EU
Concern especially over high tax wedge on
labour Using the Prescott Index
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EU specific features (i)
1) EMU Fiscal Rules 2) Increasing economic
integration (tax competition) 3) Need for
national fiscal stabilisation in EMU 4)
Population ageing (sustainability)
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EU specific features (ii) expected effects
Likely1) Fiscal Rules limit the effect of tax
reform on fiscal balances2) Integration link
between taxation and mobility clustering of
tax reformsPossibly3) Stabilisation tax cuts
accompanied by changes to welfare benefits4)
Ageing tax cuts tailored to provide
incentives to labour market participation
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Description of reforms
a) reduce average and marginal rates on labour
(including social security contribution)b)
cuts targeted at low-to-middle incomes (
reform of unemployment benefits)c)
clusteringd) cuts to corporate taxation also
commond) modest quantitative impacte)
enacted when expect deficit improvement g)
funding relevant in declared intentionsh)
gradual implementation

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Design-Motivation Consistency
reduction of average and marginal rates on
labour cuts targeted at low-to-middle incomes
?good matching of design and
motivationsHowevermodest quantitative impact
?reforms not effective

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Effects of EU specific features (i)
a) fiscal rules ? modest quantitative impact of
reformsb) fiscal rules (expect a
deficit improvement) tax competition ?
clustering of reforms?c) fiscal rules ?
funding relevant in intentions
gradual implementationd) stabilisation ageing
? tax reform targeted at low incomes
accompanied by changes to benefits?

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Effects of EU specific features (ii)
Howeverfiscal rules risks for sustainability
did not manage to inducereforms in expenditure
programsto accompany tax cuts

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Summing up
Tax reforms design consistent with
motivations Reforms may fail to be effective
as fiscal rules a) avoid large deterioration
of budget balances BUT b) do not force
reforms of expenditure programs