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BackTax policy under a Common Currency was at the centre of lectures and discussions of the Brussels Tax Forum 2012. In view of the crisis phenomena, one of the main questions was which contribution tax policy would be able to make in order to stimulate growth and employment. In particular a shift from taxes on income to less distorting forms of tax was discussed. The options of more tax coordination were also on the agenda.
Traditionally, the unanimity rule in tax issues and constant conflicts of interest would quickly nip ambitious ideas of far-reaching tax coordination in the bud. However, EU Tax Commissioner Algirdas Šemeta, who attended this year’s Brussels Tax Forum, was convinced that the crisis had changed the attitudes of the Member States on tax policy; tax decisions could no longer be taken at national level, isolated from other European countries.
André Sapir, economist at the Université Libre de Bruxelles, contributed an important, often overlooked point to the discussion. It was not only public debt that had caused the current crisis and one could not exclusively blame the so-called GIIPS countries (Greece, Ireland, Italy, Portugal and Spain). One should rather consider the fact that systemic problems had existed in the Monetary Union, which had long been ignored. For example, there had been no common stabilisation mechanism prior to the introduction of the Euro. Before the introduction of the Euro, the GIIPS countries had had by no means chronically high current account deficits; if they had experienced higher deficits there were traditionally able to compensate these by devaluing their currency, said Sapir. However, under a Common Currency this method could no longer be applied. Following the introduction of the Euro, the GIIPS countries showed high current account deficits - in contrast to the strongly risen surpluses of Germany and other northern countries. The recently signed EU fiscal pact would not solve the crisis, but strengthen the idea that the problem was only caused by
excessive public debt, which would ignore competitiveness and private debt.
Vito Tanzi, former Director of the Fiscal Affairs Department of the International Monetary Fund (IMF) went to some lengths to describe the fiscal trends of the post-war period. The experience with economic stagnation and high inflation in the 1970ies was followed by the revolution of supply-side economics, which supported low tax rates and a return of the state to its core tasks. Problems with regard to balancing the tax systems arose through the tax competition between states, which was triggered by economic globalisation: national states increasingly distinguished between the taxation of mobile capital, which was always taxed at a lower rate and other sources of taxation, which were supposed to carry a far greater burden. Whilst a number of important organisations had been created at international level, an international tax organisation, which would ensure that unfair tax competition was curbed, was still missing.
Ruud de Mooij of the IMF addressed the question as to how tax policy could contribute to increase competitiveness. His patent remedy: the social security contributions paid by employers should be reduced and in return Value Added Tax should be increased, which at least in his opinion would boost net exports in the short term. However, what de Mooij probably did not take into consideration was the fact that it does not make any sense from a macroeconomic point of view to leave social security contributions paid by employees untouched and to lumber them with an increased rate of Value Added Tax at the same time. This would only result in a diminished purchasing power, in particular in respect of low-income groups, a fact that would hardly contribute to the urgently needed burst of growth.
EU Employment Commissioner László Andor also supported a reduction of the tax burden on labour. According to the Commissioner this might help to reduce the currently very high rate of unemployment of 10.7 % or 24.3 million unemployed respectively. Apart from that a reduction of the income tax burden would have a positive impact on consumption. The relatively higher rate of consumption would have a positive effect in particular on low-income groups.
André Sapir, economist at the Université Libre de Bruxelles, contributed an important, often overlooked point to the discussion. It was not only public debt that had caused the current crisis and one could not exclusively blame the so-called GIIPS countries (Greece, Ireland, Italy, Portugal and Spain). One should rather consider the fact that systemic problems had existed in the Monetary Union, which had long been ignored. For example, there had been no common stabilisation mechanism prior to the introduction of the Euro. Before the introduction of the Euro, the GIIPS countries had had by no means chronically high current account deficits; if they had experienced higher deficits there were traditionally able to compensate these by devaluing their currency, said Sapir. However, under a Common Currency this method could no longer be applied. Following the introduction of the Euro, the GIIPS countries showed high current account deficits - in contrast to the strongly risen surpluses of Germany and other northern countries. The recently signed EU fiscal pact would not solve the crisis, but strengthen the idea that the problem was only caused by
excessive public debt, which would ignore competitiveness and private debt.
Vito Tanzi, former Director of the Fiscal Affairs Department of the International Monetary Fund (IMF) went to some lengths to describe the fiscal trends of the post-war period. The experience with economic stagnation and high inflation in the 1970ies was followed by the revolution of supply-side economics, which supported low tax rates and a return of the state to its core tasks. Problems with regard to balancing the tax systems arose through the tax competition between states, which was triggered by economic globalisation: national states increasingly distinguished between the taxation of mobile capital, which was always taxed at a lower rate and other sources of taxation, which were supposed to carry a far greater burden. Whilst a number of important organisations had been created at international level, an international tax organisation, which would ensure that unfair tax competition was curbed, was still missing.
Ruud de Mooij of the IMF addressed the question as to how tax policy could contribute to increase competitiveness. His patent remedy: the social security contributions paid by employers should be reduced and in return Value Added Tax should be increased, which at least in his opinion would boost net exports in the short term. However, what de Mooij probably did not take into consideration was the fact that it does not make any sense from a macroeconomic point of view to leave social security contributions paid by employees untouched and to lumber them with an increased rate of Value Added Tax at the same time. This would only result in a diminished purchasing power, in particular in respect of low-income groups, a fact that would hardly contribute to the urgently needed burst of growth.
EU Employment Commissioner László Andor also supported a reduction of the tax burden on labour. According to the Commissioner this might help to reduce the currently very high rate of unemployment of 10.7 % or 24.3 million unemployed respectively. Apart from that a reduction of the income tax burden would have a positive impact on consumption. The relatively higher rate of consumption would have a positive effect in particular on low-income groups.