Predatory labour taxation not an issue for the Commission

Algirdas Šemeta, Member of the European Commission in charge of Taxation and Customs Union (EC Audiovisual Services).

Algirdas Šemeta, Member of the European Commission in charge of Taxation and Customs Union (EC Audiovisual Services).

It’s really unbelievable how easily some European Union Commissioners sidestep the hot issues and make speeches about trivial themes or focus on aspects of secondary interest. Take for example Algirdas Šemeta, the EU Commissioner responsible for Taxation and Customs Union, Audit and Anti-fraud. In a speech entitled, “Making progress on European Tax Policy: Towards more fairness and grater competitiveness”, delivered in Dublin on 11 January, he choose to put the emphasis on the wrong subjects and spoke about the “European Semester”, leaving aside the burning issues of the equitable distribution of tax burdens. He even forgot to say that all taxes in order to be equitable have to be progressive, with the richer paying larger percentages of their income.

He actually sidestepped the ostentatiously high tax burden on labour and talked about the positive effects of the “European Semester”. As everybody knows the European Semester is the new fiscal instrument of the European Union to control government budget deficits in the 27 member states and has nothing to do with the tax burden on citizens, let alone its equitable distribution.

Member states are completely free to tax incomes from labour and capital the way they like, or even choose whom to tax and whom to let go. Šemeta says nothing about all that or the  inequitable methods that some countries use while taxing their subjects. As a result the term “fairness” in the title of his speech serves just decorative and public relations purposes. It’s not at all analysed nor conclusions are drown about how fairly is the tax burden distributed in member states.

Nor the term “competitiveness” is dully analysed by Šemeta, because he says nothing about the hugely counterproductive character of heavy taxation on incomes from labour. As a matter of fact in most EU member states tax factors on income from labour are much higher than on profits. He said nothing about it. No tables of inequality were revealed.

In more than one EU country incomes from capital profits are taxed with a flat rate of 10%, while in those same countries labour incomes are taxed with progressive factor scales, reaching and actually exceeding 50%. On top of that working people pay their social security contributions, which vary between 10% and 20%. In reality, above a not very high level of income from labour, the tax burden on it plus social security payments claim even more that 70% of it.
This reality completely destroys any incentive for a salary earner to gain more from his work. It also kills his willingness to ask for a rise.

The good Commissioner instead of focusing and analysing with numbers the inequitable and unproductive distribution of the tax burden between labour income and capital profits, he chooses to state the obvious by citing some general purpose truths.

Stating the obvious

It goes without saying that the Commission cannot touch the issues quoted below because the EU has no say on member states tax policies. Probably that is why he states all those obvious truths. According to Šemeta: “there has been a general trend observed in the Member States towards fundamental tax reforms. However, there is still scope to shift the overall tax burden towards tax bases that are less detrimental to growth and job creation.
Such a shift requires a package approach which ensures equitable redistribution and is adapted to the circumstances of the individual Member State”. Then he continues,

“This is why the Commission recommends that:

*First, the tax burden on labour should be substantially reduced in countries where it is comparatively high and hampers job creation. To ensure that reforms are revenue neutral, taxes such as consumption tax, recurrent property tax and environmental taxes should be favoured.

*Second, revenue should preferably be raised by broadening tax bases rather than by increasing tax rates or creating new taxes;

*Third, tax compliance should be improved by reducing the shadow economy, combatting tax evasion and ensuring greater efficiency in the tax administration.

*Finally, the corporate tax bias towards debt-financing should be reduced and tax schemes which increase the debt bias of households should be reviewed to avoid financial risks”.

Mind you when the Commissioner dared utter a word about reducing the tax burden on labour, he rushed to add that this has to be “income neutral” and actually proposes a counterbalancing increase of taxation on consumption. All first year students of economics are taught that consumption taxes increase the inequality of the overall tax burden. In practice he proposed an even more inequitable way to make it up to the government’s coffers for losses after a possible cut of taxes on labour.

After reading all the 2,016 words of his speech he made no concrete reference to the destructive inequality between taxes on labour and profits. And this while speaking in a country like Ireland, where this difference has attracted wide criticism from many sources. Even if he didn’t want to annoy his hosts, he could at least say one word in support of the wage earners. And by God the Irish are hard-working people.

the sting Milestone

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