European Union: More taxes out of less income

From left to right: Pierre Moscovici, French Minister of Finance,  Christine Lagarde, Managing Director of the IMF, Wolfgang Schauble, German Federal Minister for Finance, Maria Fekter, Austrian Federal Minister for Finance. Eurogroup of 24/3/2013, (Council of the European Union photographic library).

From left to right: Pierre Moscovici, French Minister of Finance, Christine Lagarde, Managing Director of the IMF, Wolfgang Schauble, German Federal Minister for Finance, Maria Fekter, Austrian Federal Minister for Finance. Eurogroup of 24/3/2013, (Council of the European Union photographic library).

In the fourth year of the ongoing financial and real economy crisis, with government social spending severely cut and bank credit to households and businesses continuously shirking, tax increases remain the only sure thing in life. According to a study by two Eurostat authors, Elisabeth Joossens and Laura Wahrig, taxes in absolute terms surpassed the pre-crisis level in 2011. Eurostat is the statistical service of the European Union.

In detail the study concludes that taxes (including social contributions) in 2011 accounted for 40.0 % of Gross Domestic Product (GDP) in the European Union (EU-27) and 40.8 % of GDP in the euro area (EA-17). “This represents an increase of 0.4 percentage points of GDP in the EU-27 and 0.5 in the EA-17…In 2011 tax revenues made up about 90 % of total general government revenue in the European Union. Taxes on production and imports accounted for 13.4 % of GDP and current taxes on income, wealth, etc. 12.6 % of GDP. The share of current taxes on income, wealth, etc. decreased from 2007 to 2010, but a slight increase was seen in 2011. The share of social contributions increased noticeably from 2008 to 2009, decreased further in 2010, but stayed relatively stable between 2010 and 2011, to reach 13.9 % of GDP”.

It is really an appalling situation to see people in countries like Greece, Spain, Portugal and Ireland who keep losing for years now large chunks of their incomes, to be asked to pay more taxes, both as a percentage of GDP and in absolute terms. The two authors note that, “In 2011, tax revenues in terms of GDP increased substantially, which was due to absolute tax revenues increasing along the same path as in the previous year, but nominal GDP growth being lower”.

This is obviously a technocratic observation. In reality it is a daily nightmare mainly for Greeks and Spaniards. With unemployment at 27% in both countries and millions of households with no working member, the increase of taxation has become an insurmountable problem. In Greece the complete incompetence or probably unwillingness of the Athens government to tax the wealthy professionals and the small and medium businesses, has led to increases of indirect taxation, while a newly imposed property tax is collected with the electricity bills. In this way the unemployed are caught between a rock and a hard place, even if they occupy in their own home.

Of the three or four Eurozone countries worst hit by crisis, Greece is in an impossible situation. Being the country with the lowest absolute income per capita and GDP losses of at least 20% during the last four years, its citizens are asked to pay  more taxes. According to Eurostat, tax payments as a percentage of GDP topped at 34.9% in Greece, 30.4% in Ireland and 32.4% in Spain. The same source states that “Among the countries which have joined the EU since 2004, Slovenia and Hungary had the highest tax revenue-to-GDP ratios at 37.5% and 37.1% of GDP, respectively. Even so, tax revenues in Slovenia are still 2.5 pp. of GDP lower than in the EU-27”.

All in all it’s a pity to observe that in worsening conditions for every household all over the European Union, governments are trying to increase their tax revenues in order to reduce budget deficits. Necessary or not this policy is depriving the increased tax collection of justification in the eyes of the average citizen. The problem is that almost all governments didn’t use the good times of the growth period in 2000-2008 to straighten up deficits.

They did exactly the opposite, increasing fiscal gaps and state debt. Actually most political formations in government or in the opposition pressed for larger deficits and lower taxation for higher incomes. As a result, today amidst the worst economic crisis after the WWII with falling real incomes, most of EU member states being over-indebted are obliged to keep increasing taxation. It’s a pity the political class in most of EU countries didn’t have the courage and the vision in the good times to prepare for the difficult years.

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