South Eurozone urgently needs fairer distribution of taxation burden

Brussels Tax Forum. Discussion between Sharon Bowles, Member of the European Parliament and Chairwoman of the Economic and Monetary Affairs Committee (on the left), and Algirdas Šemeta, member of the European Commission in charge of Taxation and Customs Union, Audit and Anti-Fraud. (EC Audiovisual Services).

Brussels Tax Forum. Discussion between Sharon Bowles, Member of the European Parliament and Chairwoman of the Economic and Monetary Affairs Committee (on the left), and Algirdas Šemeta, member of the European Commission in charge of Taxation and Customs Union, Audit and Anti-Fraud. (EC Audiovisual Services).

Eurostat, the EU statistical service, published last week data on the evolution of tax revenues for the EU member states. A first reading reveals two very interesting developments. Both are connected to the economic crisis which hit Eurozone in 2009-2010. In 2010 tax revenues decreased as a result of the crisis. However, despite the fact that the crisis rather deepened in the following years, tax revenues increased in 2011 as a result of the austerity measures taken all over the EU but more so in the worst hit countries of the South.

The double edge of austerity

Austerity had a double edge. Governments cut down social spending and at the same time increased taxation, in order to reduce budget deficits. This policy reached unprecedented levels in the south of Eurozone. Nevertheless, the four worst hit by the crisis countries, Greece, Portugal, Spain and Ireland, still in 2011 run comparatively very low tax revenue percentages in relation to GDP. During that year tax revenues to GDP were estimated in Ireland at 30.4 %, Spain 32.4 %, Greece 34.9 % and Portugal 36.1%, amongst the lowest revenues from taxes in the EU. At the same time Denmark, Belgium and France (48.6 %, 46.7 % and 45.9 % respectively in 2011) tax revenues were the highest.

Eurostat notes that, “The effects of the economic and financial crisis on tax revenues from 2007 onwards are apparent. From its last spike in 2006 in the EU-27 the ratio of tax revenue to GDP decreased by 1.1 percentage points to 39.6 % in 2010, while the ratio for the euro area also decreased by 0.9 percentage points of GDP from its peak of 41.2 % in 2007 to 40.3 % in 2010. 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 (or negative). This reflects pro-active tax measures taken by Member States during the last years to correct their deficits. EA-17 tax revenue as a percentage of GDP remains at a slightly higher level than EU tax revenue”.

Unfair distribution of tax burden

Coming back to the four countries worst hit by the crisis, their overall low tax revenue percentage only tells half of the story. Those countries, and for good reasons Italy should be grouped together with them, allowed for historical reasons a large part of incomes untaxed. In Ireland profits are taxed with a mere 10%, the lowest in the EU. As for Greece, Italy and Spain, due to an incompetent and/or corrupt tax administration, small and medium businesses and professionals traditionally avoid taxation. In the case of Greece and Spain this reality had catastrophic political and social dimensions.

For one thing, it blocked the fair distribution of the high cost to redress the economy and reduce the large fiscal deficits. As a result, the burden fell on those who cannot avoid taxation that is mainly wage earners and pensioners. This unfair distribution of the tax burden has undermined the political system and the social cohesion. Spain’s political system for historical reasons was spared from this ordeal. In Greece and Italy though, austerity and unfair distribution of the cost to rebalance the economy and the state finance brought about extreme, even fascist, political groups or political harlequins.

All in all, fair distribution of the taxation burden appears now as an utmost urgent priority for the political system all over south Eurozone. This is particularly true in Greece, where the tax administration and even the political system show a strong resistance, to measures blocking the unholy dealings between the taxman and citizens.

 

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