FAIR AND SUSTAINABLE TAXATION - FROM A EUROPEAN HORIZON.

AuthorGunnarsson, Asa

INTRODUCTION 696 I. GROWTH PROMOTION AS A TAX SUSTAINABILITY POLICY IN THE EU 697 II. TAX SUSTAINABILITY GAPS 701 III. NEW PERSPECTIVES ON TAXES, REDISTRIBUTION, INEQUALITY, AND GROWTH 702 IV. TIME FOR NEW PRINCIPLES ON FAIR AND SUSTAINABLE TAXATION 706 V. GENDER EQUALITY--AN EMERGING TREND IN SUSTAINABILITY-ORIENTED TAX POLICIES 708 VI. CONCLUSIONS 711 INTRODUCTION

Even though tax policies are often considered to exist for the simple purpose of funding government activities, contemporary tax systems are anything but simple. The context for this Article is related to the initiative from the European Commission to put the spotlight on the EU Member State tax systems in the 2020 strategy to reach smart, sustainable, and inclusive growth, connected to the 2030 Agenda. (1) The ambition was a response to the need of moving beyond the financial crisis of 2007/2008 and the Eurozone debt crisis in 2011/2012, and the aim was to protect a sustainable economic and monetary union in Europe. (2) Societal challenges were addressed under the European Union's Horizon 2020 research and innovation programme. (3) A sub-call addressed the question on how to overcome the crisis. Basically, the Commission was concerned about the consequences that globalization, internationalization, and human and corporate mobility would have on national tax systems regarding fiscal sustainability and tax fairness. Another concern was what role the dominant tax policies may have had on forming national tax systems to widening socio-economic and gender inequalities. (4)

The tax research project Revisioning the 'Fiscal EU': Fair, Sustainable, and Coordinated Tax and Social Policies, given the acronym FairTax, (5) was granted funding from the sub-call. FairTax brought together a multitude of disciplinary approaches to respond to the challenging tasks that tax policies should lead to improved economic stability but also play a critical role in promoting economic, social, and environmental sustainability. The project has contributed to new theoretical insights regarding the need for contextualizing tax law from a broad perspective on taxation and sustainability goals. (6)

The Article confronts the narrow concept of taxing for growth policy, by pointing out some of the project's findings on structural problems regarding tax sustainability and tax fairness that the concept has been feeding. The analysis is situated in the emerging tax policy concerns about inequalities that challenge the dominance of the dominant tax design for economic growth. I will particularly highlight how the persisting socio-economic inequalities between men and women are reproduced in tax law and how tax policies during the last decades have contributed to increase the gender inequality gap. Based on the studies in the FairTax-project, performed on the European situation, the conclusions are that we need to rethink and contextualize principles on fair and sustainable taxes. New perspectives in economic research have produced empirical evidence about the negative effects of tax reforms designed to lower tax rates for top incomes, corporations, and wealth. (7)

  1. GROWTH PROMOTION AS A TAX SUSTAINABILITY POLICY IN THE EU

    Fiscal taxation for economic growth, implemented by tax neutrality as a guiding principle, has since the beginning of the 1980s, become a dominant view on tax sustainability. Fiscal is defined as efficiency in relation to optimal tax theory, which basically is to avoid distorting tax regulations that are regarded to cause unwanted excess burdens in the economy. This has been described as an ideological hegemony, which on a global scale has institutionalized a one-path model for taxing for economic growth in tax law design. (8) The main features of these tax reforms can briefly be summarized as follows:

    * Broader labour income tax bases but low progressivity;

    * A moderate taxation of capital and corporations;

    * Uniform tax rates applied on the consumption of goods and services;

    * Introduction of in-work tax subsidies;

    * A shift from direct taxes to indirect taxes. (9)

    Neutral taxation benchmarks taxes that distort the economic efficiency of market processes as little as possible, implying a trade-off between efficiency and equity. Redistributive taxes and transfers are regarded as negatively affecting incentives to work, save, and earn income. The idea of a trade-off between equity and efficiency is at the core of the optimal income tax problem. (10)

    The taxing for growth paradigm has been embedded in how the EU Commission has regarded a growth-friendly tax structure as intertwined with the aspect of fiscal sustainability. The EU Commission has used standards for quality indicators for good and bad performances concerning growth-friendly tax structures. One of the most important quality indicators is to reduce tax distortions to a minimum. EU Member States with income taxes on labour that are above the EU GDP-weighted average have been recommended to reduce the income tax and shift to taxes that are less detrimental to economic growth. Such reforms are believed to improve fiscal sustainability and to be in line with social equity concerns. (11)

    The long-term trends on tax structures in the EU show a path specific development in line with the "taxing for growth" and optimal taxation policies promoted by the EU Commission. The figure below presents an image of the tax structures for the average of the EU15 and the EU28 Member States, respectively for the years 2002 and 2014. It describes the individual shares of the various tax bases in relation to overall tax revenue.

    Figure 1: Taxation Structure in the EU, 2002 and 2014 (12) Labour Taxes VAT Capital Taxes Environmental Taxes (Exclusive Property Taxes) EU15 2002 48.8 18 6 16.2 7.3 2014 49 9 18.8 15.0 6.7 EU28 2002 47.5 20.8 14.9 7.7 2014 47.0 22.1 14.2 7.4 Other Taxes on Consumption Property Taxes EU15 2002 4.2 4.9 2014 3.8 5.8 EU28 2002 5.2 3.8 2014 4.9 4.3 Note: Table made from bar graph. 11. EUR. COMM'N, TAX REFORMS IN EU MEMBER STATES: TAX POLICY CHALLENGES FOR ECONOMIC GROWTH AND FISCAL SUSTAINABILITY: 2013 REPORT (2013); Eur. Comm'n, Tax Reforms in EU Member States 2015. Tax Policy Challenges for Economic Growth and Fiscal Sustainability (Eur. Econ. Institutional Paper 008, Sept. 2015), https://ec.europa.eu/info/sites/info/files/file_import/ip008_en_2.pdf.

    Labour has carried a heavy tax burden. In the figure, labour taxes include both personal income tax and social contributions on labour income. The share of labour taxes amounts to almost half of overall tax revenues. However, it is not related to an increase in a progressive profile of labour taxes. Instead, for several reasons, the general trend is that the overall progressivity has decreased. Seven of the 28 Members States, all of them so-called new Member States and representative of the eastern transformative economies, have replaced progressive income tax systems with flat income rate schedules. Another significant aspect of the fall in progressivity is the drop of top marginal income tax rates for high-income earners since 1995. It is related to both nominal and effective lower tax rates on labour incomes but also to the introduction of dual income tax schemes on capital and labour incomes. Moderate and proportional tax rates on interest, dividends, and capital gains from the labour tax scheme have privileged capital income.

    Separating capital income from the comprehensive global income tax concept have also contributed to generally lower effective marginal income tax rates. The decline of the share of taxes on capital income is visualized in the development of a generally lower capital income taxation that is in tandem with lower corporate tax rates. For the EU15 Member States, the nominal corporate income tax rates were reduced from 38% to 25.9% between 1995 and 2016, and the average corporate tax rate fell by 6% between 1998 and 2015. In contrast to income taxes, the share of value added tax has gained in importance, reaching a share of about one-fifth of overall tax revenue. The figure visualizes a longer-term taxation trend in EU Member States, reflecting the focus on optimal taxation and taxing for growth and the policy implications they suggest. Taxes based on labour constitute almost half of overall tax revenues, and the overall progressivity of taxes on labour has fallen. The share of wealth-based taxes remains limited, and increases are mainly driven by real estate taxation. The trend...

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