Wednesday, February 1

The European Commission recalls that taxes are “crucial” to address inequality and the green transition


Taxes have a social function, says the European Commission. And he is saying this at a time when talk of sweeping tax cuts can bring down a British prime minister, while the idea that big power and energy companies should pay more for the extraordinary profits they are making from the energy crisis exacerbated by the Russian invasion of Ukraine.

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In this context, a conference on taxes is being held in Brussels with a view to how to plan taxes between now and 2050, organized by the European Commission. And the European Commissioner for the Economy, Paolo Gentiloni, has defended taxes as a fundamental economic and social tool for States.

“Traditionally,” Gentiloni has said, “we have looked at tax policy with a somewhat narrow focus, focusing on details, on technicalities. That’s not bad in itself, but we should complement it with a general approach. We must look more broadly at the new realities we are facing, and at the long-term trends that shape our economies and societies. And we need to reflect on the role that taxation can play in addressing these challenges and helping to meet our common goals.”

“The main function of taxes is to generate income for governments”, continued the Commissioner for the Economy: “But taxation is, of course, much more than that. Taxation can ensure that resources for the state are collected in a fair and sustainable manner. It is a crucial tool to address inequality and ensure a fairer social allocation of resources. And it can change the patterns of production and consumption, something that is particularly relevant when we think about the green transition”.

Gentiloni added: “These roles are worth keeping in mind when considering how tax can contribute to addressing climate change or inequality, and how it can support our common goal of achieving sustainable and inclusive growth.”

In this sense, the commissioner recalled “the historic global tax reform last year, agreed by 136 countries” on a minimum international corporate tax of 15%, which is still pending application: “It will bring significant improvements to the international tax landscape, making it fairer and better adapted to the modern economy. We remain committed to this crucial reform – it must become a reality. Both the minimum taxation and the reallocation of tax rights will need to be implemented in due course to provide a fairer and more stable global corporate tax system. But as we move forward in the EU, we must also ensure that all parties to the deal do the same.”

Thus, Gentiloni has also spoken about the fight within the EU against pseudo-tax havens, such as the Netherlands, Luxembourg or Ireland: “Within the EU, we have also been advancing on an ambitious tax reform programme. We have installed a fiscal transparency framework. We have strengthened our defenses against tax abuse. And we are working to make our direct and indirect tax systems fit for the digital age. In the field of VAT, for example, Member States lost €93 billion in VAT revenue in 2020. At a time when investment needs continue to grow and public finances are constrained by high levels of debt, these are losses that we can’t afford.”

According to Gentiloni, “the introduction of electronic tax filing systems will enable Member States to recover an additional €11 billion each year for the next ten years in currently uncollected VAT revenue.”

“When we reflect on the future of tax policy in the EU,” says Gentiloni, “we must bear in mind an inescapable truth: Europe is already the region with the highest taxes in the world. The tax/GDP ratio in the EU is around 40% compared to an average of 33% in the OECD. Therefore, the scope to further increase tax revenues in the future could be limited. But what we can do is consider how we can tailor our tax mix to make it fairer, greener and more growth-friendly.”

On this point, he added: “The current tax mix in the EU is highly dependent on labor taxes, which account for more than 50% of total tax revenue. VAT (with more than 15% of total tax revenue) is the second most important component. Other tax bases contribute considerably less. For example, environmental taxation has been stable at a very low level for more than a decade and only represents 2% of GDP. In the context of the green transition, there is certainly room to improve the ‘polluter pays’ principle, taking into account the potential social impact of green taxes to ensure equitable outcomes.

Priorities

“The system has to respond to three priorities: adjust to economic cycles, respond to shocks and guarantee the long-term sustainability of our welfare state, particularly in the case of Europe”, said the Spanish economic vice president, Nadia Calviño : “In the case of the Spanish system, our fiscal and economic policy in general is based on fiscal responsibility. We have been able to reduce our debt and deficit ratios as soon as growth has resumed in 2021. That has allowed us, I think, to have a stronger fiscal system.”

Calviño has defended that the Government has responded “in an effective and agile way to the shocks derived from the pandemic, protecting jobs, protecting companies and now having to respond to the war and inflation. We have all had to react very quickly by reducing VAT and other indirect taxes on energy, providing support to families. Now we have to think a little more carefully to make sure that these measures are compatible with the green agenda. And finally, we have been trying to constantly improve our tax system to align it with the broader political agendas of the EU, digital taxation, also green taxation, and make it as fair and progressive as possible.”

“Being a progressive government,” Calviño said, “one of the main priorities is that we have a fair distribution of the impact of the war. It is necessary to react to the urgent without losing sight of the main priorities with a perspective of medium and long term”.



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