Cutting tax burden is ‘priority policy for economic growth in EU’ say finance ministers

Members of the ‘Eurogroup’, which includes finance ministers of countries that use the euro, said after talks in Italy that a “coordinated euro area approach” would provide “strong impetus” for carrying out reforms across the eurozone.

According to the group (2-page / 64 KB PDF), the EU should reduce taxes on the “most vulnerable citizens, compensating tax reductions on labour by compensatory measures in areas that are less detrimental to growth”.

However, reforms should be “targeted at the country specific challenges, so as to maximise their impact”, the group said. “To that end, they should be aimed at the relevant components of the tax burden and at specific groups facing the greatest employment challenges. It should also be ensured that the reforms do not make the tax system overly complicated for taxpayers and the tax administration.”

Finance ministers said the “overall tax burden in the euro area is above the Organisation for Economic Co-operation and Development (OECD) average and is skewed towards labour”.

“In view of the need for fiscal consolidation, the tax burden on labour has also been growing over the last few years,” the group said. “This is a clear impediment to an efficient and smooth functioning of euro area labour markets and runs counter to the objective of boosting economic activity and increasing employment, in particular given the high unemployment level in several euro area member states.”

The group said: “Reducing the tax burden on labour has the potential to support consumption, stimulate labour supply and employment, as well as to improve cost-competitiveness and firms’ profitability. It will therefore increase demand, growth and support job creation, and contribute to the smooth functioning of the economic and monetary union.”

In view of the “overall limited fiscal space in the euro area”, the group called for reductions of the tax burden on labour “to be duly compensated, while taking into account the country-specific fiscal margin for manoeuvre”. Reforms for reducing the tax burden on labour should be accompanied by either a “compensatory reduction” in non-productive expenditure, or by “shifting labour taxes towards taxes less detrimental to growth, with a view to respecting fiscal targets in line with the (EU’s) Stability and Growth Pact”.

The group said the positive effects of labour tax reforms “can only materialise fully in well-functioning labour markets... therefore, the impact of reducing the tax burden on labour can be significantly enhanced when they are part of a broader package of labour market reforms”. In addition, the group said governments would have “to ensure broad societal and political support” for any reforms.

The group said it will “take stock” of plans to reduce the tax burden on labour when it discusses the draft budget plans of member states in November 2014, based on an “assessment” by the European Commission. In addition, the group said it planned to monitor the implementation of reforms in spring 2015 “as part of a broader stock-taking exercise on the implementation of the recommendations to the euro area”.

The OECD said in its annual 'Taxing Wages' report for 2014 that personal income tax had risen in 25 out of 34 OECD countries over the past three years, as countries reduced the value of tax-free allowances and tax credits and subjected higher proportions of earnings to tax. The OECD said the latest highest average tax burdens for childless single workers earning the average wage in their country were observed in Belgium (55.8%), Germany (49.3%), Austria (49.1%) and Hungary (49.0%).