30th Mar 2023


Radical tax changes mulled for future of Europe's welfare states

  • A 15 percent minimum tax-rate on large multinational corporations has already been agreed globally (Photo: Unsplash)
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What if you were told of a way to ensure that those in need receive adequate social coverage even when they do not contribute enough to the system?

On paper, it looks good. Getting the welfare state of EU members to reach everyone, from children and young people, to women and the elderly, particularly in view of a future that will be affected by demographic changes such as the ageing population.

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But where will the money come from to cover it?

The EU Commission's high-level group (HLG), an 11-member team set up to develop reform proposals at both national and European levels, has collected some thoughts on how to obtain the funds through taxation.

Proposals range from increasing taxes on corporations, to other suggestions where it has no competence, (i.e. personal income taxes, where they include taxing expatriates for several years after leaving the EU, or removing preferential regimes for high-income payers).

The proposals are not new, explained Oxfam EU tax expert Chiara Pitaturo to EUobserver. However, they take up the idea of making the tax system more progressive, rather than imposing more taxes on ordinary people.

How? By re-designing the existing tax mix.

For actors like Oxfam EU, a "drastic break with decades of tax cuts for the rich and corporations" will be needed to reduce inequality and achieve social protection for everyone. Others, such as BusinessEurope, representing enterprises in the EU, are concerned about how these proposals could undermine the bloc's competitiveness.

Here is a summary of the proposed roadmap.

Tax the rich?

So far, social contributions are collected from wages, but what if they were supported with general taxation?

Hence, the report's proposal. Coverage of all workers through a unitary contributory system, and where needed — including minimum income or general social services — general taxation would fill the gaps.

On the taxation of personal income, the HLG proposes two ways of reform: broadening the tax base, or making it more progressive.

What does this mean? The first would reduce or limit the current number of tax exemptions. For example, by bringing back into personal taxation (with higher taxation) capital income—from investments in the stock market, or from the profits that can be made from one's own business— for example.

On the other hand, making taxation of income more progressive translates into considering taxes and benefits simultaneously, or taxing income from additional hours worked.

It would also include another less popular approach for the richest, to abolish preferential tax regimes for high-income taxpayers. In practice, that means withdrawing schemes benefiting 200,000 payers, which implies a loss of €4.5 billion per year for the EU, the report says.

Increasing corporate taxation

On the above suggestions, the EU has no competence, but on the business side, it does.

Making multinationals pay their "fair share of tax" is part of what the report highlights as the EU's role to ensure a level playing field.

A 15 percent minimum tax rate on large multinational corporations has already been agreed globally as part of the two-pillar OECD reform the EU is implementing for a fairness framework, which will generate over €141bn every year, the OECD estimates.

But the other pillar is still pending, which focuses on achieving the redistribution of certain types of corporate profits according to where they have real economic activity, said Putaturo.

For the Oxfam expert, member states need to rebalance how they raise total tax revenues, most of which come from labour and consumption taxes.

On the contrary, for European business representatives, in addition to reducing taxes on labour, taxes on capital (including corporate taxation) must also be go down.

"Increasing taxation is no good way forward as this would deteriorate Europe's competitiveness," they said.

Instead, they advocate the efficiency of social investments and the creation of a European network of national social security institutions. Something like an EU forum that includes social partners and allows for regular cooperation and mutual learning.

Nevertheless, to eliminate a 'race to the bottom', the 108-page document categorically recommends increasing taxes rather than lowering them, ranging from charging for environmentally-harmful practices, to levying on revenues instead of on profits for large corporations, and adding a tax on financial transactions — expected in 2024.

"The money raised could be used to tackle any unintended consequences of the policies, as well as challenges that already exist, for example reducing the tax wedge [the difference between the employer's labour costs and the employee's corresponding take-home pay], and supporting re-skilling and upskilling", HLG members conclude.

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