March 12, 2012
The crisis has led to a considerable change in the structure of tax revenues in the eurozone, although it is not always possible to separate the structural from the cyclical effects.
Before the outbreak of the financial crisis, there was a trend towards tax systems considered growth-conducive: labour was burdened less heavily as social-security contributions were reduced and income tax was reformed. While revenues from social security contributions were equivalent to 14.7% of GDP in 2000, they fell to 14% by 2007. The share of revenues from direct taxes also declined strongly from 2000 to 2004. However, this was probably not the result of reforms alone – beside income tax, corporation tax was reformed – but was also due to reduced incomes and especially profits when the dotcom bubble burst. As a consequence of the subsequent recovery, revenues from direct taxes almost reached the same share as in 2000 again.
Revenues from indirect taxes, by contrast, have already been rising since 2001, partly because VAT and excise taxes were raised.
Since 2007, revenues from direct taxation have declined again. Within two years, revenues dropped by a full percentage point – from 13% of GDP in 2007 to 12% in 2009. One reason for this is the fact that the sluggish economy strongly reduced the tax bases – incomes and profits. However, revenues from direct taxation are likely to return to normal in view of the economic recovery.
By contrast, revenues from social-security contributions rose because many countries took economic-policy measures to protect jobs (for instance, short-time work in Germany) which initially led to a hoarding of labour. The delayed impact of the crisis on the labour market was not reflected until 2010 when revenues from social-security contributions fell. This decline is set to continue.
On the one hand, the fall in revenues from indirect taxation was triggered by the negative expectations of consumers. On the other, Ireland and Finland, for example, reduced their VAT rates to stimulate consumption. However, in 2010 already, there were indications of a renewed increase in revenues from indirect taxation.
Against the backdrop of fiscal consolidation, tax systems in the eurozone show different developments.
The southern peripheral countries are compelled to generate the highest possible tax revenues. So, for example Portugal, Spain and Greece have hiked VAT rates. The possibilities of these countries to carry out (growth-conducive) tax reforms and to accept an initial decline in revenues are currently rather limited.
In other countries, the trend towards growth-conducive tax regimes seems to be continuing.
Slovenia, for example, lowered its corporate tax rate in 2009 and 2010. Germany reduced its basic rate of income tax and at the same time raised the tax-free allowance.
In view of the stronger focus on growth in the eurozone, more attention should be paid to giving national tax systems a growth-conducive structure.