October 9, 2012
Between 2000 and 2010 in Germany, the tax burden on the production factors capital and labour decreased and the burden on consumption slightly increased. This dovetails with the recommendations of theoretical and empirical considerations. By contrast, in Portugal and Italy the burden on labour increased while the burden on capital and consumption decreased – indicating reform options for these countries. Since the outlook for economic growth in many European countries is currently rather modest there is a need for reforms that boost growth.
One possible approach would be to reconsider the design of their respective tax system. Taxes usually distort market participants’ business decisions and thus how they use production factors, thereby adversely affecting economic growth. In this context both the structure of taxes and the design of the individual tax are important. Theoretical and empirical evidence suggests that (significant) taxes on labour and capital produce more distortions than taxes on consumption (and property). Therefore, within a tax system much argues in favour of increasing the burden on consumption and decreasing the burden on labour and capital. It is important to note that the optimum design of a tax system also depends on a host of other factors such as the level and structure of the existing tax system, compliance costs and tax morale, the degree to which a society seeks to redistribute wealth, and preferences pertaining to the provision of public goods. (For more detail see The impact of tax systems on economic growth in Europe: An overview)