Move to shift the burden of taxation on to capital

Date: 01/05/1997

By Tim Jones

EUROPEAN politicians have achieved a remarkable double whammy. High rates of tax on labour-hiring have killed off jobs and, at the same time, encouraged the development of a 'black economy' where taxes are not paid. Fewer jobs, lower tax receipts - quite an achievement.

Internal Market Commissioner Mario Monti has taken a novel and maybe even a fruitful approach to the problem, beginning with a thoughtful paper for a meeting of EU finance ministers last spring in which he called for a common taxation policy which “stabilises revenues”.

This would end the tendency to tax immobile factors of production - the main one being labour - and turn instead towards taxing portfolio capital and the use of scarce resources and pollutants.

Presenting figures which shocked ministers, Monti revealed that, between 1980 and 1993, the overall tax rate on labour in the Union rose by 20&percent; while the burden fell by 10&percent; for self-employment and capital.

Over the past decade, taxes on capital have understandably been slashed across the EU as member states sought to take national advantage of the abolition of exchange and capital controls to attract necessary investment.

Tax breaks were introduced to win inward fixed investment in plant so as to create jobs, and many more were established to draw in footloose portfolio capital to invest in countries' stock markets or buy up governments' debts.

As Monti pointed out, the short-term effect of this process can be positive, with jobs created, trade deficits financed and a general upswing in the standard of living. But in the longer term, shifting the tax burden on to the creation of work can only have one effect.

Governments which are trying their best to maximise tax revenues get very upset about this 'unfair' tax competition. In January, Luxembourg Prime Minister Jean-Claude Juncker came under attack from the German and Belgian finance ministers for “unfairly” attracting savings from their citizens.

Slowly but surely, the Commissioner has managed to put together a high-level group of member states' representatives to discuss these issues with the aim of drafting a code of good taxation conduct.

Sadly, whatever these officials might agree, they are certain to be longer on reassuring words than on deeds. Tax sovereignty is just too important for governments to hand over.