Microsoft Word - 00_Title_draft.doc

Figure 3 - Total taxes (including social security contributions) in percentage of GDP in 1995 and 2005

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SEDKBEFRFI ATIT SI

EU-27

DEHULUNLUKCZBGESCYMTPTELPLEEIE LVSKLTRO USJapan

%GDP

1995 2005

n.a. n.a.

Source: European Commission (2006).OECD (2005b). US and Japan: 1995 and 2003.

Over recent years, Member States have carried out major reforms of their tax systems and these reforms
have been driven by several interrelated factors. First, the growing awareness that an excessive tax
burden on labour and its interaction with the benefit systems lowers work incentives has led Member
States to move towards a more employment-friendly labour taxation. Second, Member States have
endeavoured to rationalise and simplify their tax systems, almost always by broadening the tax base in
order to reduce the tax rates. Finally, globalisation and demographic ageing have raised the issue of how
the social models in the European countries should be financed, and particularly how to find robust tax
bases.

The option of pursuing further reductions in labour taxes, given notably the pressing need to complete
the consolidation of public finances raises difficult political and practical issues. Against the background
of consolidation of public finances, revenue-neutral tax reforms deserve particular attention. This implies
that Member States have to look for robust alternative tax bases to labour taxation to finance the welfare
state.

Increasing mobility of factors and ageing populations are creating new challenges for tax policy. For the
future, it is important to maintain the momentum towards more neutral and more efficient tax systems
within the EU, while stabilising revenues, ensuring sound public finances and budgetary discipline. This
would appear to require, among other things, further efforts to:

• improve the quality of public revenues by a growth-enhancing tax structure,


• achieve higher economic efficiency through a fiscal environment that encourages entrepreneurship
  and investment, and provides work incentives and increased employment;


• increase the fairness, transparency, and efficiency of taxation by broadening tax bases and
  eliminating unjustified loopholes, special tax regimes and exemptions.

Way forward

Discussions at the EPC, EFC and the informal ECOFIN have welcomed the analysis made in the note
and the Commission stands ready for work further on these issues. In particular, the European