INTRODUCTION:
IV. COMPOSITION OF REVENUE AND EFFICIENCY OF TAX SYSTEMS
Even though much of the discussion on the quality of public finances focussed on the public
expenditures, the quality of the revenue side of the public budgets is equally important. Given the
challenges of globalisation, ageing and the increasing international mobility of production factors and tax
bases, there is a clear need for a growth-friendly and sustainable composition of public revenues and the
efficiency of tax systems. This urging issue is best placed in the broader context of the financing of the
future, a topic that was raised under the Germany EU Presidency; at the same time, it should not be
mixed up with the narrow and often uploaded controversy of tax competition vs. tax harmonisation.
The two papers presented in this chapter reflect this comprehensive economic philosophy and they reveal
that growth-enhancing and stable revenues in the future should help the Member States secure the
financing of public goods and the European welfare states in particular.
The structure of revenues can impact long-term growth, mostly by affecting the allocation of labour and
capital. While there is some evidence that consumption taxes create fewer disincentives for growth than
direct taxes, the detailed structure of such taxes need to be carefully considered. Valenduc (2005)
explains these challenges for assessing the quality of tax revenue systems and focuses particularly on the
choice of indicators which applies in an analysis of the Belgian tax system.
The paper outlines the complexities in determining the quality of revenue systems. On the one hand, tax
systems which are neutral and efficient, that means applying a low rate and wide tax base to minimise the
deadweight costs of taxation, can be considered to be of high quality. But on the other hand, neutrality
and efficiency may conflict with other policy objectives such as redistribution. This trade-off complicates
the assessment of the quality of tax system and requires a careful choice of indicators. Valenduc
discusses a set of indicators to that measure the tax burden and the tax base and applies the assessment to
the Belgian tax system.
The paper by the Commission services reviews trends in tax revenues and reforms. It finds that the
overall tax burden has stabilised over the past few years. This was helped by a number of important
reforms of tax structures across many Member States, largely driven by the objective to enhance
economic growth and ensure fiscal discipline in an environment where effective taxation has become
more difficult. Tax reforms, however, varied widely: they included, for example, shifts in the tax burden
from low-income workers to high-income groups or from labour to consumption in general. Moreover,
additional sources of tax revenue were also sought through a stronger emphasis on environmental taxes
and taxes on immovable property, a promising avenue going forward as the paper point out. More
generally, the Commission paper stresses that future work on the revenue side of quality of public
finances should focus on identifying revenue sources which are growth-enhancing and efficient while at
the same time taking into account the individual requirements in each country.
In addition to the link of public revenue and growth, the paper also highlights the close link of national
public revenue structures and Member States’ policy goals concerning equity and efficiency. As a basic
principle, as also pointed out in the paper by Valenduc, equitable and efficient revenue structures should
avoid distortions, but encourage risk-taking and entrepreneurship, and create work incentives. To achieve
this, tax systems should be fair and simple in design and minimise the risk of tax fraud by relying on a
broad tax base. Furthermore, future tax mixes may also rely more heavily on indirect taxation. Going
forward, an exchange of experiences across the EU towards a more efficient and simple systems should
prove fruitful.