Generating 51.4% of all tax revenue in the EU, taxation on labour, including social security contributions, is the largest source of revenue for Member States, according to the European Commission's annual report on taxation, published on Monday 3 July.
“Governments are currently heavily reliant on labour taxation to generate government revenues and will therefore need to also take action on taxation, otherwise the declining share of economically active people will reduce tax revenues and put welfare states at risk”, warned the Commission. The demographic change represented by ageing populations may indeed lead to “a dramatic reduction in the number of people of working age”.
Digitalisation and globalisation are two other factors that will have an impact on the labour market. They will create both opportunities – e.g. better tax information, improved tax collection and analysis, increased labour mobility – but also challenges, such as increased automation, which may pose a risk to the sustainability of labour tax revenues if there is a substitution of capital for labour, the risk of aggressive tax planning (see EUROPE 13216/14) and excessive tax competition.
“This may in turn reduce the ability of tax systems to generate the necessary revenues and make it harder for governments to ensure their tax systems are sufficiently progressive”, the Commission concluded.
Although personal income tax is also a significant tool for redistribution, the highest tax rates have fallen in all EU countries except Greece, Portugal and Latvia. This reduction has reduced the scope for redistribution through personal income tax (see EUROPE 13211/16).
Read the report: https://aeur.eu/f/7zs (Original version in French by Anne Damiani)