In September of 2024, I had the chance to interview Professor of TaxA tax is a compulsory fee or cost collected by native, state, and nationwide governments from people or companies to cowl the prices of normal authorities providers, items, and actions. Legislation on the Lisbon College of Legislation of the Catholic College of Portugal, Dr. Miguel Correia, about the way forward for the EU tax combine. An edited transcript from that interview is under and reveals that Dr. Correia’s pondering on taxation focuses on the pressing have to rebalance the EU tax combine away from its extreme reliance on taxing labor. He argues that this over-reliance is outdated because of fashionable challenges like employee mobility, automation, and growing older populations. His proposed answer includes a basic shift towards three different pillars: a better reliance on environment friendly consumption taxes like the value-added tax (VAT), a stronger implementation of environmental taxes, and, most critically, correcting the continual under-taxation of capital and wealth. He advocates for globally coordinated options to make sure the system is progressive, truthful, and able to funding Europe’s social mannequin, viewing expertise as a key software to enhance each assortment effectivity and taxpayer compliance on this new framework.

Sean Bray: How would you characterize the EU tax combine?

Miguel Correia: That’s an enormous query. The EU tax panorama is extremely various. Every nation has its personal mixture of taxes, and that blend modifications over time. It’s not simply the sorts of taxes which are completely different; the general tax burden varies lots too. You’ve bought international locations the place whole tax income is round 20 p.c of GDP, and others the place it’s pushing 45 p.c or extra. However even with all that range, if we boil it down, I feel we will discover 4 core traits which are widespread to just about all EU Member States.

The primary one is the truth that we rely an excessive amount of on the taxation of labor, each by means of the private earnings tax and social safety contributions. To provide you an thought, in Europe, on common, round 55 p.c of our general tax income comes from the private earnings tax and social safety contributions. This has some benefits however much more disadvantages. Now, on the plus aspect, the private earnings tax in most Member States is pretty progressive, and due to this fact, it will increase the progressivity of the tax system as an entire. That is commendable. The identical isn’t true for social safety contributions, which are typically proportional. So far as I can see, with regards to benefits, that’s just about it.

In terms of the downsides, there’s much more to speak about. First, there’s the excessive tax wedgeBroadly talking, a tax wedge is the distinction between the pre-tax value or return and after-tax value or return. For labor earnings, it’s the distinction between the whole labor prices to the employer and the corresponding web take-home pay of the worker. that we observe in most EU international locations, that’s, the hole between what an employer pays and what an worker truly takes dwelling. This not solely discourages firms from hiring however, in right now’s digital world, it creates an enormous incentive to switch individuals with machines. Now, we don’t need to cease progress. We have to give AI and automation area to develop as a result of that’s how innovation occurs. However the excessive tax on labor makes this transition a lot riskier. It forces us to noticeably query this tax wedge. And if we maintain it—which I don’t suppose we must always—we’ll completely want countermeasures, like taxing automation, to stage the taking part in area between human employees and machines.

The second large downside is employee mobility. Take into consideration what occurred with COVID. It was a tricky interval, nevertheless it normalized distant work. I imply, right here we’re, having an amazing chat when you’re in Brussels, and I’m in Lisbon. We’ve all gotten used to those instruments that, frankly, firms had been hesitant to make use of earlier than. However this creates an enormous problem for tax techniques constructed on residency. The issue is that our most highly-skilled professionals—the architects, the attorneys, the individuals who pay the largest slice of earnings tax—at the moment are probably the most cell. Their work isn’t tied to a bodily place. So, that mental, high-paid work, which is a large supply of funding for our social techniques, is all of the sudden vulnerable to strolling out the door.

Third, Europe is growing older. This isn’t a brand new development, however we’re actually feeling it now. I’m in Portugal, and together with Germany and Italy, we’re on the entrance traces of this demographic shift. You may see it in day-to-day life, and EU information confirms the development is ready to proceed. This creates a large fiscal problem for a system that depends on taxing labor. Give it some thought: you might have fewer individuals working and paying into the system, and on the identical time, you might have extra individuals retiring and drawing advantages out of it. With extra pensions to pay and rising healthcare prices, relying so closely on a shrinking workforce to pay the payments is just not sustainable.

And the ultimate level on labor taxation is the previous assumption that we must always tax labor and capital otherwise. The historic pondering was that capital was cell and arduous to trace, whereas labor was caught in a single place. That justified taxing labor extra closely. Nicely, the tables have turned. As we’ve seen, digitalization has made labor cell. On the identical time, expertise and international agreements, just like the Frequent Reporting Normal and higher information sharing, have made capital simpler for tax authorities to trace throughout borders. So, the previous logic is totally outdated. We now have a world with cell labor and trackable capital. This actuality calls for that we basically rethink how we tax capital.

The second main attribute of our tax mixes is our heavy reliance on VAT. Now, not like the issues with labor taxes, I don’t see this as a nasty factor. Quite the opposite, I feel it’s a wonderful income, and we must always lean into it extra. Why? For 2 important causes. It’s environment friendly. VAT doesn’t distort financial conduct almost as a lot as company earnings taxA company earnings tax (CIT) is levied by federal and state governments on enterprise earnings. Many firms are usually not topic to the CIT as a result of they’re taxed as pass-through companies, with earnings reportable below the person earnings tax. does. It’s a a lot cleaner, extra impartial strategy to elevate income. And it boosts competitiveness. When a European firm exports a product, the VAT is basically washed off on the border. The product leaves Europe tax-free, which helps us compete on the worldwide stage. Company earnings tax, however, stays within the product’s value.

On prime of that, we’re getting significantly better at gathering it. The VAT hole, that’s, the distinction between what’s due and what’s collected, is shrinking throughout Europe. In my very own nation, Portugal, it has dropped from round 16 p.c down to only 4 or 5 p.c. Tax administrations are utilizing real-time invoicing and new applied sciences to search out fraud, and the potential to enhance assortment with expertise remains to be immense.

Now, the core downside with VAT is that it isn’t progressive. It hits lower-income households more durable as a result of they spend a bigger portion of their cash. However right here’s the factor: we’d like a progressive tax system, not essentially a progressive all the things. Not each single tax has to do the heavy lifting on equity. You may depend on a robust, environment friendly tax like VAT so long as you might have countermeasures in place, akin to focused assist for probably the most needy, to steadiness out the results and make sure the general system is truthful.

The third attribute that’s widespread to most of our tax mixes is that we have to do extra on environmental taxation. And right here’s a shocking truth: during the last decade, the share of income from inexperienced taxes within the EU has truly been lowering. We’re heading within the mistaken course. There’s a brand new Vitality Taxation Directive being negotiated that goals to repair this by linking taxes on to the polluting potential of a gasoline. That’s precisely the best way to go, however the political discussions are proving troublesome. And similar to with VAT, we’ve to be good about designing these taxes with countermeasures to guard susceptible households from the affect.

Final however not least, the fourth attribute is the continual under-taxation of capital. We do a good job of taxing wealth that you could see, like actual property. However we do a really poor job of taxing the form of wealth the richest individuals maintain, monetary belongings. That is the place the true problem is, and our tax techniques are, to a major extent, lacking it. So, how can we repair this? The concept of a international annual wealth taxA wealth tax is imposed on a person’s web wealth, or the market worth of their whole owned belongings minus liabilities. A wealth tax may be narrowly or broadly outlined, and relying on the definition of wealth, the bottom for a wealth tax can range. is gaining a whole lot of traction, and I consider it deserves severe consideration. Sure, there are technical challenges, like valuing belongings. However many of those hurdles turn out to be smaller if we act collectively on a world stage and make good use of the brand new applied sciences. A renewed look right into a globally coordinated, intelligently designed monetary transaction tax may be justified. The previous methods of taxing are not match for goal. We have to push for coordinated, international options, constructing on the brand new technological developments to enhance tax design and administration.

In a nutshell, that is how I see the present tax combine and its traits in Europe now.

Sean Bray: How does the ability-to-pay precept come into play in VAT coverage?

Miguel Correia: That’s a query that will get to the guts of VAT coverage. Our tax techniques are constructed on a core thought, which is referred to in most European Constitutions: the “ability-to-pay” precept. Principally, everybody ought to contribute primarily based on their financial capability. The issue is, if you happen to rely too closely on VAT, you undermine that very precept. A lower-income individual has to spend almost all the things they earn simply to get by, so nearly all of their cash is hit by VAT. A really rich individual, however, saves a big portion of their earnings. That saved cash isn’t touched by VAT till it’s ultimately spent. This implies the relative burden of VAT is way heavier on the poor than on the wealthy, which creates an actual equity downside. So, that’s why you may’t have a robust VAT in isolation. It must be balanced. For me, the reply is evident: sure to a robust VAT, nevertheless it completely should go hand-in-hand with stronger taxation of capital.

Sean Bray: Do you see the company earnings tax as a significant income raiser in the way forward for the tax combine?

Miguel Correia: Truthfully, no, I don’t see company earnings tax ever being a main income. Proper now, it solely brings in about 8-9 p.c of the whole tax income. For years, we’ve reduce the headline tax charges however have tried to make up for it by broadening the tax baseThe tax base is the whole quantity of earnings, property, belongings, consumption, transactions, or different financial exercise topic to taxation by a tax authority. A slim tax base is non-neutral and inefficient. A broad tax base reduces tax administration prices and permits extra income to be raised at decrease charges.. However basically, it’s simply not a really environment friendly tax. It creates financial distortions and harms worldwide competitiveness in ways in which a VAT, for instance, merely doesn’t. For these causes, I consider it’s all the time going to have a restricted position. Its actual job is to work in tandem with the private earnings tax.

Sean Bray: What are your ideas on a world wealth tax?

Miguel Correia: A world wealth tax doesn’t imply creating some form of world authorities that collects taxes. We will’t even handle that inside the EU. Right here we’re talking about international coordination. It’s much like what we’re doing with the worldwide minimal company tax below Pillar Two. The concept is that international locations agree on a standard set of minimal guidelines, a ground, for the way they’ll tax the wealth of their very own residents. We’d set up clear pointers on who will get to tax what, very like we’ve carried out for many years with earnings tax treaties. The tax itself would nonetheless be a nationwide tax, collected by nationwide governments. This strategy avoids constitutional points whereas stopping a race to the underside the place the super-rich can simply transfer their belongings to a tax haven.

Now, are there technical difficulties? Completely. However good tax design can resolve them, and we have already got examples to be taught from. Take a look at Spain: they’ve an annual wealth tax that’s working proper now. They’ve developed options like progressive charges and exemptions to guard the center class. The 2 largest hurdles individuals all the time carry up are valuation and liquidity. Certainly, it’s simple to worth publicly traded shares, however what a couple of non-public firm or a bit of artwork? It is a actual problem, however there are pragmatic options, like valuing these belongings each 5 years as an alternative of yearly. Then there’s liquidity, the “asset-rich, cash-poor” downside. Somebody would possibly personal a helpful asset however not have the money readily available to pay the tax. For this reason the tax charge needs to be low and designed sensibly. The purpose is, we aren’t ranging from scratch. We will be taught from international locations like Spain and use expertise and higher data sharing between international locations to make it work.

So, why undergo all this bother? As a result of we should. We love the social security nets we’ve in Europe. They guarantee equality and peace, and I don’t suppose any of us need to lose that. However that prices cash. If we agree that our present tax combine is damaged, with an excessive amount of of a burden on labor, then we’ve to seek out the income some place else. And the info is evident, due to the work of economists like Thomas Piketty: wealth inequality is now far better than earnings inequality. We merely need to do a greater job of taxing capital. Politically, it’s a tricky battle. However that’s precisely why we’re having this international dialog. To start out discovering actual, coordinated options.

Sean Bray: What issues do smaller Member States face when designing tax coverage in comparison with bigger Member States?

Miguel Correia: Competitiveness is a big problem for smaller international locations. Nevertheless it should be truthful competitors. Frankly, I’m not a fan of tax techniques designed with the only real goal of plundering the tax base from different international locations. I consider that erodes the spirit of the European venture. You may’t speak about European unity after which flip round and devise a tax scheme to undercut your neighbor. Being a small nation isn’t a clean test to do no matter you need. The EU has tried to implement fairer competitors with issues just like the Code of Conduct, however truthfully, its instruments are too weak because of the requirement of unanimity voting on the Council of the European Union to approve tax laws. This must be revised. Simply have a look at the EU’s official listing of tax havens: it’s far too quick, and we might by no means even agree on what the penalties must be. So, my place is straightforward: competitors, sure. A race to the underside, no.

Sean Bray: What would make the tax system fairer, and the way can expertise assist make tax submitting simpler for taxpayers?

Miguel Correia: Let me contact on each of these factors, beginning with equity. We’ve made progress, however there’s nonetheless a whole lot of work to do. For me, actual equity comes down to a couple key issues. First, closing tax gaps. We have now to maintain cracking down on tax evasion and avoidance throughout the board, for people and firms. There’s nonetheless an enormous quantity of uncollected income on the market. Second, controlling loopholes. We have to maintain shut observe of particular tax breaks and credit. They need to be reviewed continuously to ensure they’re nonetheless justified. Third, making the tax system less complicated. It has turn out to be far too advanced, and that complexity itself is a supply of unfairness. Lastly, taxing wealth correctly. As we’ve already mentioned, we have to do a greater job of taxing wealth.

The final problem I need to point out is the unimaginable affect of expertise, which I see as a possible double-win. On one aspect, expertise provides tax authorities highly effective new instruments to seize income that’s presently misplaced to fraud. We will use AI and information analytics to be far more efficient and environment friendly. As well as, that very same expertise may make life simpler for sincere taxpayers. The purpose must be a system so seamless and clear that compliance is not a burden. The large problem for the approaching years will likely be putting the precise steadiness right here: utilizing these highly effective instruments to make sure everybody pays their fair proportion, whereas fiercely defending the rights and privateness of the taxpayer.

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