Fabrizio Balassone, Daniele Franco, Alessandra Staderini (*)

1. Fabrizio Balassone, Daniele Franco, Alessandra Staderini (*) Tax Policy in EMU: a Preliminary Assessment (*) Banca d’Italia - Research Department

2. Aim of the paper Analyse motivations of recent European tax reforms to: a) check consistency of designb) assess influence of EU specific features

3. Outline of presentation 1) Review motivations of reforms2) Discuss expected effect of EU features3) Description of reforms4) Assess consistency of reforms with motivations5) Examine evidence of EU features effects

4. Motivations (i): The timing of reforms At the end of the 1990s almost all EU Governments announced a reform Factors accounting for clustering: 1) Common unemployment and growth problems (Lisbon Council, 2000) 2) Cyclical upturn  margins for tax cuts 3) Elections (political opportunism)

5. Motivations (ii): Tax reforms and elections 2003 2002 2001 2000 announcement of reform 1999 1998 1997 1997 1998 1999 2000 2001 2002 2003 elections

6. Motivations (iii): Policy arguments Analyse Governments’ declared intentions (Stability Programmes) Results: 1) all use supply-side arguments 2) low weight to equity considerations

7. Motivations (iv): Some examples 1) Spain: “reform designed to boost the supply side ...” 2) The Netherlands “tax reform expected to push up supply of labour…” 3) Germany “... for promotion of growth and employment…” 4) Greece “…to increase business activity and labour supply…”

8. Motivations (v): The tax burden in the EU Motivations hardly surprising: a) in the 1990s EU growth is relatively low and unemployment relatively high b) tax burden rising from the 1960s in the EU c) although empirical evidence is ambiguous a link between the two was suggested

9. Motivations (vi): The tax burden in the EU * Concern especially over high tax wedge on labour * Using the “Prescott Index”:

10. EU specific features (i) 1) EMU Fiscal Rules 2) Increasing economic integration (tax competition) 3) Need for national fiscal stabilisation in EMU4) Population ageing (sustainability)

11. EU specific features (ii): expected effects Likely:1) Fiscal Rules: limit the effect of tax reform on fiscal balances2) Integration: link between taxation and mobility + clustering of tax reformsPossibly:3) Stabilisation: tax cuts accompanied by changes to welfare benefits4) Ageing: tax cuts tailored to provide incentives to labour market participation

12. Description of reforms a) reduce average and marginal rates on labour (including social security contribution)b) cuts targeted at low-to-middle incomes (+ reform of unemployment benefits)c) clusteringd) cuts to corporate taxation also commond) modest quantitative impacte) enacted when expect deficit improvement g) funding relevant in declared intentionsh) gradual implementation

13. Design-Motivation Consistency reduction of average and marginal rates on labour cuts targeted at low-to-middle incomes good matching of design and motivationsHowevermodest quantitative impact reforms not effective

14. Effects of EU specific features (i) a) fiscal rules modest quantitative impact of reformsb) fiscal rules (expect a deficit improvement) + tax competition clustering of reforms?c) fiscal rules funding relevant in intentions + gradual implementationd) stabilisation + ageing tax reform targeted at low incomes + accompanied by changes to benefits?

15. Effects of EU specific features (ii) However:fiscal rules + risks for sustainability did not manage to inducereforms in expenditure programsto accompany tax cuts

16. Summing up * Tax reforms design consistent with motivations* Reforms may fail to be effective as fiscal rules: a) avoid large deterioration of budget balances BUT b) do not force reforms of expenditure programs