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Mr. László ANDOR
EU Commissioner responsible for Employment, Social Affairs and Inclusion
Adapting tax systems to address employment and social challenges
The Brussels Tax Forum
Brussels, 6 March 2012
Ladies and gentlemen,
As Commissioner for employment, social affairs and inclusion, I am very pleased to be here today and address the Tax Forum. With my intervention, I would like to contribute to the debate on the effect of shifts in taxation — and in particular of taxes on labour — for employment, for social cohesion and for fighting against poverty. This debate is even more relevant in the light of the conclusions of the European Council last week which invited Member States to review their tax systems with a view to shifting taxes away from labour.
Such a discussion is necessary. Until now, the debt crisis has diverted attention in recent months from policies that promote growth and employment.
Now that the financial markets have stabilised to some extent, we have to urgently consider policies that will foster a job-rich recovery.
This means balanced measures that focus on both the supply and the demand side of the economy.
Taxes can be useful here as they have an impact on the demand and supply sides of the economy.
The employment and social crisis and Europe 2020
Ladies and gentlemen,
I know you are all aware of the seriousness of the current employment and social crisis. The figures speak for themselves.
Unemployment stands at 10.1% in the EU and 10.7% in the euro area.
EU total jobless number is 24.3 million, with just under 17 million in the euro area.
The USA, in contrast, has seen unemployment fall since the end of 2010. This January, it stood at 8.3%.
Meanwhile, the EU’s youth unemployment rate is even more worrying. In January this year, 5.5 million young persons under 25 were unemployed in the EU. They were 3.3 million in the euro area.
There are wide differences in rates between the Member States. These range from less than 8% in Germany to just under 50% in Spain.
The picture is very bleak for the EU.
That is why I believe we are duty-bound to consider all options to mitigate the impact of the crisis on the lives of our fellow Europeans.
I am relying on this Forum to improve our understanding of the way tax policy reform could contribute to our efforts.
As you know, Europe 2020 seeks to foster growth that is smart, sustainable and especially inclusive.
Two of Europe 2020’s five headline targets are to:
These targets are especially relevant from my viewpoint, because:
The 2011 Annual Growth Survey that kicked off the first European Semester underlined the importance of tax policy for growth and employment.
Several Member States received country-specific recommendations relating to taxation, in particular as regards the need to reduce the tax on labour.
These issues are even more present in the 2012 Annual Growth Survey package, which includes a report on taxation policy for the first time.
In what ways can taxation be mobilised?
As you know, taxes affect aggregate demand through their impact on income distribution and on international competitiveness.
In the short to medium term, aggregate demand is an important determinant of employment.
And the distribution of income — between labour and capital, and between different groups of workers — and employment are important determinants of poverty.
In particular, on the labour supply side, tax regimes may encourage or discourage labour market participation.
On the labour demand side, they have an impact on the relative price of labour and capital, and determine productivity growth, innovation, wages and profitability.
Four points should be borne in mind here.
One: in the current severe economic downturn with a major production capacity gap, changes in tax have more potential for triggering demand-side effects than supply-side effects in many Member States.
Two: there are special constraints on tax policy within a monetary union with irreversibly fixed nominal exchange rates.
Fixed nominal exchange-rate regimes mean that adjustments can no longer be made through changes in the nominal bilateral exchange rate, and that the labour markets bear the brunt of the adjustment.
Three: there is a growing feeling that some groups of income-earners are not paying their fair share of tax.
Four: the whole issue needs to be seen against the background of fiscal austerity.
We are operating under tight budgetary constraints that influence our opportunities of using tax policy as a way of stimulating supply or demand.
So let’s look at the impact of tax policy on employment and social cohesion in a severe economic downturn.
It is often argued that unit labour costs in some Member States have developed unfavourably because their nominal labour cost growth was above their productivity growth.
In other words, the cost of labour has outstripped productivity.
This raises the question about the extent to which tax affects the nominal labour cost and productivity, and how tax policy can be geared to meeting the Europe 2020 targets.
The nominal labour cost includes gross wages and salaries — before deduction of tax and employees' social security contributions — employers’ social security contributions, and bonuses and overtime payments.
Nevertheless, the effect on employment of cutting tax is limited by the need to maintain our welfare systems, fiscal sustainability and general price stability — all at the same time.
To that extent, there is scope for considering shifting the tax burden from labour to other sources of revenue in revenue neutral ways, such as through indirect and environmental taxes.
Labour tax cuts across the board
The most popular option for offsetting the loss of direct tax is to increase indirect taxes, although there are suggestions about capital and property taxes too.
Even in the short term, this may conflict with efforts to meet the Europe 2020 target for reducing poverty and promoting social cohesion.
Empirical evidence suggests that shifting tax from labour to consumption — for instance, by increasing VAT — has a rather regressive effect on income distribution.
It would also shift part of the burden from the working population — including low-wage earners — to those who do not work — such as pensioners and benefit recipients.
And that would have a negative effect on their purchasing power.
The social implications of shifting tax from labour to consumption could possibly be tempered by concentrating the rise in indirect tax on a very specific group of goods.
It is often suggested that this could be fossil energy carriers, the use of which harms the environment.
But here again we need to bear in mind that increasing fossil fuel taxation may also increase the production costs that impair international competitiveness and raise the cost of basic heating and cooking needs for the poor.
Tax cuts to restore international competitiveness in one Member State may trigger tax cuts in others.
This may then spark retaliatory measures and put severe strain on Member States’ public finances and social cohesion.
To forestall such adverse deflationary effects of tax competition between Member States, I believe it is vital for tax policy to be coordinated more closely at European level.
Labour tax cuts for the low-paid
Today there is wide political consensus that tax policy — especially policy that reduces the tax burden on low-paid workers — is important in promoting job-intensive growth.
Nevertheless, the only Member States where the tax burden on low incomes is below 30% are Ireland, the United Kingdom, Malta and Luxembourg.
This should be a wake-up call to the other Member States.
Reducing the burden on lower-paid individuals may affect both the supply side and the demand side.
Bolstering labour demand for lower-paid workers, many of whom are low-skilled, is crucial in the current climate, with high unemployment among the low-skilled.
Targeted cuts in employers’ social security contributions to bolster labour demand have been undertaken in such countries as Belgium, France and Finland.
A more selective approach could be adopted to meet public demand for income tax to be spread more fairly.
This could involve cutting tax on the wages of the low-paid and offsetting the loss of revenue by raising tax on the very high-wage earners.
As the lower paid are likely to consume more from their disposable income than higher-income groups, I would expect such tax redistribution to increase aggregate demand, certainly in a severe economic downturn like the present.
More rational, more transparent labour taxation
Another section of the population on whom lower personal income tax could have a significant impact are women — especially as second-earners — by virtue of the cumulative and progressive nature of income taxation.
Women are often subject to a particularly high disincentive to work, alongside relatively high elasticity of labour supply with respect to labour income.
Measures limiting such disincentives could help increase female participation in employment. This could, in turn, decrease the percentage of the population at risk of poverty or social exclusion.
Some also argue that more determined action is needed to combat fraud, undeclared work, and bogus self-employment, all of which may be driven by excessively high taxation.
On this, we should be aware of possible distortion between tax and social security regimes for employees and the self-employed, in combination with the long-term decline in corporate taxes.
Financial transaction tax
Lastly, we should not shy away from adopting innovative taxation measures.
Here, I welcome current efforts to ensure that the financial sector makes a fair contribution to fiscal consolidation and society in general.
This tax on financial transactions should have no adverse effect on job creation.
This is because it would not affect normal financial transactions by people and businesses to secure a mortgage on a house, a bank loan, insurance, and so on.
But it should bring more stability to the financial markets, and that is a precondition for smart, sustainable and inclusive growth.
And the proceeds could be used to generate employment and to fight poverty.
Ladies and gentlemen,
Today I have tried to show that tax policy is among the policy instruments available for meeting the Europe 2020 targets.
The challenges facing the labour market today call for a multi-dimensional approach.
It must cover the development of skills, access to employment, the provision of well-designed in-work benefit, life-long learning opportunities, health-care provision and demand-side improvements.
Shifting tax from labour — especially among the low-skilled — may be an important aspect of that approach.
In April, I will present an "Employment package" – a medium-term agenda aimed at reinforcing policy action in support of employment. It will cover a broad range of action needed to restore a job-rich growth, including labour market reform, human capital investment, mobility, as well as the employment potential of economic greening and of the “white” and ICT sectors. This package will also offer another possibility to consider how reducing the tax burden on labour can help improve employment. That is why I consider today's debate very important and timely.
I realise that shifting tax from labour is not necessarily an easy option, but we must give it serious consideration.
The cohesiveness of our societies depends on fair distribution of the burden of tax, fair distribution of its benefits — and fair access to employment.
What is important today is having a job — the individual’s surest path to social integration and well-being.
Many EU citizens are living through a time of harsh austerity measures designed to restore fiscal stability.
We cannot expect a job-rich recovery to follow on automatically — unless we adopt other policies to promote sustainable growth.
If changes to tax regimes can help to create jobs, then they must be considered.
I look forward to hearing the results of your discussions.