Tax Policy in EMU: A Preliminary Assessment

Abstract

In the late 1990s, after a phase of fiscal consolidation, several European countries introduced tax cuts with a view to reducing distortions and supporting growth. The reforms were prompted by concern about the effects of high tax levels on competitiveness and employment. The paper explores the main challenges that tax policy faces within the framework of EMU. It considers the implications of EU fiscal rules, the need for fiscal stabilisation at the national level, the effects of economic integration on tax bases and the role of tax policy with respect to the long term sustainability of public finances. It examines revenue trends in the EU and the main features of recent reforms. The reforms had a relatively limited impact on the overall tax burden and on the tax wedge on labour. This depends both on the reforms still having to exert their full effects and on the constraints imposed by the EMU fiscal framework, whereby significant tax cuts can be introduced only if expenditure policies are simultaneously modified. The paper also notes that the challenges posed by tax degradation and competition are still basically unanswered. It concludes by noting that the scope of national tax policies has been significantly curtailed.

Keywords: tax policy, fiscal policy, tax reforms

JEL Classification: H20, H21