Tax systems and tax reforms in Europe: Rationale and open issue for more radical reforms

same story as before.

It looks to me quite impossible to claim that today EU¹⁰ is working well and pursuing its
declared aims, those being the status and the trends of its Member Countries’ fiscal systems.
Is it really possible to strengthen the single market, particularly as to the free movement of
goods, people and capitals without fiscal interference, when max-min values of fiscal pres-
sure, sorted by type of tax or their burden diverge by two digit figures? Notice further that the
only process of convergence under way to this day seems have been due to the growth of the
income tax, the harmonization of VAT and some tax competition on the most mobile capital.
Again, the main and bad final result has been an increase of near 50 per cent in the labor aver-
age tax wedge during long years of declining growth and increasing unemployment.

The unavoidable flip side of the coin is that only wide reforms can correct such widely
varying tax systems and structural differences and to substitute inefficient existing processes
of tax competition and harmonization. These were not however the reforms pursued by many
European Countries during the 1990s, which essentially brought about some simplifying and
rationalizing effects of the existing systems, together with a lot of other minor changes (Gan-
dullia 2003), but sometimes did not improve many already critical situations at all. Let us ex-
plore some of the main cases.

(i) Corporate Tax - It is commonly recognized that from the 1980s onwards corpora-
tions’ statutory “all-in” tax rates decreased markedly, by about 15 points (from less than 47 to
near 32 per cent in the EU average during the years 1980-2003-forecast figure) (Cnossen
2002). This has been commonly attributed to a greater fiscal competition, which in turn would
result highly correlated with the increasing degree of globalization and capital mobility
(Bretschger and Hettick 2002). The tax burden decrease was empirically confirmed for the ex
ante but not the ex post effective rates. This trend of implicit (= effective ex post) rates is also
due to the broadening of the bases that usually matched rates cuts (Devereux, Griffith and
Klemm 2001). The final result might have been of no-incentive-investments reforms, as is
suspected by Keen (2002) for the much vaunted German case and its planned Italian mirror
opposite (Bernardi 2002b). If I am right, Keen’s fine analysis of the German 2000 tax reform
also hints between the lines at the fact that at least one reason for the alleged simplification

¹⁰ EU may be now seen as an institution which falls between a “Confederation” and a ”Federation.” According to
the common language of political philosophy, “Federation” means that the center and the states are coordinate
and independent. The center is instead subordinate to the states in a “Confederation” (quotation in Cnossen
2002).

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