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



on one side. The same Musgrave’s “Theory” reflects this feeling. 1970s supply siders and OT
theorists brought the topic to light once more. Making tax systems supply friendly, by reduc-
ing rates and broadening bases, became thus the “buzz” word of the tax reformers of the
1980s, but the results were not as positive as expected (e.g. Bosworth and Burtless 1992, for
the paramount US case). The taxation-to-growth link then became a topic of an endless dis-
cussion, maybe with just one evident robust conclusion up to now being reached. The story
could be briefly summarized as follows.

(i) Supply and demand of labor - Today consensus opinion is that elasticity figures differ
from zero, but in mid range remain relatively small, albeit with some differences between la-
bor market core or marginal areas (particularly between men and married women, e.g. Blun-
dell 1992). Gross average estimate in the US case has been set around 0.15
15 for total supply
and 0.25 for demand. The more unionized European labor markets
16 sure enough allow for a
somewhat higher supply value, but how much is not clear at all (Leibfritz
et al. 1997).

(ii) Economic Theory - Neoclassical economic growth aggregate models à la Solow do
not say very much about taxation effects, if not near the same post-Keynesian and plain com-
mon sense advise to promoting capital accumulation, i.e. taking off taxes as much as possible
from investments and savings (at least as to their short-to-medium run effects). Endogenous
growth models claimed to be able to provide much more robust and targeted prescriptions
(Myles 2000). However empirical checks showed once again that the general level of average
and marginal fiscal burden is of minimal relevance (still Myles 2000; Cassou and Lansing
2000). Specific allowances should be allowed to physical and human capital accumulation
(Tanzi and Zee 1997), but once more the linking figure does not seem clear-cut (Besley
2000). Last, the so called “New theory of economic growth” stresses the need for taxes (e.g.
Tanzi 2002; Jones 2002) and institutions (going back to North 1990) not hindering or med-
dling with economic transactions induced by the market. Up to now the list of specific pre-
scriptions is still short and selective (for taxes) or somewhat vague (for institution).

(iii) Statistical inference - The simple checks of statistical correlation (a very poor al-
though still popular tool of analysis) between taxes and growth dates back some thirty years.

15 This for instance means that a tax cut which can raise net wage by ten per cent will increase labor supply just
by 1.5 per cent.

16 According to a diffused opinion, labor market institutional setting might play a greater role than the level of
tax wedge to explain the degree of unemployment, particularly in comparison between Europe and the US (e.g.
Blanchard 1999).

11



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