Before any further analysis, basic common sense suggests that (average) tax wedges on
labor at around 45 per cent and implicit rates over 30 per cent for corporations have some-
thing to do with the European declining growth rate and increasing unemployment. Theoreti-
cal hints and empirical data suggest that tax reforms could help, but only if burden taken off
from labor and corporate capital can be pushed to a relevant extent if it is to give some size-
able advantages. How to finance such huge tax-cuts is the subsequent puzzle.
The Stability Pact prevents the reduction of fiscal pressure and takes in any workable ex-
penditure cuts, if not those which heavily would roll back the welfare state. Thus the escape
route necessarily involves shifting the tax burden, from labor (social contributions, mainly
those of employers) and corporations to rents, environmental externalities and, mainly, con-
sumption (VAT). Theory and evidence are in fact not thoroughly reassuring about this policy
while political economy predictions warn us to beware of an its no easy electoral feasibility.
To climb over this last obstacle, I propose that the heavier consumption taxes shoud fund an
universal social security safety net, which also encompasses minimum pensions treatments.
In a world where growth rates decline, one is forced to find an additional source of wel-
fare by increasing social fairness, to which fiscal fairness may contribute. Firstly, through a
legitimated and transparent political process of tax voting, secondly by establishing an equita-
ble fiscal exchange and well behaved tax rules between state and citizens, finally through the
most familiar channels of vertical and horizontal equity. The both have to be empowered and
enlarged to better contribute to the society of pair opportunities. This direction of reform
should get a general approval, but in fact it might raise a long list of ideological and vested in-
terest oppositions.
European Countries should be aware that present tax reforms are to be applied in dra-
matically changing institutional setting. We can just (but must) speculate on the main (and
uncertain) consequences. It is indeed necessary to have tentative frame within which one can
discuss such relevant issues, being however aware that the overall effective scenario might be
largely different and its moves could come very slowly in the time.
EU central functions will probably increase: here it is suggested that the financing should
come partly from a transparent tax such as an (additional in our scheme) EU VAT rate which
is visible to consumers (and better than a sharing to income tax revenues, which on the con-
trary is largely hidden in the withholdings on labor incomes). The remaining amount of fi-
nancing can be found by attributing to the Union level both environmental levies and the two
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