Labour Taxation in the European Union - Convergence, Competition, Insurance?

Abstract

Carlos Martinez-Mongay outlines labour tax trends in the European Union over the last three decades. The analysis is based on macro data: the average effective tax rates on labour, consumption and capital. Different measures of effective tax rates on labour in EU Member States are calculated; they are compared with those in the USA and Japan and with the effective tax rates on consumption and capital. All the measures show that the tax burden on labour has increased in the EU over the last three decades both in absolute terms and in comparison to the effective tax rate on capital. Moreover, over the same period the tax rates on labour, consumption and capital have converged across EU countries. These trends largely depend on two factors: the increase in social spending and international tax competition. However, concerning the latter there is little evidence that changes in tax rates on labour are related to changes in tax rates on capital. This suggests that international co-movements of tax rates and tax revenues may be due to common structural changes underlying tax policies rather than to tax competition forces.