Polycrisis, Megatrends – Tax Policy Trends and Responses

Abstract

The EU relies heavily on labor taxation including social security contributions (accounting for more than half of all EU-27 tax revenues), though it can discourage labor market participation. Besides, ageing, digitalization, global markets, new forms of work and increasing labor mobility question the residence-based principle of personal income tax. The sustainability of the social security system can be promoted by additional behavioral tax (linked, for example, to the consumption of unhealthy products or the use of risky services). In the former socialist countries analyzed in this study (Croatia, Bulgaria, Latvia, Estonia, Hungary, Poland and Romania), the share of consumption taxes in total tax revenue is above 38%, well above the EU average. In countries with high consumption tax rates and significant consumption tax revenues, both labor and capital income tax revenues are typically below the EU average. The share of environmental taxes in tax systems is low, both on average in the EU and in the examined countries (although most of them are at or above average). Nonetheless, in the former socialist countries, the share of property taxes is lower than the EU average (for historical reasons, property taxation is less accepted by their societies). According to a Commission study published in 2024 (see: “Growth-Friendly Taxation in a High-Inflation Environment,” European Commission, European Economy Economic Brief 079), strengthening property taxation would help to make the tax system fairer, although not in a time of high inflation and crisis. Harnessing the potential of digitalization contributes to efficient and effective tax administration and can also reduce administrative costs, thus facilitating compliance. Latvia, Hungary and Poland recorded an exceptionally large improvement in VAT compliance, with VAT gaps falling between 2013 and 2021 by over 15 pp, which turned them into the best performers in the EU (Romania still faces challenges in the field of tax avoidance, VAT compliance gap and inefficient tax auditing). Tax administrations in most of the analyzed countries are therefore well adapted to the challenges of digitalization. The future tax system must implement a desirable green tax reform shifting a part of the tax burden away from labor to tax bases linked to environment taxes and other behavioral taxes – regarding the sustainability of the tax system as the European and national budgets face significant financial pressure due to the polycrisis, megatrends and EU loans. In the studied former socialist countries (Croatia, Bulgaria, Latvia, Estonia, Hungary and Romania) the share of consumption taxes in total tax revenue is above 38%, well above the EU average. In countries with high consumption tax rates and significant consumption tax revenues, both labour and capital income tax revenues are typically below the EU average. The share of environmental taxes in tax systems is low, both on average in the EU and in the countries studied (although most of them are at or above average). Though, in the former socialist countries the share of property taxes is lower than the EU average (for historical reasons, property taxation is less accepted by their society). According to a Commission study in 2024, strengthening property taxation would help to make the tax system fairer, although not in a time of high inflation and crisis. Harnessing the potential of digitalisation contributes to efficient and effective tax administration and can also reduce administrative costs, thus facilitating compliance. Latvia, Hungary and Poland recorded an exceptionally large improvement in VAT compliance, with VAT gaps falling between 2013 and 2021 by over 15 pp and currently they belong to the best performers in the EU. Tax administrations in most of the studied countries are therefore well adapted to the challenges of digitalisation. The future tax system must implement a desirable green tax reform shifting a part of the tax burden away from labour on to tax bases linked to environment taxes and other behavioural taxes – regarding the sustainability of tax system as the European and national budgets faces significant financial pressure due to the the policrisis, megatrends and EU loans.