EU proposes to fundamentally change tax systems

The European Commission published its Strategic Foresight Report 2023 on 6 July 2023, which aims to put people's well-being and sustainability at the heart of Europe's open strategic autonomy. To this end, the report contains ten action points and also implies fundamental reconsideration in the tax systems of Member States.

Background

The 2023 Strategic Foresight Report by the European Commission (hereinafter: Report) is by nature a communication from the Commission to the European Parliament and the Council and titled ‘Sustainability and people's wellbeing at the heart of Europe's Open Strategic Autonomy’. Basically, the Report examines the key intersections between the structural trends and dynamics affecting the social and economic aspects of sustainability, to clarify the potential choices and trade-offs that the EU is likely to face in the future, i.e. revolves around the concept of sustainability both from an economic and social point of view and focuses on the key intersections thereof. Alongside the strategic economic considerations – the ‘twin’ green and digital transitions – the paper also highlights social considerations, including the ageing and increasing old-age dependency of the European population, as a trigger for change.

Goals and concepts

The Report outlines the key areas in which action is highly needed, to achieve the sustainability transition, as follows:

1. Ensure a new European social contract,
2. Deepen the Single Market to champion a net-zero economy,
3. Boost the EU’s role offer on the global stage,
4. Support shifts in production and consumption towards sustainability,
5. Move towards a ‘Europe of investments’,
6. Make public budgets fit for sustainability,
7. Further shift policy and economic indicators towards sustainable and inclusive well-being,
8. Ensure that all Europeans can contribute to the transition,
9. Strengthen democracy
10. Complement civil protection with ‘civil prevention’

Tax implications

It’s clear that the Report contains some ambitious concepts, but what’s tax got to do with it such challenges and goals? Firstly, according to the Report, the current EU tax framework, based mainly on labour taxes, including social contributions, does not reflect the ongoing changes. Since the share of working-age people will shrink drastically over the coming decades, and productivity growth is unlikely to offset this evolution, the ability of labour taxation to generate the same amount of revenues as today will very likely be reduced. In this regard, new forms of taxation (e.g. on carbon emissions, waste, unsustainable or unhealthy products and services) could also gain importance to complement labour taxes.

Secondly, the green transition requires a shift in the behaviour of natural and legal persons likewise and, as the Report suggests, tax incentives should be a key tool to achieve that. Last but not least, the transition requires unprecedented investments, i.e. both from public and private funds. It follows that Member States’ budgets, and as such, tax income, will also play an important role.

Next steps

As the Report is a ‘communication’ to the Parliament and the Council, it is of course not legally binding to the Member States as it is and it contains rather concepts than actual steps for a tax reform. It is also worth noting that some of the proposed instruments have opposite impact mechanisms (e.g. global minimum tax and tax incentive regimes) and that the EU currently has no power or mandate to regulate direct taxes e.g. taxation on labour or pension regimes, either. From a taxation point of view, therefore, the Report is an interesting read, but can and should not serve as a basis for a comprehensive tax reform within the EU.