12 Aug 2014

The potential triple win in smart tax reforms: competitiveness, jobs and the environment

Tax folder on a desktop
Reshuffling the tax burden could lower companies' overall production costs.
© DOC RABE Media, Fotolia.com

A new study estimates that EU Member States could make their business sectors more competitive by changing the way taxes are collected from companies. The study suggests that by reducing the business tax burden linked to labour costs (social security contributions, payroll taxes, etc.) and shifting the expected tax revenue to the energy consumption facet instead, Member States could lower companies' overall production costs. If the tax reforms in this direction were ambitious enough, they would make the business sector more profitable whilst at the same time fostering job creation and reducing CO₂ emissions, the study says.

The JRC and the European Commission's Directorate-General for Taxation and Customs Union (DG TAXUD) produced this preliminary study to encourage discussion and to contribute to the debate on taxation in the EU. The study looks simultaneously at different countries and sectors, taking into consideration not only capital, but also labour and energy taxes to analyse their impact on the cost of doing business. While to date existing studies have focused on capital taxation only, the new paper provides for the first time estimates of the effective marginal tax rate (total costs incurred by the employer) in a single framework encompassing capital, labour and energy taxes for 17 OECD countries and 11 manufacturing sectors. This composite approach is particularly useful when assessing the potential impact of a tax policy on the total cost of a specific economic activity in a given country.

The study indicates that in order to encourage growth and job creation, tax reforms should not be based merely on profit taxation as the overall production costs for companies contain a much larger set of taxes, including labour (social security contributions, payroll taxes, etc.), environmental (e.g. taxes on energy use and CO₂ emissions), property and or local/regional taxes. The results of the study suggest that increasing energy taxes and lowering labour taxes could entail a significant reduction in the total production costs and thus yield substantial efficiency gains for firms. It is also assumed that lowering labour-related taxes would encourage companies to create more jobs, whilst higher energy taxes would push them to opt for green energy solutions to qualify for tax breaks.

The study acknowledges that further research, including on different business sectors and with data from additional EU and non-EU countries, is needed in order to make comprehensive conclusions on the topic.

Keywords: research, innovation
JRC Institutes