This paper examines some of the challenges and opportunities for fi scal policy in the future. It starts by recalling the evolution of the modern tax system with the introduction of a progressive income tax and value-added taxes, and the consequent rise of government spending fi nanced from a widening revenue base. It then highlights the growing role of globalization and the concurrent problem of tax “competition” and the rise of “fi scal termites” which weaken the tax structure of countries. This interplay of globalization, tax competition, and new technologies has given rise to e-commerce, offshore zones, and complex new fi nancial instruments which, in turn, impact tax revenue, tax structures, and the use of particular tax bases. As a consequence, ambitious public spending will need to be constrained. The paper postulates three pillars to address these challenges: improve the working of private markets through effective use of government regulatory power; the progressive substitution of spending programs from a more universal character toward more targeted programs for the poor based exclusively on documented needs; and the progressive exploitation of new opportunities offered by globalization for services not domestically available or only at a high cost. Experimentation will be needed, but the transformation is likely to include elements of these three pillars – without which the public fi nances of several European countries will become more and more a public concern.
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Paper provided by Laboratory for Macroeconomic Analysis in its series Working Papers with number
WP13_2007_03.