Consolidation on the revenue side and growth-friendly tax structures: an indicator based approach

The paper examines potential challenges arising at Member State level from the need and scope for either consolidating on the revenue side or shifting taxes away from labour. It uses a systematic indicator-based screening to identify Member States that may face a challenge in each of these two policy areas. The first quantitative screening is applied to identify Member States that have a need and room for shifting taxation away from labour to other tax bases. The analysis of labour taxation looks at overall labour taxation and at taxation of two specific groups considered to be rather responsive to labour supply incentives, namely low-skilled workers and second-earners. A second screening aims at identifying at Member States that might consider using taxation – in addition to expenditure control – to consolidate their public finances and steer them onto a sustainable path. This screening looks into the potential need for substantial fiscal consolidation and the availability of 'tax space'. Robustness checks are carried out to test how far the screening results depend on the screening approach. These checks overall confirm the outcome of the main screening approach. However, both screenings need to be complemented with in-depth country analysis before being able to draw firm policy conclusions.