Appendix 2 : Taxation in Europe : Towards more competition or more co-ordination ?
Taxation is high in EU countries. Tax-to-GDP ratios stand at around 40% compared with 25% in Japan and the US. This high level of taxation provides the funding of the European social model characterised by a high level of public expenditure and transfers. Apart from governing powers (armed forces, police, justice), the State provides free services to households (education, health); finances public infrastructures, research, culture; pays significant social transfers (family policy, minimum income) and social insurance (pensions, unemployment). Ageing populations imply higher pensions and health spending; technical progress leads to higher education and research spending; rising social exclusion implies higher assistance benefits. People ask for more public infrastructure and higher security spending. Military spending as well as aid to developing countries seem to be required if countries wish to play a major role internationally. All these elements make the rising trend in public spending difficult to resist. Besides, European countries think that public spending should be on a contributory basis. It makes sense to have people on highest incomes or wealth pay more for collective spending, as they benefit most from the way the social system is organised. Taxes must reduce income inequalities. It is hence crucial for European countries to remain entitled to collect tax revenues, according to democratically agreed rules. Section 2 discusses how the European social model is at risk in a global world; it discusses several strategies for European taxation: competition, unification, coordination. Section 3 provides a descriptive analysis of tax structures and trends in Europe. Section 4 deals with income tax coordination. Section 5 addresses social contributions coordination. Section 6 deals with corporate taxation. Section 7 concludes with a strategy for tax co-ordination.