Euro Area Weighs Lowering Labor Taxes to Spur Growth

Euro-area nations are investigating whether lower taxes on workers could boost growth, along with how to cut labor levies without driving up government debt.

Countries need to look for “administratively simple” ways to shift their tax structure that will bring in predictable revenue, according to a July 3 planning document prepared for euro-area technical meetings and obtained by Bloomberg News. Euro-area finance ministers will discuss the so-called tax wedge in July and September, with a goal of agreeing on a list of best practices.

“Within the limited fiscal room for maneuvre available to most member states,” the paper states in its list of issues for discussion, “do you agree that a reduction in the tax wedge would be a major policy instrument to reduce the high tax burden on labor and hence help boosting economic activity and increasing employment?”

Tax cuts for low-income, low-skilled workers could have the biggest effect, the document said. Nations with high wage taxes may create “unemployment or inactivity traps” for workers weighing whether a job is worth enough to offset a decrease in government benefits.

Spain, France and nine other euro-area nations face particular challenges in this area, according to the European Commission. In a June 27 draft report, the Brussels-based commission said euro-area nations should consider the urgency of making changes along with economic and potential spillover effects.

‘Budgetary Neutral’

In Italy, “the political feasibility of the tax wedge cut is challenged by recent developments,” the commission said. While there’s public and political consensus on moving away from wage taxes, “it is much harder to find agreement on its financing,” according to the report.

Spain’s budget plans so far suggest that deficits in 2015 and 2016 may rise from changes to personal and corporate income taxes, “suggesting that the tax reform may not be altogether budgetary neutral,” the commission report said. It also said Spain could consider reversing part of a 2014 increase in personal income taxes, introduced in response to the crisis.

France also has taken steps. “While recent measures will help reduce the tax burden on labor, the positive impact on growth and jobs may turn out to be lower than estimated by the government,” the commission report said.

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