The European Election and Tax Policy: Mapping Tax Policy Visions across European Political Groups

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Note: This is part of a series on the upcoming European election highlighting the most important educational taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities.
topics for voters while examining reform options for policymakers going forward.

Every five years, political groups in the European Parliament adopt manifestos outlining their priorities for the European election. These documents are meant to inform voters, establish policy positions, and serve as a roadmap for the group’s legislative agenda.

With one month to go until the polls open, it’s important to understand how the seven political groups in the European Parliament define their vision, values, and priorities on economic and tax policy. The appendix table presents the groups’ main ideas and priorities regarding select economic themes, based on the content of their election manifestos.

In short, economic priorities vary from fostering economic growth and innovation to promoting social justice and sustainability. The deeper question for candidates is how their groups intend to use tax policy to achieve their broader economic policy goals.

Visions for European Tax Policy

When it comes to tax policy, the divergence in priorities is clear. While some groups place a premium on using the tax system to redistribute income and environmental sustainability, others prioritize competitiveness and economic efficiency in the tax system. These differences underscore the complexity of tax policy and its implications for shaping the economic landscape of Europe.

For the public, understanding these varying priorities is essential for informed voting. For policymakers, future tax policies should include principled revenue-generating solutions to address the continent’s pressing challenges, such as financing the green transition or repaying the COVID-19 recovery package NextGenerationEU.

The table below shows each group’s visions on tax policy:

What’s at Stake

The European Parliament has a limited legislative role in taxation as most decisions are adopted by unanimous vote in the Council of the European Union. However, the Parliament has a role to play in shaping the public perception of tax policy and discussions in the Council and Commission. It also has more legislative power to guide broader economic policy, so understanding each group’s tax and economic policy positions is essential.

By incentivizing innovation, ensuring long-term competitiveness, and supporting the transition to a sustainable economy, well-designed tax policies can help drive Europe forward.

With these objectives in mind, what are the most effective tax policies to achieve them? How can we make sure tax policy doesn’t stand in the way of Europe’s success?

Pro-Growth Reform Options

European tax policies should be simple, stable, transparent, and neutral while supporting greater economic growth and opportunity. The primary goal should be to raise government revenue while causing the least amount of economic distortions as possible.

Reform efforts over the next mandate will be crucial. Policymakers should focus on the possibility of promoting two key policies: full expensingFull expensing allows businesses to immediately deduct the full cost of certain investments in new or improved technology, equipment, or buildings. It alleviates a bias in the tax code and incentivizes companies to invest more, which, in the long run, raises worker productivity, boosts wages, and creates more jobs.
and addressing the EU’s value-added tax (VAT) policy gap.

Full expensing allows businesses to immediately deduct the full cost of certain investments in new or improved technology, equipment, or buildings. It alleviates a bias in the tax code and incentivizes companies to invest more, which, in the long run, raises worker productivity, boosts wages, and creates more jobs. Research has shown that it is particularly helpful to small and credit-constrained businesses that are trying to grow.

Full expensing offers a unique opportunity for Members of the European Parliament (MEPs) to advocate for a policy that transcends party lines. By promoting full expensing at the EU level, MEPs can address key priorities outlined in various political groupings’ manifestos that are particularly capital intensive, like the green transition. Revenue effects are usually negative in the short term, but they can improve over the long term as profitable investments lead to more revenues.

An efficient option to raise revenue is addressing the VAT policy gap. This gap refers to the difference between potential VAT revenue and actual collections, highlighting inefficiencies and vulnerabilities in the current system. France and Germany each have an actionable policy gap of €72 billion and €68 billion, respectively. This gap in France alone is so large that closing it would generate enough revenue to eliminate the income tax altogether. Consumption taxes like the VAT tend to cause the least amount of economic distortions while raising stable revenue over time.

The EU already has the ability to work on the VAT system and should therefore focus more effort on working with Member States to reduce exemptions and eliminate reduced rates.

Conclusion

As Europe stands at a crossroads, the decisions made in the upcoming elections will shape the trajectory of the continent for years to come. It is incumbent upon both voters and policymakers to engage in informed decision-making and collaborative efforts to develop tax policies that not only meet the diverse needs of European citizens but also foster a prosperous and resilient future for Europe.

Principled tax policies can drive Europe forward, but only if crafted with precision and purpose.

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