In light of the currently rather modest outlook for economic growth in many European countries, reforms are called for to boost growth. Since the financial crisis, the countries of Europe have been faced with the difficult challenge of consolidating their budgets while at the same time promoting economic growth. One possible approach would be to reconsider the design of their respective tax systems.
Since the turn of the millennium Europe has witnessed a slight trend towards more growth-conducive tax systems. Tax systems have been redesigned mainly in the countries of northern and eastern Europe, whereas central Europe has seen little change.
Raising consumption taxes while at the same time lowering taxes on labour and capital can stimulate an economy's growth forces. Taxation of labour and capital should be kept low as it distorts decisions by economic agents, which in turn negatively impacts the use of the growth factors labour, capital and techno-logical progress. Taxation on consumption has less adverse effects in this respect.
The financial and economic crisis also has an impact on tax systems in the EU. It will make itself felt both in the short term and over a medium to longer-term horizon. For the short run, countries have attempted to stimulate demand via tax relief, reducing the effects on the real economy. In the medium to long term, fiscal consolidation will be given priority, which may also lead to tax hikes.
