Social Europe

  • EU Forward Project
  • YouTube
  • Podcast
  • Books
  • Newsletter
  • Membership

The ‘Tax Shift’: A Surrealist Fantasy

Jan Drahokoupil 15th March 2016

Jan Drahokoupil

Jan Drahokoupil

Reducing taxes on labour – personal income taxes and employers’ and employees’ social security contributions – is often seen as key to increasing employment levels. The latest crop of country-specific recommendations issued by the European Commission is a case in point. But the rationale for such a ‘tax shift’ is relatively weak. For most countries, it is likely to represent yet another much-talked-about reform with little relevance for actual employment and economic outcomes.

Higher labour costs are assumed to reduce the demand for workers. Moreover, high labour taxation may lower incentives for the unemployed and inactive to take up work as it means that the additional income to be derived from employment is too limited to fuel the motivation to work. Referring to these two reasons, the Commission (EC) has advocated a shift in taxation away from labour to the ‘least distortionary taxes’, including taxes on consumption, housing and other property, and environmental taxes (European Commission 2015: 24).

The arguments for shifting the tax burden to property and activities that harm the environment are strong, but, for various reasons, there has been little action on these fronts. The ‘tax shift’ debate thus in practice boils down to the advice to shift taxation away from labour and capital income to consumption. However, it is hard to come up with convincing grounds for this recommendation.

The method used by the EC to identify countries in need of reducing taxation is simple, but hopelessly arbitrary: countries are found to be in need of reducing their tax rates if their taxation levels happen to be significantly above the EU average (see European Commission 2015 and various country-specific recommendations).

The idea that consumption taxes are somewhat less harmful relies on empirical modelling by the OECD (2010). The OECD’s own research, however, questions the rationale for the tax shift towards consumption as it confirms that consumption taxes affect employment and hours of work in pretty much the same way as do income taxes. What can be firmly established, however, is that such a shift is regressive as it affects the lower income groups.

Where’s the link?

Empirically, it is difficult to separate the effect of taxes from other elements of the policy mix in individual countries. Nevertheless, a comparison of employment and tax levels in the EU, as shown in a figure taken from the ETUI’s 2016 Benchmarking Working Europe report, shows no relationship between the two. In fact, many countries with very high employment levels impose steep labour taxes. As a result, countries identified by the Commission as in need of reducing taxes on labour – i.e. Belgium, Czechia, France, Italy, Hungary, Finland and also the ‘borderline’ cases of Germany, the Netherlands, Austria, and Sweden –  include these best-performing countries.

Where the crisis countries suffering from high unemployment are concerned, reducing labour costs through lowering taxation does not seem to offer any immediate respite either. As shown also by the EC’s own labour market analyses, adjustment strategies based on a reduction in labour costs have reached their limits, with countries characterised by high unemployment recording falling labour costs also.



Don't miss out on cutting-edge thinking.


Join tens of thousands of informed readers and stay ahead with our insightful content. It's free.



The second rationale pointing to a possible lack of incentives to take up work is sounder.

It is plausible that high labour taxation levels may create incentive problems for the inactive or some groups of workers. They may shy away from additional employment effort due to the high taxation imposed on the additional income. Potentially affected groups include the inactive, the unemployed, second earners in a household, and low-wage earners. The EC’s analysis finds a number of such traps in individual countries (European Commission 2015: 26-27). However, even in this case, countries suffering from such traps include cases of both worst and best performance in terms of employment among the affected groups.

Finally, the ‘tax-shift argument’ has been reinterpreted in a popular version that emphasises a need to reduce social security contributions (SSC) paid by the employers in particular. Such an argument may be intuitively appealing to employers seeking to reduce any taxes that they are obliged to pay, but there is no reason why they should matter more than other components of labour taxation – in fact, they may be less relevant to incentives for workers. Empirically, there is in the EU no correlation between employer SSCs and employment levels.

Nevertheless, this thinking informed the 2015 tax shift in Belgium, reducing employer social security contributions from 33% to 25%. Ironically, despite having the highest level of taxation on labour and a unique tax mix heavily subsidizing car use, that country was a boring European average as far as its levels of employer SSC were concerned. Once again, Belgian surrealism helpfully illustrated the futility of efforts on the European level.

etuifig1Figure Tax wedge on labour (average wage) and overall employment rate (20-64 years), 2014 

* data are available for 2013 only.

Note: Tax wedge on labour: The difference between the wage costs to the employer of a worker on an average wage, including personal income tax and compulsory social security contributions, and the amount of net income that the worker receives.  Source: European Commission tax and benefits database based on OECD data (European Commission, 2015).

Jan Drahokoupil

Jan Drahokoupil is Senior Researcher at the European Trade Union Institute (ETUI) in Brussels.

Harvard University Press Advertisement

Social Europe Ad - Promoting European social policies

We need your help.

Support Social Europe for less than €5 per month and help keep our content freely accessible to everyone. Your support empowers independent publishing and drives the conversations that matter. Thank you very much!

Social Europe Membership

Click here to become a member

Most Recent Articles

u4219834dafae1dc3 2 EU’s New Fiscal Rules: Balancing Budgets with Green and Digital AmbitionsPhilipp Heimberger
u42198346d1f0048 1 The Dangerous Metaphor of Unemployment “Scarring”Tom Boland and Ray Griffin
u4219834675 4ff1 998a 404323c89144 1 Why Progressive Governments Keep Failing — And How to Finally Win Back VotersMariana Mazzucato
u42198346ec 111f 473a 80ad b5d0688fffe9 1 A Transatlantic Reckoning: Why Europe Needs a New Pact Beyond Defence SpendingChristophe Sente
u4219834671f 3 Trade Unions Resist EU Bid to Weaken Corporate Sustainability LawsSocial Europe

Most Popular Articles

u4219834647f 0894ae7ca865 3 Europe’s Businesses Face a Quiet Takeover as US Investors CapitaliseTej Gonza and Timothée Duverger
u4219834674930082ba55 0 Portugal’s Political Earthquake: Centrist Grip Crumbles, Right AscendsEmanuel Ferreira
u421983467e58be8 81f2 4326 80f2 d452cfe9031e 1 “The Universities Are the Enemy”: Why Europe Must Act NowBartosz Rydliński
u42198346761805ea24 2 Trump’s ‘Golden Era’ Fades as European Allies Face Harsh New RealityFerenc Németh and Peter Kreko
startupsgovernment e1744799195663 Governments Are Not StartupsMariana Mazzucato
u421986cbef 2549 4e0c b6c4 b5bb01362b52 0 American SuicideJoschka Fischer
u42198346769d6584 1580 41fe 8c7d 3b9398aa5ec5 1 Why Trump Keeps Winning: The Truth No One AdmitsBo Rothstein
u421983467 a350a084 b098 4970 9834 739dc11b73a5 1 America Is About to Become the Next BrexitJ Bradford DeLong
u4219834676ba1b3a2 b4e1 4c79 960b 6770c60533fa 1 The End of the ‘West’ and Europe’s FutureGuillaume Duval
u421983462e c2ec 4dd2 90a4 b9cfb6856465 1 The Transatlantic Alliance Is Dying—What Comes Next for Europe?Frank Hoffer

ETUI advertisement

HESA Magazine Cover

With a comprehensive set of relevant indicators, presented in 85 graphs and tables, the 2025 Benchmarking Working Europe report examines how EU policies can reconcile economic, social and environmental goals to ensure long-term competitiveness. Considered a key reference, this publication is an invaluable resource for supporting European social dialogue.

DOWNLOAD HERE

Eurofound advertisement

Ageing workforce
The evolution of working conditions in Europe

This episode of Eurofound Talks examines the evolving landscape of European working conditions, situated at the nexus of profound technological transformation.

Mary McCaughey speaks with Barbara Gerstenberger, Eurofound's Head of Unit for Working Life, who leverages insights from the 35-year history of the European Working Conditions Survey (EWCS).

Listen to the episode for free. Also make sure to subscribe to Eurofound Talks so you don’t miss an episode!

LISTEN NOW

Foundation for European Progressive Studies Advertisement

Spring Issues

The Summer issue of The Progressive Post is out!


It is time to take action and to forge a path towards a Socialist renewal.


European Socialists struggle to balance their responsibilities with the need to take bold positions and actions in the face of many major crises, while far-right political parties are increasingly gaining ground. Against this background, we offer European progressive forces food for thought on projecting themselves into the future.


Among this issue’s highlights, we discuss the transformative power of European Social Democracy, examine the far right’s efforts to redesign education systems to serve its own political agenda and highlight the growing threat of anti-gender movements to LGBTIQ+ rights – among other pressing topics.

READ THE MAGAZINE

Hans Böckler Stiftung Advertisement

WSI Report

WSI Minimum Wage Report 2025

The trend towards significant nominal minimum wage increases is continuing this year. In view of falling inflation rates, this translates into a sizeable increase in purchasing power for minimum wage earners in most European countries. The background to this is the implementation of the European Minimum Wage Directive, which has led to a reorientation of minimum wage policy in many countries and is thus boosting the dynamics of minimum wages. Most EU countries are now following the reference values for adequate minimum wages enshrined in the directive, which are 60% of the median wage or 50 % of the average wage. However, for Germany, a structural increase is still necessary to make progress towards an adequate minimum wage.

DOWNLOAD HERE

S&D Group in the European Parliament advertisement

Cohesion Policy

S&D Position Paper on Cohesion Policy post-2027: a resilient future for European territorial equity

Cohesion Policy aims to promote harmonious development and reduce economic, social and territorial disparities between the regions of the Union, and the backwardness of the least favoured regions with a particular focus on rural areas, areas affected by industrial transition and regions suffering from severe and permanent natural or demographic handicaps, such as outermost regions, regions with very low population density, islands, cross-border and mountain regions.

READ THE FULL POSITION PAPER HERE

Social Europe

Our Mission

Team

Article Submission

Advertisements

Membership

Social Europe Archives

Themes Archive

Politics Archive

Economy Archive

Society Archive

Ecology Archive

Miscellaneous

RSS Feed

Legal Disclosure

Privacy Policy

Copyright

Social Europe ISSN 2628-7641

BlueskyXWhatsApp