A move from labor taxes to environmental measures, such as a carbon tax, could support medium-term economic recovery, according to a communication published Wednesday by the commission, which is the European Union's executive arm. The commission included the tax discussion as part of a larger package of policy recommendations in response to what it called the "unprecedented economic shock" resulting from the virus, which causes the respiratory disease COVID-19.
The COVID-19 crisis is having a major impact on labor market and social conditions, according to the communication. In response, the EU's executive arm recommended "fair and growth-friendly tax systems" that can support private investment while improving the business environment. In addition, such systems can encourage employment, reduce inequalities and contribute to a resilient economy, the commission said.
"Since an efficient and fair tax system is particularly important to support an effective economic recovery in the medium term, some member states are recommended to reform their tax system, including through shifting from labor to environmental taxation," according to the communication.
Regarding the EU's overall policy objectives, the commission noted that "the pandemic underlines the interconnectedness of economic, social and environmental spheres and the need for a holistic strategy to recovery."
The commission sent its recommendations to the European Parliament, the European Council of member states and individual advisory committees. It called on the council to adopt country-specific recommendations for 2020 and 2021.
Labor taxes — personal income taxes and social security contributions — are the largest tax category in an overwhelming majority of the countries that belong to the Organization for Economic Cooperation and Development, according to a March 2019 report from the Paris-based organization.
A recent study from the Tax Foundation found that individual income taxes and social insurance taxes combined made up about 50% of the average OECD revenue sources in 2018. Consumption taxes, such as the value-added tax, made up the next largest amount at 32.1%, according to the study, which was published in February.
As for environmental measures, the OECD has estimated that a tax on energy use at €30 ($33) per ton of carbon dioxide would generate about 1% of gross domestic product in additional revenue across the 44 countries the organization studied.
Daniel Bunn, vice president of global projects at the Tax Foundation, told Law360 Friday that countries could use that revenue to shift away from labor taxes by the same amount. Doing so would mean carbon taxes could make up roughly 3% percent of government revenues, allowing labor taxes to shift from about 50% percent of the tax take to 47%, he said.
"That shift sounds like a simple policy trade, but some countries may be interested in having both new revenues from carbon or other environmental taxes without reducing taxes on other factors," Bunn said.
The commission's recommendation to shift from labor to environmental taxation comes after specialists said European governments need to be cautious about making such a change. Speaking during a tax conference in Brussels in February 2019, a representative of Europe's business community expressed skepticism about calls for a shift.
With a tax on carbon, "the tax income by design is intended to decrease," said Clemens Rosenmayr, a policy adviser at Eurochambres, which represents European chambers of commerce in Brussels. He said balancing the introduction of an environmental tax with a decrease in labor taxation means that "from a government perspective, this has to be assessed very carefully."
A representative for the commission couldn't be reached for comment on Friday.
--Additional reporting by Todd Buell. Editing by Vincent Sherry.
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