Download Trade Balance as a Fiscal Policy Goal

ERMELINDA LOPES
[email protected]
SCHOOL OF ECONOMICS AND MANAGEMENT
UNIVERSITY OF MINHO
BRAGA – PORTUGAL
Fax: 253 676375
May, 2012
Trade Balance as a Fiscal Policy Goal
Abstract
The fiscal policy in industrial economies converges more in tax burden then in tax revenue structure. As
theory of optimal taxation suggest, the excess burden showing the welfare loss experienced as a consequence of
paying a tax. The fiscal international discussions increases on the level of the EU, the G-20, the OCDE, the UN,
the IMF, and WTO in order to increase new measures in fiscal policy towards higher trade and, generally, also
lower taxes. These results can be measured by higher integration with effects, namely, in trade, labor market and
taxation. In this paper, we compare intra-EU trade between 2002 and 2007. For several EU Member States, EU
represents more than 70% of trade. We also compare tax burden, as well as labor and capital income taxes,
between1960-2009. We conclude that fiscal policies can improve economic growth and trade balance
sustainability. The government revenues through economic growth are more sustainable than government
expenditure with higher taxes, or financing. Trade balance as a fiscal policy goal can be implemented with lower
corporate income tax rates, as well as VAT rates reducing, by this way, the market prices. Both are those with
higher implications in price structure of goods, affecting trade and budget sustainability.
JEL No. E62,F15,F16,F23
1. Introduction
Economic integration promotes positive results to firm management and trade balance reducing, by this way, the
financial needs to the economies with a persistent budget deficit.
If there are these two financial needs, in budget and trade deficits, they difficult a sustainable growth mainly in a
strong taxes competitiveness environment. When we compare, for example, the average in EU15 with the average
in10 new Member States, in 2005, we see a big disparity in corporate tax rates within EU registering
30.4
and
18.2, respectively. This disparity can provoke a relative disincentive to economic growth. The enterprise
movement towards New Member States through the foreign direct investment (FDI) looking for lower taxes rates,
that also provokes an increase trade, from economies with lower cost (poorer) to those with higher market demand
(richer). Within European context, the protectionism is yet referred as one of the most important impediments to
international trade and investment. This is the case of Germany, Denmark, Norway, Czech Republic and Slovakia
(CESifo 2010: 24). Considering the economic growth also a result of economic factors mobility, makes sense the
mobility of capital and labour be a result of higher proximity and interdependency between economies, mainly
between neighbours, and with deeper political relationship.
Considering EU as a whole, and comparing trade between 2002 and 2007, it is visible an increasing growth in
exports and imports, mainly, in intra-EU27. Table 1, shows us the dimension of EU27 world trade (goods and
services, volume), in 2008. We can see that EU plays an important role in the world trade. Represents close to
40% in exports and also register a close value in imports, which implies a little trade disequilibrium. Euro area
shows a positive trade, with 29.4% and 29.2% of export and imports, respectively. This information gives us an
idea about the recent dimension of EU in world trade.
Table 2 shows information about world GDP, in volume. In 2008, the EU27 and EU16 show different values:
22.3% and 15.9%, respectively. Other relevant information is the euro area external trade surplus with 6.7 bn
euro, compared with 5.7 bn euro deficit, for EU27, in July 2010. It is also important to say that EU27 trade
surplus increased, mainly with the USA and Switzerland; and trade deficit increased with China, Russia and
Norway as we can see in Eurostat (2010:1).
H.-W. Sinn in CESifo (2010: 14) refers that Germany developed a large trade surplus that minored the trade
deficit in other euro countries, and confirms that it is true with the GANL countries1 where Germany has the main
EU exporter country. If we consider that current account surplus as capital export, if not, no net flow of capital
can leave the country. However, this reason can also explain its lower growth compared with the ROE countries2
as argues H.-W. Sinn. This pessimistic point of view, in our opinion, is rewarded by its position in the world
context, when he states that Germany has been the world`s second biggest capital exporter after China and ahead
of Japan.
1
2
The GANL countries include Germany, Austria and Netherland.
The ROE countries include the rest of the eurozone.
2
Face this trade reality, makes sense to considered also the fiscal policy as a way to improves trade performance,
as well as, capital and labor mobility. There is welfare cost with income taxes, being labor income taxes those
where there are more disparities, as show Christina Romer and David Romer (2012) by net income classes.
In this paper, we emphasize these points. First, we develop some basic concepts of fiscal policy. Second, we
show the relevance of integration to trade, using EU sample. Third, we compare the disparities between main
different taxes, particularly, labor and corporate income taxes, as well as VAT rates.
We conclude that, there are in EU richer countries with lower corporate income taxes revenues and better results
in trade balance. Then, knowing that tax income is usually detrimental to growth, it is important to think more
about fiscal policy in order to determine the optimal combination of monetary and fiscal policies needed to
implement successful fiscal consolidation, as suggest Huixin Bi, Eric Leeper and Campbell Leith (2012).
2. Tax theory: the basic concepts
In this point the objective is to present the tax theory as a relevant issue of international macroeconomics that also
includes integration and trade. All issues are increasingly sources of business decisions that must be considered in
management agenda. In an era of globalization the market dimension increase, both, in amount of consumers, but,
also, in purchasing power. The global competiveness index includes several economic and institutional
dimensions, but, private and public confidence institutions are essential to trade. The taxes structure represents an
important component of cost that firms, increasingly, need to consider when they chose a market to produce or to
sell and buy.
The globalization, while respecting the principle of national tax sovereignty, implies an increasing in global
initiatives regarding tax policy, as refer Jan Wourers and Katrien menwissen (2011). They refer several
initiatives, namely, the recent efforts of G-20 about Financial Activities Tax (FAT). Recent developments about
the theory of optimal taxation, particularly to capital factor, suggest that tax rates to capital should be equal to
zero in the long run, as we can see in Thomas Piketty and Emmanuel Saez (2012). This idea makes sense,
knowing that there already is a cost with capital depreciation.
Capital tax is a cost to firms management and then implies lower grow as conclude Afonso et al. 2011. This fact,
justify the suggestion of Thomas Piketty and Emmanuel Saez (2012), where indicate that all inheritance taxes and
property taxes, as well as, corporate profits taxes and individual taxes on capital income should be eliminated and
that, the resulting tax revenue loss should be recouped with higher labor income or consumption or lump-sum
taxes.
2.1 Direct tax initiatives as income tax: Capital and Labor tax
Direct tax (T) initiatives include income tax, being capital (TK) or labor tax, (TL). They are stronger in fiscal
policy discussion, even knowing that they are not the higher share as government revenues. Both are direct tax
3
initiative compared with VAT that is an indirect tax. Nowadays, the financial and economic globalization offers
opportunity to factors mobility, first, to capital and then to other factors. Financial innovation creates additional
conditions to accelerate the mobility of capital factor. Thomas Piketty and Emmanuel Saez (2012) pay attention
to two key ingredients for a proper theory of capital taxation: The large aggregate magnitude, the high
concentration of inheritance and imperfections of capital markets. These reasons justify the recent efforts by
international institutions to taxation the capital movements in order to reduce the financial crisis promoted by
financial speculations. This fact imposes substantial capital taxes to advanced economies where the total tax
revenues are relevant, particularly, in EU with 39% of GDP, and much less, in US, with 27% of GDP. The
contribution of firms and workers to social security system in Europe makes the main inequality.
However, makes sense also to consider that, real interest rate (r) result from the following equation:
r = iWhere, i is the nominal interest rates and,
is inflation. Then, if i =
=> r = 0; in this situation, any additional
cost, as capital tax, implies a negative return to capital.
Being disposable income, Yd = Y – T, considering Y as total income and T as total taxes, an increase in any taxes
decreasing Yd.
Christina Romer and David Romer (2012) using US data for investigating the incentive effect of changes in
marginal income tax rates, concluding that they are positive but small, and income taxes were paid almost
entirely by the rich.
Thomas Piketty and Emmanuel Saez (2012) analysis the income in several countries and show the annual
inheritance flow as a fraction of disposable income in France, between 1820-2008, where we can see a recent
increasing, reaching around 20%. There also is instability in its tax flow, increasing since fifty years, registering
more than 16%, in 2008. Not less important, is to compare the income tax rates between, U.S., U.K., France and
Germany. There is a big decreasing after 1980, and also a strong convergence between them after 2000.
Comparing income tax rates between labor income and capital income between, U.S. and U. K., we can also see a
significant decreasing, after 1980, and also a convergence between them.
In a context with financial crisis, there are more difficulties to deficit financing, particularly, in EU context,
where Debt/GDP ratio increase strongly for several EU counties. Then, arrangement to limit the deficit as a
constraint on the budgetary process, can be a better solution to the problem, and not increase the capital income
tax, which promotes the mobility to capital factor. If not, the growth rates can decrease by both, lower capital
return and higher capital tax, which implies lower investment.
The persistence of budget deficit is an import point to be reflected. Charles Wyplosz (2012) pay attention to fiscal
rules as an essential point to be considered to control the financial crisis and their need to be controlled, namely
by tax, and identify the number of years with budget deficit in excess of 3% of GDP between1999-2011.
4
2.2 Corporate and international corporate taxes
Corporate tax rates vary greatly around the world. Lower corporate tax rates promote the possibility for greater
economic production and then, higher self-financing. But it is also true that higher corporate taxes rates are a way
to contribute for government spending in order to financing public policies, such as health, education,
infrastructures, security, etc.
Defining corporate income tax from the personal income tax, in first case, there is a tax net income, or profits,
and not gross income, allowing deductions of the business cost. It is an old tax compared with VAT. There is an
economic discussion about the incidence of the corporate income tax. Some believe that its burden falls entirely
on the owners of capital. However, this reason is, partially, justified by the capital mobility, whose capital flow to
investments that produce higher after-tax returns.
The financial globalization is a way to promote higher investments in any place around the world, and then,
generated incentives to international tax differences, being also a way to international profit shifting by
multinationals. Harry Huizinga and Luc Laeven (2008) conclude that international profit shifting leads to a
substantial redistribution of national corporate tax revenues. Within EU context, the economic and monetary
integration improves these opportunities. In fact, the corporate income tax raises the cost of capital and reduces
after-tax returns and thus, increases the migration of capital into non-corporate or tax-exempt sectors of the
economy. Other changes in business organization can result from the market financing, reducing market equity
returns and increase the issuance debt because interest payments are tax deductible, while dividend payments are
not. The investments in assets financed by debt tend to be preferable (also because can be used more easily as
collateral for loans), than those financed by stock. Corporate bonds outstanding increased strongly, mainly, in US
market.
The corporate income in Europe is taxed at different rates in different countries, and then, improves to the
international profit shifting within multinationals. Harry Huizinga and Luc Laeven (2008) conclude that, within
European context, many European nations appear to gain revenues from profit shifting by multinationals largely
at the expanse of Germany. In fact, in this work, Germany is the EU Member State with lower corporate income
tax revenues as % of total revenues.
2.3 Value Add Tax (VAT)
Value Add Tax (VAT) is an indirect tax initiative (Ti) and is also a consumption tax (TC). Cross country indirect
initiatives can be used to achieve global rebalancing as well as exchange rates. This tax must be compared
mainly, between countries within an integration process. Chunding Li and John Whalley (2012) compared the
world´s three largest economies (US, Germany and China) and conclude that VAT structures are not only good
for global rebalancing but also beneficial for welfare and revenue collection. Normally, the imports are taxed with
VAT but, exports leave the country tax free. Within EU27, the value of taxes less subsidies on products
5
represents 10.2 of GDP, as we can see in Eurostat, 2010. A VAT system has implications in international trade by
using the destination principle and the origin principle. Normally, the exports are exempt with refund of input
taxes (free of VAT), and imports are taxed as locally produced goods. This implies that different taxes provoke
different cost between countries. In destination principle imports are taxed while exports are not taxed, in the
origin principle is the opposite. Within countries with origin principle, as Germany and China, makes sense an
increase in Foreign Direct Investment (FDI) to other economies, in order to sell directly in market. Naturally, the
effect on trade balance will be significant. However, it can be accommodated by divergence in exchange rate or
wages rate changes. Chunding Li and John Whalley (2012) argues that destination principle can promote exports
more than imports, and show the major global countries from 2001 to 2010, identifying China, Germany and
Japan as those with surplus, and US those with deficit.
Comparing the tax revenue structure, Carlos Vegh and Guilhermo Vuletin (2012) conclude that
industrial countries rely heavily on direct taxation, particularly on personal income. In contrast,
developing economies rely more on indirect taxation, particularly the value-added tax. This last ones,
was created in 1948, in France, and followed by Denmark, as first European country (but not yet as EU
Member State, only in 1972), in 1960.
3. Integration as a trade support: the European Union
In this point we pay attention to the dimension of economic transactions between each Member State
and EU, as a whole. The economic growth is a way, but also a result of economic factors mobility,
mainly, between neighbours and with deeper political relationship. The international currencies are a
good vehicle to real economic transactions and promote exports and imports as an important component
of GDP. The economic growth and a trade balance are also a support to budget deficit, facilitating the
fiscal policy role.
3.1 Trade between Member States
We know that trade unbalanced also creates a need of liquidity and makes a currency as a scarce
resource. In euro area, the euro as a strong international currency creates an additional difficulty to trade
balance, when its exchange rate becomes to increase. This phenomenon is worst if also the public
accounts of same country register a deficit. The result it will be higher interest rates.
The economic trade balance increases with real transactions, then, we pay attention to the information
about external and intra-European Union trade, from 2002 to 2007 as we can see through Eurostat
(2009). Comparing 2002 with 2007, we can see an increasing growth in exports and imports, mainly, in
6
intra-EU27. First, we pay attention to EU dimension as a whole, considering EU and euro area. Table 1
shows us these both dimension in world trade.
TABLE 1:
World Trade (goods and services, volume) and world GDP (volume), in 2008
Exports
(a)
Imports
World GDP
(a)
(c)
EU (b)
39.1
39.5
22.3
Euro Area (b)
29.4
29.2
15.9
Source: European Economy 10/2009, European Commission and our contribution.
(a)
Relative weights, based on exports of goods and services (at current exchange rates) in 2008.
(b)
Intra and extra EU trade.
(c)
Relative weights, based on GDP (at constant prices and PPS) in 2008.
We can see that EU plays an important role in world trade. Represents close to 40% in exports and also
register a close value in imports, which implies a little trade disequilibrium, as table 1 shows. The euro
area shows a positive trade with 29.4 of exports and 29.2 of imports. This information gives us an idea
about the recent dimension of EU in world trade.
Table 1 also shows information about the EU share in world GDP. The EU27 and EU16 registered, in
2008, the following values: 22.3 and 15.9, respectively.
More recent information, Eurostat 2010, refers that, in euro area, there is an external trade surplus with
6.7 bn euro, compared with 5.7 bn euro deficit, for EU27. The EU27 trade surplus increased, mainly
with the USA and Switzerland; and trade deficit increased with China, Russia and Norway, as we can
see in Eurostat (2010).
H.-W. Sinn in CESifo (2010) refers that Germany developed a large trade surplus that minored the trade
deficit of other euro countries, and confirms that it is true with the GANL countries 3 where Germany
has the main EU exporter country. Considering the current account surplus as capital export, this fact,
can also be seen as an exporting capital because without a current account surplus, no net flow of capital
can leave the country. However, this reason can also explain its lower growth compared with the ROE
countries4 as argues H.-W. Sinn. This pessimistic point of view, in our opinion, is absorbed by its
position in the world context, when he states that Germany has been the world`s second biggest capital
exporter after China and ahead of Japan.
3
4
The GANL countries include Germany, Austria and Netherland.
The ROE countries include the rest of the eurozone.
7
3.2 Portugal and Poland and its main partners
We pay attention two Member States of EU: Portugal as eurosystem member and Poland only as EU
member. In Portugal we can see the following information:
TABLE 2:
Portugal and its main partners (billion EUR)
Exports
2002
2007
Imports
2002
2007
Total
27.4
37.6
Total
42.5
57.1
Intra-EU27
22.3
28.8
Intra-EU27
33.9
43.0
Extra-EU27
5.1
8.8
Extra-EU27
8.6
14.0
Spain
5.7
10.2
Spain
12.3
16.8
Source: European Commission (2009). Eurostat
The table 2 shows an intensive intra-EU27 trade. There is increasing values in export but also in
imports, particularly, between intra-EU27. Spain and Germany, as main Portuguese partners, absorb
more than half of Portuguese exports: 5.7 and 4.8 billion EUR, in 2002; and 10.2 and 4.8, in 2007.
However, there is a big increasing in Spain and stagnation in Germany. The imports, in 2007, represent
16.8 and 7.3 from total intra-EU27 whose value was 43.0 billion EUR. There is a big negative trade
balance for Portugal with its main partners which increases between 2002 and 2007. Angola, USA and
United Kingdom are the exception, in both periods of analysis.
If we do a similar analysis to Poland, we can see the following:
TABLE 3:
Poland and its main partners (billion EUR)
Exports
2002
2007
Imports
2002
2007
Total
43.5
102.3
Total
58.5
120.9
Intra-EU27
35.3
80.7
Intra-EU27
40.8
88.6
Extra-EU27
8.2
21.6
Extra-EU27
17.7
32.3
14.1
26.5
Germany
14.2
35.1
Germany
Source: European Commission (2009). Eurostat
Poland as Member State of the EU intensifies its exports much more than Portugal. Increase from 42.5,
in 2002, to 102.3 billion EUR, in 2007. However, imports following the similar tendency and registers
58.5, in 2002 and 120.9, in 2007 which provoke higher trade deficit from 15.0 to 18.7, respectively.
Concluding, Portugal concentrates its main extra-EU27 trade (export) in USA, Angola and Brazil, but
more recent data shows that Angola becomes first. Poland concentrates in Russia and China.
8
The intra-EU27 trade represents a big part of trade in each EU Member States and also can explain,
partially, the decreasing of transatlantic trade as emphasize Philip Whyte (2009). Trade is an important
component for growth sustainability, but both countries increase their disequilibrium in trade. However,
there is a strong trade intensification of intra-EU27 which reinforces the European currency
sustainability.
3.3 EU trade (goods only- 2008): Portugal and Poland
Through table 4, we can see more recent information about the share of EU trade in Portugal and
Poland, in 2008. Portugal and Poland are two countries within EU, but the location, the age as EU
member, and monetary integration can explain some specific orientations of its exports, both with
specifics markets, namely, within EU countries as we can see before.
TABLE 4: EU Trade (goods only): Portugal and Poland (2008)
Exports
Portugal
EU27
76.8
Imports
Poland
78.5
Portugal
Poland
72.6
73.4
Source: European Economy 10/2009, European Commission .
For both EU Member States, EU represents more than 70% of trade, particularly, the export whose
destination represents 76.8% (Portugal) and 78.5% (Poland) of total exports. For imports, the EU are
also very important role registering, however, lower values: 72.6 and 73.4 to Portugal and Poland,
respectively. The dimension of EU trade is strong between all EU27 Member States proving the
advantageous of integration through the single market, and not less important, the trade intensification
through the single currency. Both pillars prove to play a very important role in this project, as a whole.
4. A trade balance as a fiscal policy goal
The tax burden, defined as government revenue expressed as percentage of GDP, changes
significatively across countries, even between EU Member States. Carlos Vegh and Guilhermo Vuletin
(2012) refer that there is a consensus in literature sustaining that government spending has been
procyclical in developing countries and countercyclical in industrial economies, however, there is no
evidence on taxation side. Their work confirms this last point. They study cyclical properties of tax rate
9
policy including 62 countries (20 industrial economies and 42 developing countries), for the period
1960-2009, considering personal income, corporate income and value-added tax rates. Not less
important, is the positive correlation between government spending and total tax revenues, as well as
with output volatility.
4.1 Corporate tax rates
The fiscal policy in industrial economies converges more in tax burden then in tax revenue structure.
But compare industrial economies with developing countries the convergence is higher in tax revenue
structure. The income, been corporate or personal, has been more stable in taxes and revenue than the
value-added tax.
If there is a positive result in trade balance it will be an instrument to finance the economy and can
attenuate the negative effects of budget deficit provoked by insufficient tax revenue. The opposite
situation, a negative trade balance, imposes additional financial needs that can be a source of instability,
mainly, in Member States where there also is disequilibrium in budget (budget deficit).
We can see through the table 5 the average corporate taxes rates that comparing the EU15 with new
Member States (New MS10), in 2005. Not less important, is to compare the tax burden (% of GDP)
between industrial economies and developing countries between1960-2009.
Table 5: Corporate tax rates in 2005, and tax burden between 1960-2009 (% of GDP)
Corporate tax rate (2005)*
Tax burden (1960-2009)**
EU15
30.4
Industrial economies
25.5
New MS10
18.2
Developing countries
18.8
Sources:* Nicodeme, 2006 in Raudonen, TUTWPE nº 182. ** Carlos Vegh and Guilhermo
Vuletin, 2012.
There is a divergence between them that provokes a relative economic growth disincentive in EU15, and
also in industrial economies, as a whole. This reality, diminishing the foreign direct investment (FDI)
and, by this way, the international trade, that will also be promoted through a decreasing in corporate
taxes rates. It will be a good strategy to trade balance to be used by a fiscal policy goal.
10
4.2 Tax revenue composition
Tax revenue structure differs from country to country. The tax burden is also important in each country
and, diverges significantly. Now we also pay attention to value-added tax revenues (as % of total tax
revenues) between EU15.
Table 6: EU15 Tax burden and value-added tax revenues (as % of total tax revenues): 1960-2009
Tax burden
Value-added tax revenues
Austria
23.42
27.84
Belgium
31.38
26.15
Denmark
36.82
30.98
Finland
25.23
35.87
France
19.49
39.95
Germany
14.11
27.59
Greece
30.82
32.94
Ireland
34.68
27.41
Italy
27.66
23.45
Luxembourg
38.56
22.39
Netherlands
30.24
30.04
Portugal
20.70
33.26
Spain
18.53
26.79
Sweden
31.65
37.39
United Kingdom
33.82
22.88
Source: Carlos Vegh and Guilhermo Vuletin, 2012.
11
Fig. 1: Tax burden (% GDP) and VAT (% revenue), 1960-2009
45
40
35
30
25
20
15
Tax burden(% GDP)
VAT ( % revenue)
10
5
0
We can see that Luxembourg register higher tax burden as % of GDP, with 38.56, and France registers
the higher value-added tax revenues (as % of total tax revenues) with 39.95. By the other side, Germany
registers the lower value, with 14.11 and, Luxembourg with 22.39, respectively. It is visible a big
disparities within both tax revenue indicators.
4.3 Tax revenue composition: personal and corporate income taxes
Tax revenue structure differs from country to country, not only in tax burden (as % of GDP) and valueadded tax revenues (as % of total tax revenues), but also, in personal and corporate tax income. Both,
personal and corporate taxes, represents more than 50% (as percentage of total tax revenues), in several
countries, as is the case of Belgium, Italy and Spain.
12
Table 7: EU15 personal and corporate income tax revenues (as % of total tax revenues): 1960-2009
Personal income tax revenues
Corporate income tax revenues
Austria
36,18
8,74
Belgium
47,13
12,16
Denmark
35,06
8,69
Finland
25,65
11,39
France
22,15
14,27
Germany
38,63
5,17
Greece
22,48
14,25
Ireland
35,62
13,81
Italy
43,24
12,29
Luxembourg
28,30
18,04
Netherlands
29,66
17,02
Portugal
26,02
14,11
Spain
37,09
21,66
Sweden
11,47
12,97
United Kingdom
37,58
12,24
Source: Carlos Vegh and Guilhermo Vuletin, 2012.
Fig. 2: Personal income tax and corporate income tax, (1960-2009)
50
45
40
35
30
25
20
15
10
Personal income tax
Corporate income tax
5
0
13
We can see that Belgium register higher personal income tax revenues, with 47.13 as % of total tax
income, and Spain register the higher corporate income tax rate revenues, with 21.66 as % of total tax
income. By the other side, Sweden registers the lower value, with 11.47 and, Germany with 5.17,
respectively. There is a significant disparity within both income tax revenues, personal and corporate,
but much higher between personal income taxes. It is also relevant to say that personal income tax is the
main source of tax revenue, but Sweden in the only one where the corporate income tax revenues are
higher than personal income tax, with 12.97 and 11.47, respectively. Not less important, it also is those
that register lower value, considering the average of both tax revenues, as we can see easily, through the
Fig. 2.
4.4 EU VAT rates
To know more about tax revenue structure, make sense to consider also the value-added rates. By this
way, we have a deeper understand of fiscal policy system, and reinforce the information about tax
burden (as % of GDP), value-added tax revenues (as % of total tax revenues), as well as personal and
corporate tax income.
Table 8: EU15 value-added rates (VAT - standard rate), 2006
VAT rates (standard rate)
Austria
20
Belgium
21
Denmark
25
Finland
23
France
19.6
Germany
19
Greece
23
Ireland
23
Italy
21
Luxembourg
15
Netherlands
19
Portugal
23
Spain
18
Sweden
25
United Kingdom
20
Source: European Commission, 2012.
14
Fig. 3: VAT rates (Standard rate), 2006
VAT rates (standard rate)
30
25
20
15
10
5
0
VAT rates (standard rate)
We can see that Denmark and Sweden register, both the higher value with 25 % VAT rates and
Luxembourg registers the lower value 15 %. This is the income (indirect tax) where there are lower
disparities between EU15 Member States.
Sweden has lower income with personal and corporate income taxes, but has a stronger in VAT rates,
registering 37.39 in value-added tax revenues (as % of total tax revenues). The market price of products
can differ, not only by direct tax structure, but also by indirect tax. These lower disparities can be
significant, particularly when Members States are neighbors.
5. Conclusion
We conclude that there are EU richer countries with lower corporate income taxes revenues and better results in
trade balance. The trade balance can be an instrument to finance the economy and can attenuate the
negative effects of budget deficit provoked by insufficient tax revenue. The fiscal policy in industrial
economies converges more in tax burden then in tax revenue structure. But, compare industrial
economies with developing countries between 1960-2009, the convergence is higher in tax revenue
structure.
The tax burden divergence, as well as their tax rates structure, provokes a relative disincentive to
economic growth in EU15 compared with New Member States, and also within industrial economies, as
a whole. Then, the foreign direct investment (FDI) and, by this way, the international trade, will also be
15
promoted through a diminishing in tax divergence, particularly, between the corporate taxes rates. This
fiscal policy goal can be a good strategy to trade balance. Finally, knowing that tax income is usually
detrimental to growth, it is important to think more about fiscal policy in order to determine the optimal
combination of monetary and fiscal policies needed to implement successful fiscal consolidation, as suggest
Huixin Bi, Eric Leeper and Campbell Leith (2012).
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