Taxes Are a Divisive Issue for Europe, Tax Returns After Tax Reform, Sympathy for the IRS

  • Taxes Are a Divisive Issue for Europe
  • Tax Returns After Tax Reform
  • Sympathy for the IRS
  • As tax documents fill our mailboxes in the U.S., we explore the individual income tax regimes across the world.

    Politicians for centuries have used taxation as a primary incentive to garner greater public influence. But the current surge in populism, particularly across Europe, revives age-old grievances from taxpayers.

    Since the onset of the financial crisis, European politicians, particularly in countries facing severe stress, have been forced to pursue fiscal consolidation efforts through a combination of higher taxes and lower spending, referred to as austerity. These measures have endangered economic activity, producing severe recessions in places like Greece and Spain. As a result, public unrest has risen across Europe, leading to the resurgence of populism.

    Anger over austerity still festers. Initially, concern was directed at cuts in government programs and payments. But as we are finding out, there is substantial antipathy over the level of taxation in many European countries. No one enjoys paying taxes, especially if they have no say in their determination or can’t sense benefits in return. Anti-tax movements are ages old, contributing substantially to the fall of monarchic models of government across Europe. Modern democracies have given the people a voice in setting taxes and disbursing the proceeds, but that hasn’t quelled concern.

    Taxes collected directly (such as personal income tax and corporate tax) or indirectly (such as value added tax [VAT] and customs duty) by governments are revenues used for funding infrastructure, social welfare, education and defense. They can serve as a tool to rebalance income inequality. Taxes can also be used as an element of social policy to encourage or discourage certain types of activity.

    In market economies, consumers, producers and governments change their behavior in response to taxes. Higher levels of collection allow governments to increase public expenditure for items like infrastructure, education and health care that have the potential to promote long-term prosperity. On the other hand, high income-tax rates can discourage individuals from working, saving and investing.

    The European Union (EU) does not have a direct say in how countries spend their tax revenues and set individual income tax rates. However, to minimize potential risks from high budget deficits and large accumulated debts, the European Commission provides national tax policy recommendations aimed at making them more efficient and growth-friendly.

    Many European countries have struggled to strike the right balance since the financial crisis. Ireland, on one side of the spectrum, cut its corporate tax rate to a very low level and enjoyed substantial inflows of commerce. Today, Ireland has a balanced budget and one of the highest rates of economic growth in the EU. More recently, tax cuts in Spain provided an accelerant to its economic expansion.