The UK government should look at how it is collecting VAT revenues and consider action on property taxes, according to a European Commission report on tax reform and policy challenges facing member states.
The annual Tax Reforms in EU Member States report is published jointly by the European Commission’s Directorate-General for Economic and Financial Affairs (DG ECFIN) and DG for Taxation and Customs Union (DG TAXUD).
It says that while more than half of the member states have introduced VAT reforms over the last two years, the majority increased statutory rates rather than broadening the VAT base. The report claims many member states collect VAT revenues far below the level that could be collected theoretically if all consumption items were taxed at the standard rate.
The report says widespread use of VAT exemptions and reduced VAT rates, and a high gap in tax collection are among the main reasons for the shortfall, and identifies the UK as having a particularly low level of revenues from VAT as measured by the VAT revenue ratio. Other states with poor collection rates include Greece, Spain, Italy, Latvia and Portugal.
The UK is also one of the countries identified as having relatively high transaction taxes on property transfers and relatively low recurrent tax on property. The report recommends that the UK considers shifting taxation from transaction to recurrent taxes. It also stresses that the taxation of housing continues to favour the accumulation of debt in many member states, due to mortgage interest deductibility combined with low tax on imputed rents.
The report calculates that around one third of member states have scope for shifting taxation away from labour to tax bases less detrimental to growth. In these cases, a high tax burden on labour (including specific labour market groups) coexists with some room for increasing growth-friendly taxes, ie, consumption taxes, recurrent housing taxes and environmental taxes.
The report provides a detailed overview of recent tax reforms carried out in member states in 2012 and the first half of 2013. It summarises changes in overall tax revenue and identifies common trends across countries, offering a descriptive typology of reforms and identifying areas where tax reforms could improve income distribution and help countries get their public finances back on track.