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Final words from FairTax Consortium and Coordinator

Legacy of the FairTax project – five dimensions of tax sustainability.

In the end of April 2019, the FairTax consortium had its final review meeting at the Research Agency in Brussels, summing up both the last one and a half years of work and providing an overall assessment of the project. As much as 19 working papers based on new research were published and three successful stakeholder events took place in Brussels during the last period. The monitors highlighted the impressive dissemination output and excellent research, also underlining the outreach and engagement of a true pan-European collaboration. The overall feedback of the monitors concludes that there is no doubt that the project objectives and milestones have been met, and they stress the capacity of the consortium to changing situations and challenges. They particularly point out the changed landscape for the work on simulations on different common consolidated corporate tax bases (CCCTB). Professor Danuše Nerudová, Mendel University in Brno who has been the leading researcher describes how the pre-conditions changed: “First, the relaunch in 2016 of the CCCTB proposal introducing a threshold for entering into the system demanded adjustments of the simulation model. Secondly, Brexit changed scenario on the tax-base sharing mechanism under the CCCTB, which forced us redo the work a second time.” The project coordinator, professor Åsa Gunnarsson confirms that “the flexible approach of the work on CCCTB, but also the overall adaptative capacity of FairTax and the associated partners were truly praised at the review meeting. The results have been highly visible and a topical part of the project is of immediate interest for the European Commission.”

“The project has been implemented during a period of global changes and allowed the consortium to open up for further perspectives, and also for future research collaborations”, says professor Ann Mumford at King’s College London. Her main task in the project was to investigate the EU’s legislative competencies regarding taxation and soft law mechanisms shaping tax policies. In her collaboration with other researchers in the project, she has also taken part in a cross-disciplinary development of a concept on five dimensions of tax sustainability. In her view, “to make tax law a part in the progress in ensuring a sustainable future for its citizens the perspectives of social, economic, environmental, institutional/cultural, and equality have to be considered.”

Åsa Gunnarsson agrees, and points out:” Our research shows that in the ongoing discussion concerning ‘the social dimension of Europe’ it appears that there is much to gain if the tax policy interaction between member states and the European Union, which currently is taking place within the European Semester, could be extended to consider that taxes are one of the most efficient instruments to achieve desired social and welfare policy outcomes. To promote fair and sustainable taxation on both EU and member state level, future negotiations regarding the tax competences of the European Union have to be designed with the aim to level out the contradictions between national, European and international goals and obligations. There is now a case for policy-makers and legislators to concentrate on active tax law design and active measures for tax compliance, rather than focusing on distortive effects of tax regulations.”   She encourages the national ministries of finance to draw some insights from the outcome of the model for evaluation and measuring of the sustainability of tax systems for the EU countries, developed by the team at Mendel University. Originally, the model covered four dimensions of sustainability, economic, social, environmental and institutional, but the inbuilt modularity enables the socio-economic dimensions to be changed, augmented or replaced, in order to function as a diagnostic tool for decision-makers in the field of taxation. In the last deliverable, the team at Mendel added the gender dimension. “I like to regard the model as a tax sustainability diamond, as it is so multi-dimensional, and I am impressed to see and compare the preliminary results of a tax sustainability diamond for each of the 28 EU countries. Most importantly, it shows what choices that have to be made.”

The FairTax project has also approached the institutional/cultural and equality dimensions of tax sustainability in qualitative and in-depth studies. Professor Lynne Oates at Exeter University and associate professor Lotta Björklund-Larsen at Linköping University have been leading two work packages performing studies on co-operative tax compliance programs, launched by national tax authorities in six EU countries, to proactively engage large business. The studies have focused on how the objective of proactive engagements with large business to achieve enhanced administrative processes in terms of efficiency by real-time working, risk assessment and mutual understanding have worked out in practice. “When comparing the six studies, we could see that the institutional/cultural dimension in practice could be broken down into yet seven more dimensions consisting of; cultural orientation, evaluations, competences, hindrances, resistance and equality. And the monitors obviously considered the studies to be successful, both from a practical point of view and regarding impact”, says Lynne Oats. Åsa Gunnarsson confirms that real impact has been made in the close collaboration with national tax authorities and large business. “The high impact factor was obvious at the stakeholder event in Brussels the 7th of November 2018 at the Norwegian representation, when the Nordic experiences of co-producing compliance were presented. The title for the seminar was Stuck in the past or on the way to new practices?  The future of Co-operative Compliance. More than 50 key decision makers from 16 countries attended and discussed their experiences and practices.”

Equality as a tax sustainable dimension has been studied in two work packages, number three on gender equality and four on intragenerational equality. Åsa Gunnarsson reports that “a growing interest on the topic gender equality and taxation has been visible throughout the project. We have earlier made a press release on the impact researchers from FairTax have had on the new policy from the European Parliament, urging the Member States to reform their taxation systems to become more gender equal. However, during the last period the work carried out on gender equality consists of policy recommendations on gender effects of changes in tax bases, mix rates, and units based on microsimulations in six related EU member states. Not surprisingly, the simulations show that the introduction of joint taxation with income splitting would benefit couple households with one active income contributor in almost all countries included.” The working paper on the microsimulations states that one central result of the analyses is that the extent of gender differences in the effects of the various simulation scenarios differs markedly across the six countries studied. It remains to be explored “to what extent these cross-country differences in the gender-differentiated impact of policy measures are associated with the prevailing welfare state / family of taxation types”.

Issues concerning intragenerational equality as a key to fiscal sustainability have been recognized for a long time, and is rooted in the Brundtland Report from 1987, stating that future development of the planet would be considered sustainable if the present generation were able to satisfy its own needs, without compromising the ability of future generations to do so as well. Improving economic stability in EU member states is at the heart of plans for deeper integration of fiscal policies. A key premise of the FairTax project is to emphasize that such policies should lead not only to improved economic stability, but should also play a critical role in promoting equality and social inclusion. Associate professor Emer Mulligan at National University in Galway leads the research concerned with harmonizing and coordinating EU tax and social policies, one of four key themes of the FairTax project. This research was undertaken against the backdrop of population ageing, which has been identified as a major societal challenge for all Western nations. A key challenge arising from such profound changes for governments is the sustainability of current levels of pension provisions. The work carried out in the work package uses Irish pensions policies as a lens through which intergenerational fairness, equality and social inclusion in the context of ageing populations is examined. The approach is to give citizens a voice by collecting data interviews and focus groups and concludes with a set of recommendations. From a citizens’ perspective policymakers should take specific action with regard to pensions policy and reform, with an emphasis on the need to implement policies which prevent compounding socio-economic inequalities into your old age.

Finally, now when the project is winding up, many publications are in the pipeline that will disseminate the FairTax research by presenting tax policy recommendations based on those structural problems that have been defined as tax sustainability gaps. These are:

  • High and increasing weight of labour taxes,
  • Decreasing importance of corrective Pigovian taxes, particularly of environmental taxes
  • Intense tax competition including profit shifting,
  • Persisting intragenerational and gender inequalities
  • Tax compliance issues and tax fraud
  • Decreasing progressivity of tax systems
  • Unused potential to use taxation at the EU level to promote sustainable growth and development in Europe

One central message of FairTax emphasizes the importance of a comprehensive tax base perspective, both reaffirming importance of traditional revenue sources, such as personal and corporate income taxes, and recognizing the potential of other tax bases such as wealth-related taxes, indirect consumption taxes, and environmental taxes. The tax base perspective also opens up for innovative discussions on potential candidates for tax-based own resources to finance the EU budget. Under the lead of Margit Schrazenstaller, the research team at WIFO, Vienna, has in depth investigated total seven possible candidates for EU taxes. Studies on all seven potential tax bases are published in the FairTax Working Paper Series. Margit Schratzenstaller explains: “For each option, the current status of taxing the respective tax subjects and tax bases in the EU was presented. Arguments for why the individual tax candidates would be suitable tax-based own resources for the EU were identified, and analysed in respect to how they would contribute to closing existing sustainability gaps in EU Member States’ tax systems. Moreover, the potential revenues of these tax options were estimated. A synthesis report has also recently been published as FairTax Working Paper Series Nr 25. The report elaborates with four dimension of tax sustainability, economic, social, environmental and institutional, in order to evaluate the suitability of the various options for tax-based own resources. Besides this summary evaluation, we undertook a first exploration of the geographical incidence of the individual options and identified their legal basis.” The work on possible EU taxes as genuine own resource for financing the EU budget received high praise from the monitors due to significant impact on the debate and impressive dissemination results.

Åsa Gunnarsson concludes: “Condensed to a simple message, our legacy is: close the sustainability gaps by developing welfare models and principles for tax bases that can meet the social challenges that need to be addressed both at EU and member state level. That is what we hope to be one of the key long-term impacts of the project.”