The European Union: Investigation of How Low Taxation Resulted In Higher Economic Growth - Case Study Example

The European Union: Investigation of How Low Taxation Resulted In Higher Economic Growth Name Course Professor’s name University name City, State Date of submission Economics An investigation on how low taxation in EU resulted in higher economic growth Introduction The EU is made up the following independent countries: Austria Belgium Cyprus Estonia Finland France Germany Greece Ireland Italy Latvia Luxembourg Spain The Netherlands Economic growth Every country seeks economic growth for it to be better placed economically against other countries in terms of size. Economic growth is a concept that is an integral part of achieving both the macro and micro economic balance. It is defined in terms of production capacity and the consumption level of goods and services. Following this, it is generally an increase in the total production capacity and the consumption factor in a country. Evidently, the term only focuses on the size of an economy, as opposed to how better off an economy is against different factors (Centre for the Advancement of the Steady State Economy, 2015). It thus, measures increased prosperity of a state. Indicators of economic growth As aforementioned, economic growth measures prosperity of a state in terms of size. There are different factors that governments use to verify this concept. They include: Per capita income Population changes Gross domestic product changes Employment level Research and development Education level Government spending They characterize absolute results of macroeconomic business objects. These indicators are also needed to compare the macroeconomic objects, with different quality characteristics such as national economies, which are at different levels of development, or societies that are different structure of their productive forces. Economic growth means a regular, steady expansion of economic system, which is to increase the size of the applied social labor and manufactured product - goods and services. Economic growth is the main problem of quantitative and qualitative development. Furthermore, economic growth is in the specific dynamics quantitatively increase and qualitative improvement of social productivity and the factors that produce it. There are two main types of economic growth extensive and intensive. Extensive type of economic growth - is expanding production based on a quantitative increase in its production factor in maintaining the preliminary technical and technological parameters and qualifying them. Intensive type of economic growth is expanding production through qualitative improvement of its operating factors in improving organizational and economic relations of production (division of labor, specialization and cooperation of production, etc.). This increase is achieved by increasing the employees who can develop their professionalism, the use of innovative tools and items of work, the use of a more rational production potential. This increases the pro-labor productivity and efficiency. Role of the government In the European Union, countries elect government officials to office in order to serve them and make better economic policies that will ensure better economic growth. The following are some of the roles performed by any government to the economy: Eliminating high levels of unemployment Ensuring a reduction of prices , in order to increase consumers’ purchasing power across the state Increasing standards of living through better economic growth, which ensures the production capacity of a country, is increased. Taxation Today, every presidential campaign must include at least one economic reform in terms of taxation policies. Firstly, a tax is a compulsory contribution imposed by a country’s government, usually with different predetermined criteria. Originally, economists believed that taxation main aim was to raise government revenues that are then channeled back into an economy as government expenditure. Some of the types of taxes in the European Union countries are: Income tax Value Added Tax Corporation tax National Insurance Local government tax Effects of taxation Taxation is known to have an effect on ROI as well as expected profitability, which ultimately affects the rate of economic growth. Hence, a lower taxation will increase returns to investments ration, (Includes both physical and human capital) and research and development. This translates to more innovation and accumulation of capital stock. Moreover, tax policy may attenuate the supply of labor as it may discourage participation. In addition, it may also discourage productivity growth by attenuating factors such as research and development as well as venture capital. Role of taxation Resource mobilization- This is achieved through the imposition of direct and indirect taxes. Income inequalities reduction- This is attributed to the fact that taxation follows the principle of equity. Generally, direct taxes are meant to be progressive in nature, the converse of which is true. Social welfare Foreign exchange Regional development Inflation control Both the direct and indirect taxation are an integral part of economy growth and development as they promote employment, needless to say, economic stability. Thesis The impact of taxation on any economy is among the most hotly debated aspect; whether low taxation results in any economic growth or not. The following paper discusses on the impact that low taxation has had in the European Union on their economy, particularly, economic growth. The statement being investigated is “proof that low taxation in the region resulted in higher economic growth”. Effects of taxation The EU has about 15 member states. In the year 2013, there were many tax reforms introduced with the sole aim of harmonizing the tax policy to ensure economic growth. One – there were incentives introduced to foster entrepreneurship and investments. This was done through introduction and an extension of the direct taxation measures. The tax incentive introduced in Portugal and Spain ensured that profits are reinvested to steer more growth, while others like Germany had the aim of stimulating equity investments. Furthermore, the United Kingdom introduced, in the same period, a new tax relief. This had the effect of promoting investments in SMEs commonly known as ‘seed’ companies. Generally, as tax rates step up, individuals in the affected country will commence working fewer hours. This is a situation where the government finances its expenditure outside taxation. Hence, the move in the UK of tax cuts resulted in more ‘seed’ companies being established which created employment for more people and increased the GDP in the period 2012-2014. It is worth noting that the higher the tax rates are the more citizens devote most of their time in trying to find ways to evade tax, rather than being engaged in productive activities (Engen & Skinner, 2010). The converse is also true. Two- a report from The World Bank indicates that the Western Balkans,(Croatia and Macedonia), signed an MOU in 2013 to integrate with the EU in order to accelerate economic growth, reduce poverty levels and improve the overall standard of living of its citizens. This owes to the fact that the EU taxation policy was friendly and played a key role in ensuring those goals were met in mid June 2013. In addition, the Western Bulkans integration resulted in lower telecommunication cost, more human capital development and more FDI investment as it integrated the EU taxation policy which was favorable then, compared to the external environment considered challenging. During 2011 and half of 2012, most EU member states were subjected to the EDP, (Excessive Deficit Procedure). Over that period, countries such as Greece, Italy, Cyprus and Portugal targeted to increase personal income tax progressively, so as not to discourage growth from low income earners. This measure was however temporal and the net overall effect resulted in a speed up of fiscal consolidation. In 2013, the Netherlands and Austria introduced a tax cut on social security advantages, which targeted older workers (The EU Commission, 2012). Besides, Finland and Germany lowered overall tax across the whole population to step up economic growth (The EU Commission, 2012). Similarly, Belgium and Hungary also granted tax reliefs to all low income earners in their country in 2011. Sweden, Denmark and Spain also followed suite by granting tax base relief with the sole aim of improving human capital which is a factor of economic growth (The EU Commission, 2012). Statistical findings In the 4th quarter of the Eurozone, the GDP recorded was an increase growth of 3% from the previous 2014 quarter. Overall, the economy grew by 1.4% margins in 2014 (The European Union, 2015). In 2008, the EU countries experienced a deteriorating public finance which created financial and economic quagmire. Following this, between 2011 and 2012, the region implemented fiscal policies to aid in restoring back a sustainable growth. The need for tax revenue in the member states stemmed from the need to create and restore growth over medium-long-term periods. The share of all direct taxes across the union rose from 31.5% in 2009 to 32.1% in 2012 as a result of the tax reform changes that saw a temporal increase in the Union’s taxation. From the analysis below, it is clear that the Union is cautious on how it implements tax reforms in the labor market so as not to alter GDP negatively. When labor is highly flexible, the tax rate is slightly lower than when it is rigidly flexible. This is depicted through a 33.7% increment, (1.90 – 2.54) and 4%, (1.08- 1.13) respectively. For instance, Sweden announced a +1.4% increase in its GDP in 2012 which is attributed to strong public finance and better taxation (Engen & Skinner, 2010). In 2014, the country had a budget bill of SEL 24 billion aimed at improving employment rate, research and development encouragement as well as strengthening competitiveness. As a result of low taxation, its central government revenues decreased to 0.1% of GDP while government expenditure rose to less than 1%GDP. Conclusion The low taxation is a move that is being slowly adopted across the Union in all member states to steer development internally amidst the harsh external environment. This has increased their GDP levels, encouraged more research and development, increased human and physical capital flow in and out of the region and stepped up youth employment levels, kindly refer to the Appendix attached in the Appendix section. Appendix Table showing a result of economic performance across the EU between 2002 and 2012 Source: The World Bank References Centre for the Advancement of the Steady State Economy, 2015. What is Economic Growth?. [Online] Available at: http://steadystate.org/discover/faqs/ [Accessed 17 April 2015]. Engen, E. & Skinner, J., 2010. Taxation and Economic Growth. National Tax Journal, 49(4), pp. 617-642. Remeur, C., 2015. European Union tax policy – Background to key issues in the debate on taxation matters in the EU. [Online] Available at: http://epthinktank.eu/2015/02/20/european-union-tax-policy-background-to-key-issues-in-the-debate-on-taxation-matters-in-the-eu/ [Accessed 17 April 2015]. Romer, M., 2010. Economic Growth: Compound Rates of Growth. 2 ed. s.l.:Aplia Graduate School of Business: Stanford University. The EU Commission, 2012. Tax reforms in EU Memebr States:Tax policy challenges foreconomic growth and fisca sustainabilityl. Taxation Papers, Volume 34, pp. 1-124. The EU Commission, 2015. EU Tax Policy Strategy. [Online] Available at: http://ec.europa.eu/taxation_customs/taxation/gen_info/tax_policy/index_en.htm [Accessed 17 April 2015]. The European Union, 2015. Economic Report 2015 - Includes the EU and Eurozone real Gross Domestic Product growth rates, with latest forecasts and historical data, GDP per capita, and GDP composition by sector.. [Online] Available at: https://www.gfmag.com/global-data/country-data/the-european-union-gdp-economic-report [Accessed 18 April 2015]. U.S Department of Treasury, 2015. Resource Center: Economics of Taxation. [Online] Available at: http://www.treasury.gov/resource-center/faqs/Taxes/Pages/economics.aspx [Accessed 17 April 2015]. Read More