Shifting taxes away from labour to strengthen growth in the euro area

In the euro area taxes are strongly skewed towards labour. Structural tax reforms aimed at shifting taxation away from labour are needed to strengthen the euro area?s economic growth and job potential. This section examines how different tax bases affect potential growth and investigates the effect of tax shift reforms over the last decade. The section first analyses the benefits of reducing the taxation of labour in terms of increased labour market participation. Next, the section discusses other tax bases that are less detrimental to growth. Finally, applying a reduced-form regression analysis, the section investigates to what extent tax structures affected output between 2006 and 2017 in the euro area and presents scenarios that illustrate the long-run impact on output of tax shift reforms. Overall, the analysis presented below confirms that shifting taxation away from labour to other tax bases can contribute to improving output. However, to stimulate growth, a shift in taxes should be part of a broader reform package that aims also to simplify and modernise tax systems, to address tax fraud, evasion and avoidance, to ensure that tax systems favour the deepening of the single market, and to remove the debt bias in taxation.