Capital income taxation in the euro area

This chapter examines trends and implications of capital income taxation in the euro area. As demographic change is expected to challenge the revenue-generation function of labour taxation, national tax systems may need to shift part of the tax burden away from the labour. Capital income especially personal capital income taxation is sometimes considered a potential alternative tax base. Labour is the dominant tax base for most euro area Member States, but over the past 20 years a majority of countries in the euro area have increased the role of capital taxes in their tax mix. Still, capital income is generally taxed at a lower rate than labour. While earlier academic literature argued that capital income taxation negatively impacts savings and investment, the findings from recent research are more nuanced. Taxing capital income also has distributional effects, as the share of capital income over total income tends to be higher for higher income households. From a policy perspective, it may be particularly interesting to look at how tax systems treat income from capital gains and corporate profits. To ensure sustainable tax revenues in the future, possible strategies to increase revenues from capital taxation include promoting tax simplification, strengthening tax compliance (including by tackling tax avoidance) and reinforcing international tax cooperation.