The Commission’s country-specific recommendations in its European Semester report last month highlighted that need for a shift away from high labour taxation and towards environmental and consumption charges. As a means of creating employment, the recommendation is a no-brainer, however precious little progress has been made since the Commission made the exact same recommendation last year.
The problem of high labour taxation is a distinctly European one. The OECD 2014 report on taxation as a percentage of labour costs finds that EU member states occupy the 14 top spots, with Belgium heading the table with taxation accounting for 55.8% of average labour costs.
As the EU struggles to bring down its high unemployment rate of 10%, a tax-shift offers one of the most effective means of both creating employment and achieving our long-stated environmental goals. One rough rule of thumb is that for every €1 billion in labour tax reductions, 10,000 jobs can be created.
In looking for concrete ideas for an environmental tax shift, aviation is the most obvious source. It is 10 times more carbon intensive than other forms of transport and within the EU is it expected to grow almost twice as fast as its lower-carbon competitor, rail.
Despite this, aviation receives some of the most favourable tax treatment of any industry. Due to EU rules, it is exempt from both VAT and fuel duty; exemptions not afforded to other transport modes. These exemptions add up to €40 billion every year – meaning member states are missing out on labour tax cuts that could create 400,000 jobs.
Ending these exemptions would create a level playing field between all modes of transport, help the EU meet its 2030 climate targets and provide a reliable basis for a shift away from labour taxation. Few policies can be said to achieve so many different objectives.
These exemptions originate not at member state level, but in complex and unworkable EU legislation in the fields of VAT and fuel duty. So rather than reprimand member states once a year for failing to act, the Commission should propose amendments to these laws that will allow countries to introduce job-creating environmental taxes.