Who likes paying taxes? Nobody particularly enjoys seeing part of their salary go to the taxman each month. After all, you worked hard for this money. So, why do we actually pay taxes? Taxes are the main source of income for the state. The state uses tax income, among other things, to pay for things that benefit the common good – such as the construction and maintenance of hospitals, schools, and infrastructure (such as roads), as well as the salaries of police, firefighters, soldiers, etc.

In many European countries, the principle of “progressive taxation” applies, which means that people with higher incomes have to give up a larger share than low-wage earners. But some people find that taxation is generally too high in Europe and even harms our economies. They argue high taxes discourage investment, innovation, and productivity. Is that correct?

Can high taxes also bring benefits? Scandinavian countries have some of the highest tax rates in the world (for comparison, while the maximum federal income tax rate in the USA is around 37%, in Sweden the highest personal income tax rate is 57%). However, despite high tax rates, the Scandinavian countries are also economically very successful. Why is that?

Supporters argue that high tax revenues enable the Nordic countries to offer comprehensive social benefits, e.g. to support the poor and the sick, as well as to finance high-quality education policy and promote scientific research. The high level of social security is also one reason why the quality of life in Scandinavian countries has been amongst the highest in the world for years – and despite high taxes, that can help attract companies and stimulate innovation.

What do our readers think? Clearly, we’re simplifying an incredibly complex issue and there are a range of different perspectives from our readers on this question: Carl, for example, thinks that high taxes are bad because they lead to a big state, while Franz thinks that high taxes are necessary to pay for public services.

To get a reaction, we spoke to Kira Marie Peter-Hansen. She is an MEP from the Danish People’s Socialist Party and Vice-Chair of the Subcommittee on Taxation in the European Parliament. What would she say?

Well, I don’t think you can say that high taxes either good or bad. I think it depends on what the taxes are used for. And in Denmark, where I’m from, we have a pretty high level of taxes and I think that’s a really great thing because we get free education, free healthcare, and we can invest in the green transition. But, of course, it doesn’t make sense if the high taxes are spent on something that is inefficient.

Next up, our reader Imogen is particularly bothered by the fact that large companies use tricks and loopholes to minimise their tax bill while taking advantage of the benefits of the Single Market (for example, headquartering in countries with lower corporate tax rates like Ireland and Luxembourg).

What does MEP Kira Marie Peter-Hansen think?

I think tax competition is one of the biggest threats to my generation. I think it is a big problem that we have a Single Market in the European Union, but then we have tax competition in all of these countries. Something we are working on [in the European Parliament] is the list of tax havens, but we can only have non-EU countries on the list – even though, for example, Luxembourg and Ireland also have lower taxes.

Next, our reader Joshua argues that the easiest way to prevent tax avoidance is to lower taxes for all businesses.

We put his suggestion to Sven Giegold. He is an economist and sits in the European Parliament for the Greens. He has been campaigning against tax evasion for years. What does he think of Joshua’s idea?

There is a lot of debate on whether you can get rid of tax fraud and aggressive tax avoidance by lowering taxation. The point is: you can’t lower it so far that people really stop tax fraud, and there’s a lot of evidence for this. Obviously, if you have a tax rate of zero, then there is no fraud anymore. But when you want to have a similar tax rate on corporate income as on private income – which is also needed for tax fairness – then you always have a level of taxation, which gives a lot of incentives to fraud. There are lots of studies and evidence backing this.

You can’t lower the taxes so far that the fraud stops. This means we have to fight fraud; we have to fight aggressive tax avoidance, in particular by the larger and more wealthy actors, which could well afford to pay their fair share.

Finally, in order to close tax loopholes, some advocate the introduction of a harmonised corporate tax rate across the European Union (or, at the very least, a common tax floor and ceiling). However, Christos is concerned that such harmonised tax rates would make it difficult for economically weaker Member States to remain competitive compared to richer states. So, is corporate tax harmonisation in the EU a bad idea?

For an answer to Christo’s question, we again asked MEP Sven Giegold to respond. What does he think?

Well, this is a very fair point. So I would argue, first we have to harmonise how to calculate the tax base. It has to be clear, in each country, which share of the profit has to be taxed. This important, because at the moment, most of the tax competition happens by manipulating where you actually pay your taxes. So, a company may work in Romania or in Germany but pay its taxes in Ireland or the Netherlands. This is not profiting the poorest countries, nor the richer ones. It’s only shifting the tax base in an illegitimate way. So, when we want to solve this, the question is: should we also harmonise the tax rate? And there I agree with Christos. A country which is providing higher public goods, because it’s richer, should also charge a higher tax rate and a country which is poor should charge a lower tax rate.

Europe could basically simply define a minimum tax rate according to economic development. There should be an absolute minimum. Beyond that, richer countries should be obliged to charge more; to charge more when they get rich, and increase that rate as they become richer. That would be the ideal tax system. Of course, now politics comes in. Still, I would argue, harmonising tax rates and the tax base would help both rich and poor countries in Europe and internationally. But in order to avoid overcharging in the poorer countries, we don’t need a one-size-fits-all solution but rather a minimum tax rate and binding higher tax rates as countries grow richer.

Are high taxes good or bad? Do high taxes have a negative impact on economic growth? Or can high taxes have positive consequences, such as a strong social system and high living standards? Let us know your thoughts and comments in the form below and we’ll take them to policymakers and experts for their reactions!

Image Credits: Photo by Simon Moore on Unsplash. Portrait Credits: © European Union 2020. © Dominik Butzman.