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Why do we need a new fiscal system for the 21st century?

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With inequality rising almost everywhere due to pandemic shocks, both the US and the EU are moving towards reviewing their fiscal systems. Many agree that new mechanisms are indispensable to guarantee governments the necessary revenues while relieving the fiscal pressure on low-income citizens. What are the essential elements to ensure that the new system is adapted to these needs?

The acceleration of technological progress that characterised the last few decades has also caused significant changes in the real economy. These changes have also led to an increase of multiple types of inequality among and within countries, regions and even cities across the world. Economic globalisation is currently perceived as happening at the cost of people’s well-being, health and the environment. This perception produces intense, alarming social reactions driven by the citizens’ sense of injustice, fostering support for alternative political movements with anti-systemic messages or rhetoric.

Tax systems necessarily affect the world in which we live. Even before the recent economic and pandemic crises, many experts called for reforms to adjust fiscal rules and ensure they fit the new economic reality of our century and the ambitious goals of sustainability and environmental protection called by the EU agenda. Most of our present economic issues can be ascribed to the fact that current macroeconomic rules were conceived when the movement across borders of goods, capital and activities was difficult and expensive.

Re-Imagine Europa’s Economy Task Force on “An Ideal Fiscal System for the 21st Century” held the first meeting of key advisors on October 21st to develop an innovative, pioneering proposal for an ideal fiscal system and a fairer and more competitive economic model. The Task Force is chaired by Alain Lamassoure, Former Member of the European Parliament, Former Chairman of the EP Committee on Budgetary Control and of the EP Committee on Budgets. Key advisors have been summoned to be part of the group and build a vision that considers all the different needs and expectations, starting from a few simple principles.

EU fiscal rules must adapt to today’s economic conditions. Inequalities undermine social confidence, diminish support for democratic institutions, and hinder growth and quality employment. According to studies funded by the European Parliament, while roughly 10% of EU workers live in poverty, labour tax revenues still represent the major source of revenues for Member States governments.

The economic policy framework of the euro area was created in the early 1990s when Europe was facing the risk of overinflation, and the high rates of government-issued bonds favoured expansionary fiscal contractions. The current system was conceived for a different era, in which our economies relied more on labour and less on capital for their functioning. Digital technologies reversed this proportion dramatically, gradually restricting the demand for workers and contributing to the growing concentration of wealth. Hence, any proposal to build an ideal fiscal system should include effective mechanisms to ensure that individuals and businesses contribute fairly.

Two other important characteristics of any proposal for a renewal of the taxation system are certainly clarity and transparency. European fiscal systems are complex and require professional assistance to understand the underlying mechanisms effectively. A system designed to promote clarity and transparency could allow citizens to grasp better how and why taxes are collected and how the resulting tax revenue is spent, substantially contributing to trust in institutions.

Moreover, the pace at which technology developed in the last decades suggests it’s worth imagining an innovation-oriented system. On the one hand, this means it should be conceived to adapt promptly to a fast-changing technological landscape. On the other, it should also be built in a way that helps promote environmentally and socially ethical practices, as well as any other form of sustainable innovation.

Like all great battles over the issues that plague our interconnected and globalised world, such an effort must be coordinated at the supranational level. Recent scandals exposing the use of tax havens underline the inadequacy of geographically based jurisdictions in ensuring that profits are properly accounted for and revenues collected. This does not inevitably mean that the same system should be adopted globally but rather that solid multilateral agreements between countries operating under different fiscal systems are necessary.

The substantial economic recovery that will follow the pandemic crisis represents a unique opportunity to build a prosperous and equitable future, in line with the shared values of social equity and overall well-being that have always characterised Europe. By visiting Re-Imagine Economy’s home page, it is possible to follow the work of the Task Force and be updated on all the most recent developments in this area. Stay connected!

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