Friday, January 2, 2015

EURO-ZONE NEED RELAXED TAXATION & NOT QE (LIQUIDITY)

The whole world is eagerly waiting for the Quantitative easing to be provided by Euro-zone so that asset bubbles and speculative growth projections could be taken and the stock markets are being rallied to new heights. By QE the whole world takes it as printing of money for the system and zero interest rates. As a economist I find that QE of the Eurozone should be designed where taxation benefits are being given in Consumption, Labour and Capital.  We don’t need QE in the form of asset bubbles but in economic benefit where the end user as well as overseas investors gets attracted to the country. I will discuss 3 key areas of Taxation system where I find change is required to bring growth over the next couple of years. You may come up with QE to pump liquidity in the system but that will be for short term and also circulation of capital will not happen. The resources will be trapped to certain part of the capitalist community rather than flowing to the economic factors. QE should be circulation of capital and that’s will only only happen when the same is designed to give taxation benefits to the euro-zone people across the 3 key areas.

Taxation trends in the European Union & the new QE strategy
Lest study the current trend of the taxation system prevailing in euro-zone and the problems and solution related to them:
·         In 2012, the overall tax ratio, i.e. the sum of taxes and compulsory actual social contributions in the 28 Member States (EU-28) amounted to 39.4  % in the GDP-weighted average, nearly 15 percentage points of GDP over the level recorded for the USA and around 10 percentage points above the level recorded by Japan.

Now before going for austerity measures why not adopt the policy of low taxes which automatically adjust the austerity amounts but leading growth opportunities for the industry and economy.  Entrepreneurs and corporate will have more surplus at their own ends as taxation rates are low but also the government cuts down its public expenditure adopts the austerity measures at its own ends without affecting the private segment. More surplus would leads to less borrowing and less stress on the banks and more business opportunities would come. Euro area tax revenue as a percentage of GDP remained at a slightly higher level than EU tax revenue (39.4 % of GDP in the EU-28 and 40.4 % of GDP in the EA-18). We need to cut down on this aspect since this will lead to less business and less employment. What we need is that QE should be taxation benefit wise and not printing of fresh liquidity into the system.

This will create long term economic investments as tax sops would make employment and business to grow. Once the employment numbers come down –taxation form the employed would benefit the economy. At the same time social cost burden for unemployed will come down. This all will happen only when the taxation aspect is improvised and made user friendly. If we are taking austerity as well as getting QE out of pocket then we need to channelize the same where doing business become aggressive and easy. FDI investments would also become active when the taxation systems become attractive.
  
·         Labour taxes are the largest source of tax revenue
Labour taxation as mentioned above is the biggest part. Taxes on labour declined from 2009 (19.9 % of GDP) to 2010 (19.7 % of GDP) and then increased from 2010 onwards to exceed the 2009 level in 2012 (20.1 % of GDP). Since 2009, a number of Member States raised the top rate in the area of personal income taxation. Now if Euro-zone wants consumption to happen then obviously one needs capital in his hands to buy the same. Hence this area of taxation needs to be reduced substantially so that even Tourists also find the country to be cheap which also pushed up the GDP growth for the country. QE should be utilized in this way. Giving taxation benefits to the consumption of goods leads more manufacturing to happen which leads to multiple job creation and taxation earnings for the government. FDI investments will also increase as goods and services become cheap and hence volume based earnings start happening in the long term. I have kept the article  very short so that it become more brief to the point of issue.

·         Upward trend in VAT rates since 2009 continued in 2014

Consumption taxes increased from 10.7 % of GDP in 2009 to 11.1 % of GDP in 2010 remained relatively stable to stand at 11.2 % of GDP in 2012. This was mainly due to increases in VAT rates in many Member States resulting in higher VAT revenues as well as resumed domestic demand in most Member States.
 Low VAT rates would spook consumption for the economy and also it is user friendly for the end user. The current taxation revenue to the GDP is only being focused towards revenue and this is very much clear from the below comparison chart.  




The problem of Euro-Zone slowdown is the taxation system where no compromise is being executed to cut  down the rates since focus is on income from taxation. We are trying to keep the income rates in the same  level as it was in 2002. We must understand that we are not in the economic condition of 2002 and we are in the year of 2015 where economic and technological know-how is no more private property. Hence  making  the investment and economic climate of Euro-zone to be attractive we need taxation reliefs which would   make the country attractive to the global world and the domestic ones. QE in liquidity injection into the system would create bubbles but not employment neither entrepreneurship which leads to long term economic growth for EU.

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