In September of 2024, I had the opportunity to interview Professor of TaxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. Law at the Lisbon School of Law of the Catholic University of Portugal, Dr. Miguel Correia, about the future of the EU tax mix. An edited transcript from that interview is below and shows that Dr. Correia’s thinking on taxation focuses on the urgent need to rebalance the EU tax mix away from its excessive reliance on taxing labor. He argues that this over-reliance is outdated due to modern challenges like worker mobility, automation, and aging populations. His proposed solution involves a fundamental shift toward three other pillars: a greater reliance on efficient consumption taxes like the value-added tax (VAT), a stronger implementation of environmental taxes, and, most critically, correcting the chronic under-taxation of capital and wealth. He advocates for globally coordinated solutions to ensure the system is progressive, fair, and capable of funding Europe’s social model, viewing technology as a key tool to improve both collection efficiency and taxpayer compliance in this new framework.
Sean Bray: How would you characterize the EU tax mix?
Miguel Correia: That’s a big question. The EU tax landscape is incredibly diverse. Each country has its own mix of taxes, and that mix changes over time. It’s not just the types of taxes that are different; the overall tax burden varies a lot too. You’ve got countries where total tax revenue is around 20 percent of GDP, and others where it’s pushing 45 percent or more. But even with all that diversity, if we boil it down, I think we can find four core characteristics that are common to pretty much all EU Member States.
The first one is the fact that we depend too much on the taxation of labor, both through the personal income tax and social security contributions. To give you an idea, in Europe, on average, around 55 percent of our overall tax revenue comes from the personal income tax and social security contributions. This has some advantages but far more disadvantages. Now, on the plus side, the personal income tax in most Member States is fairly progressive, and therefore, it increases the progressivity of the tax system as a whole. This is commendable. The same isn’t true for social security contributions, which tend to be proportional. As far as I can see, when it comes to advantages, that’s pretty much it.
When it comes to the downsides, there’s a lot more to talk about. First, there’s the high tax wedgeBroadly speaking, a tax wedge is the difference between the pre-tax price or return and after-tax price or return. For labor income, it is the difference between the total labor costs to the employer and the corresponding net take-home pay of the employee. that we observe in most EU countries, that is, the gap between what an employer pays and what an employee actually takes home. This not only discourages companies from hiring but, in today’s digital world, it creates a huge incentive to replace people with machines. Now, we don’t want to stop progress. We need to give AI and automation space to grow because that’s how innovation happens. But the high tax on labor makes this transition much riskier. It forces us to seriously question this tax wedge. And if we keep it—which I don’t think we should—we’ll absolutely need countermeasures, like taxing automation, to level the playing field between human workers and machines.
The second big problem is worker mobility. Think about what happened with COVID. It was a tough period, but it normalized remote work. I mean, here we are, having a great chat while you’re in Brussels, and I’m in Lisbon. We’ve all gotten used to these tools that, frankly, companies were hesitant to use before. But this creates a huge challenge for tax systems built on residency. The problem is that our most highly-skilled professionals—the architects, the lawyers, the people who pay the biggest slice of income tax—are now the most mobile. Their work isn’t tied to a physical place. So, that intellectual, high-paid work, which is a massive source of funding for our social systems, is suddenly at risk of walking out the door.
Third, Europe is aging. This isn’t a new trend, but we are really feeling it now. I’m in Portugal, and along with Germany and Italy, we’re on the front lines of this demographic shift. You can see it in day-to-day life, and EU data confirms the trend is set to continue. This creates a massive fiscal challenge for a system that relies on taxing labor. Think about it: you have fewer people working and paying into the system, and at the same time, you have more people retiring and drawing benefits out of it. With more pensions to pay and rising healthcare costs, depending so heavily on a shrinking workforce to pay the bills is simply not sustainable.
And the final point on labor taxation is the old assumption that we should tax labor and capital differently. The historical thinking was that capital was mobile and hard to track, while labor was stuck in one place. That justified taxing labor more heavily. Well, the tables have turned. As we’ve seen, digitalization has made labor mobile. At the same time, technology and global agreements, like the Common Reporting Standard and better data sharing, have made capital easier for tax authorities to track across borders. So, the old logic is completely outdated. We now have a world with mobile labor and trackable capital. This reality demands that we fundamentally rethink how we tax capital.
The second major characteristic of our tax mixes is our heavy reliance on VAT. Now, unlike the problems with labor taxes, I don’t see this as a bad thing. On the contrary, I think it’s an excellent source of revenue, and we should lean into it more. Why? For two main reasons. It’s efficient. VAT doesn’t distort economic behavior nearly as much as corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. does. It’s a much cleaner, more neutral way to raise revenue. And it boosts competitiveness. When a European company exports a product, the VAT is essentially washed off at the border. The product leaves Europe tax-free, which helps us compete on the global stage. Corporate income tax, on the other hand, stays in the product’s price.
On top of that, we’re getting much better at collecting it. The VAT gap, that is, the difference between what’s due and what’s collected, is shrinking across Europe. In my own country, Portugal, it has dropped from around 16 percent down to just 4 or 5 percent. Tax administrations are using real-time invoicing and new technologies to hunt down fraud, and the potential to improve collection with technology is still immense.
Now, the core problem with VAT is that it isn’t progressive. It hits lower-income households harder because they spend a larger portion of their money. But here’s the thing: we need a progressive tax system, not necessarily a progressive everything. Not every single tax has to do the heavy lifting on fairness. You can rely on a strong, efficient tax like VAT as long as you have countermeasures in place, such as targeted support for the most needy, to balance out the effects and ensure the overall system is fair.
The third characteristic that is common to most of our tax mixes is that we need to do more on environmental taxation. And here’s a surprising fact: over the last decade, the share of revenue from green taxes in the EU has actually been decreasing. We are heading in the wrong direction. There’s a new Energy Taxation Directive being negotiated that aims to fix this by linking taxes directly to the polluting potential of a fuel. That’s exactly the way to go, but the political discussions are proving difficult. And just like with VAT, we have to be smart about designing these taxes with countermeasures to protect vulnerable households from the impact.
Last but not least, the fourth characteristic is the chronic under-taxation of capital. We do a decent job of taxing wealth that you can see, like real estate. But we do a very poor job of taxing the kind of wealth the richest people hold, financial assets. This is where the real issue is, and our tax systems are, to a significant extent, missing it. So, how do we fix this? The idea of a global annual wealth taxA wealth tax is imposed on an individual’s net wealth, or the market value of their total owned assets minus liabilities. A wealth tax can be narrowly or widely defined, and depending on the definition of wealth, the base for a wealth tax can vary. is gaining a lot of traction, and I believe it deserves serious consideration. Yes, there are technical challenges, like valuing assets. But many of these hurdles become smaller if we act together on a global level and make good use of the new technologies. A renewed look into a globally coordinated, intelligently designed financial transaction tax may also be justified. The old ways of taxing are no longer fit for purpose. We need to push for coordinated, global solutions, building on the new technological developments to improve tax design and administration.
In a nutshell, this is how I see the current tax mix and its characteristics in Europe now.
Sean Bray: How does the ability-to-pay principle come into play in VAT policy?
Miguel Correia: That’s a question that gets to the heart of VAT policy. Our tax systems are built on a core idea, which is referred to in most European Constitutions: the “ability-to-pay” principle. Basically, everyone should contribute based on their economic capacity. The problem is, if you rely too heavily on VAT, you undermine that very principle. A lower-income person has to spend nearly everything they earn just to get by, so almost all of their money is hit by VAT. A very wealthy person, on the other hand, saves a large portion of their income. That saved money isn’t touched by VAT until it’s eventually spent. This means the relative burden of VAT is much heavier on the poor than on the rich, which creates a real fairness problem. So, that’s why you can’t have a strong VAT in isolation. It needs to be balanced. For me, the answer is clear: yes to a strong VAT, but it absolutely must go hand-in-hand with stronger taxation of capital.
Sean Bray: Do you see the corporate income tax as a major revenue raiser in the future of the tax mix?
Miguel Correia: Honestly, no, I don’t see corporate income tax ever being a major source of revenue. Right now, it only brings in about 8-9 percent of the total tax revenue. For years, we have cut the headline tax rates but have tried to make up for it by broadening the tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates.. But fundamentally, it’s just not a very efficient tax. It creates economic distortions and harms international competitiveness in ways that a VAT, for example, simply doesn’t. For those reasons, I believe it’s always going to have a limited role. Its real job is to work in tandem with the personal income tax.
Sean Bray: What are your thoughts on a global wealth tax?
Miguel Correia: A global wealth tax doesn’t mean creating some kind of world government that collects taxes. We can’t even manage that within the EU. Here we are speaking about global coordination. It’s similar to what we’re doing with the global minimum corporate tax under Pillar Two. The idea is that countries agree on a common set of minimum rules, a floor, for how they’ll tax the wealth of their own residents. We’d establish clear guidelines on who gets to tax what, much like we’ve done for decades with income tax treaties. The tax itself would still be a national tax, collected by national governments. This approach avoids constitutional issues while preventing a race to the bottom where the super-rich can just move their assets to a tax haven.
Now, are there technical difficulties? Absolutely. But good tax design can solve them, and we already have examples to learn from. Look at Spain: they have an annual wealth tax that is working right now. They’ve developed solutions like progressive rates and exemptions to protect the middle class. The two biggest hurdles people always bring up are valuation and liquidity. Indeed, it’s easy to value publicly traded stocks, but what about a private company or a piece of art? This is a real challenge, but there are pragmatic solutions, like valuing those assets every five years instead of annually. Then there’s liquidity, the “asset-rich, cash-poor” problem. Someone might own a valuable asset but not have the cash on hand to pay the tax. This is why the tax rate has to be low and designed sensibly. The point is, we aren’t starting from scratch. We can learn from countries like Spain and use technology and better information sharing between countries to make it work.
So, why go through all this trouble? Because we must. We love the social safety nets we have in Europe. They ensure equality and peace, and I don’t think any of us want to lose that. But that costs money. If we agree that our current tax mix is broken, with too much of a burden on labor, then we have to find the revenue somewhere else. And the data is clear, thanks to the work of economists like Thomas Piketty: wealth inequality is now far greater than income inequality. We simply have to do a better job of taxing capital. Politically, it’s a tough fight. But that’s exactly why we’re having this global conversation. To start finding real, coordinated solutions.
Sean Bray: What considerations do smaller Member States face when designing tax policy compared to larger Member States?
Miguel Correia: Competitiveness is a huge issue for smaller countries. But it must be fair competition. Frankly, I’m not a fan of tax systems designed with the sole purpose of plundering the tax base from other countries. I believe that erodes the spirit of the European project. You can’t talk about European unity and then turn around and devise a tax scheme to undercut your neighbor. Being a small country isn’t a blank check to do whatever you want. The EU has tried to enforce fairer competition with things like the Code of Conduct, but honestly, its tools are too weak due to the requirement of unanimity voting at the Council of the European Union to approve tax legislation. This should be revised. Just look at the EU’s official list of tax havens: it’s far too short, and we could never even agree on what the penalties should be. So, my position is simple: competition, yes. A race to the bottom, no.
Sean Bray: What would make the tax system fairer, and how can technology help make tax filing easier for taxpayers?
Miguel Correia: Let me touch on both of those points, starting with fairness. We’ve made progress, but there’s still a lot of work to do. For me, real fairness comes down to a few key things. First, closing tax gaps. We have to keep cracking down on tax evasion and avoidance across the board, for individuals and corporations. There’s still a huge amount of uncollected revenue out there. Second, controlling loopholes. We need to keep close track of special tax breaks and credits. They should be reviewed constantly to make sure they’re still justified. Third, making the tax system simpler. It has become far too complex, and that complexity itself is a source of unfairness. Lastly, taxing wealth properly. As we’ve already discussed, we need to do a better job of taxing wealth.
The last issue I want to mention is the incredible impact of technology, which I see as a potential double-win. On one side, technology gives tax authorities powerful new tools to capture revenue that’s currently lost to fraud. We can use AI and data analytics to be much more effective and efficient. In addition, that same technology can also make life easier for honest taxpayers. The goal should be a system so seamless and transparent that compliance is no longer a burden. The big challenge for the coming years will be striking the right balance here: using these powerful tools to ensure everyone pays their fair share, while fiercely protecting the rights and privacy of the taxpayer.
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