Recent findings regarding the shift from direct to indirect taxation in the EA-17

The relative merits of direct vs. indirect taxes have been largely debated since the advent of public finance theory. The current phase of the discussion concerns the relative ability of these two kinds of taxes to creating a more growth-friendly environment. The prevailing view favours indirect taxation, and suggests a shift of the fiscal burden towards indirect taxes, especially those on consumption. We shall be looking only briefly at this last question, as this paper has two other principal aims. The first aim is to evaluate the entity of the said tax shift over the last decade across Euro Area (EA-17) member countries. Our conclusion is that a “true” tax shift has not been as widespread and large as the EU Commission believes. Secondly, among the most widely-debated issues concerning the tax shift, we are going to examine the contrasting short-term impacts on the economy resulting from it, and we shall outline the possible risk that, in the short term, this tax shift may exacerbate the economic slump spreading across the European Union, particularly as an effect of the general adoption of restrictive fiscal policies by almost all member countrie