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1 Santiago Calvo & Diego Sanchez de la Cruz, Statutory vs. Effective Tax Rates: Why Do Higher Taxes Not Necessarily Lead to Increased Revenues? 1 (2024)

handle is hein.taxfoundation/stateffect0001 and id is 1 raw text is: *TAX FOUNDATION I EUROPE Statutory vs. Effective Tax Rates: Why Do Higher Taxes Not Necessarily Lead to Increased Revenues? Santiago Calvo Diego Sanchez de la Cruz Guest Contributor Guest Contributor September 2024 Key Findings • The gap between statutory rates and average effective tax rates for personal income tax (PIT) in the European Union varies significantly, affecting the efficiency and simplicity of the tax system. • Simplified tax systems, with fewer deductions and exemptions, combined with broader bases help reduce tax avoidance while improving efficiency in revenue collection. • Those EU Member States with a smaller gap between statutory and average effective tax rates for PIT enjoy higher tax competitiveness, which in turn helps drive investment and economic growth. • Increasing tax rates without simplifying the system may not always result in a proportional in- crease in tax revenues, due to changes in incentives and their effect on taxpayer behavior. • Keeping marginal and average effective tax rates as aligned as possible reduces economic distor- tions and facilitates tax certainty for companies and individuals, improving the efficiency of the tax system and reducing its negative impact on production. • EU Member States like Spain and Germany have reached a high tax rate threshold. As a result, ad- ditional increases in statutory rates for PIT do not generate a significant increase in tax revenues, a scenario that may be described as a Laffer Curve effect. The mission of Tax Foundation Europe is to improve lives through tax policies that lead to greater economic growth and opportunity. TAX FOUNDATION EUROPE, RUE D'ARLON 40, 1000 BRUXELLES, BELGIUM taxfoundation.org/eu

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