EU TAXATION POLICY DURING FINANCIAL CRISIS

Authors

  • Algis Junevicius, Kristina Justinaviciene Kaunas University of Technology

Abstract

The paper deals with the problems of tax coordination and perspectives during and after financial crisis. As we see the 2008 financial crisis is the worst economic crisis. Great Depression of 1929 was financial crisis which know all world financers and we can compare these days financial crisis with 1929 financial crisis. Thr 2008 financial crisis has been characterised by a rapid credit expansion, high risk-taking and exacerbated financial leverage and credit crunch when the bubble burst. In particular, it reviews the existing evidence on the links between taxes and many characteristics of the crisis. Finally, it examines some possible future tax options to prevent such crises.
This financial and economic crisis presents major challenges for tax administration. With the economic downturn, tax agencies are encountering growing compliance risks and greater demands for taxpayer support in the face of prospective budget cuts. This paper examines these challenges and sets out a strategy and measures for responding to them. Theoretical and empirical studies suggest that an economic downturn tends to worsen taxpayer compliance in important aspects. While a drop in compliance may have some countercyclical effects on the economy, tolerating noncompliance is not an appropriate response to the crisis because it is distortionary, inequitable, and, perhaps most importantly, hampers the rebuilding of tax bases over the medium-term.
The crisis therefore presents the financial authorities – central banks, regulators and finance ministries – with two challenges:
The first and most urgent is to design short-term policies so as to at least limit the adverse impact of deleveraging and deflation on the real economy. We cannot make that impact nil, but we do know how to avoid the policy mistakes which turned the initial problems of 1929-30 into the Great Depression. Fiscal and monetary policies need to be carefully designed, and – as we approach a zero interest rate and consider quantitative easing options – need to be increasingly coordinated. And there are a wide range of policies which can be taken to free up financial markets, funding guarantees, liquidity provision, tail risk insurance, direct central bank purchases of assets, and regulatory approaches to capital regulation which avoid unnecessary pro cyclicality in capital adequacy requirements. The measures announced by the Chancellor of Exchequer on Monday were designed as an integrated package, which will have a significant impact. And if more measures are acquired they can and will be taken.
It is not, however, on this challenge of short-term economic management – where the lead must be with the fiscal and monetary authorities. But instead on the second challenge: how to design the future regulation and supervision of financial services so that we significantly reduce the probability and severity of future financial crises.
Financial sector innovation. The fundamental macro economic imbalances have thus stimulated demands which have been met by a wave of financial innovation, focused on the origination, packaging, trading and distribution of securitised credit instruments. Simple forms of securitised credit – corporate bonds – have of course existed for almost as long as modern banking. In the US, securitised credit has also played a major role in mortgage lending since the creation of Fannie Mae in the 1930s; and securitisation had been playing a steadily increasing role in the global financial system and in particular in the American financial system for a decade and a half before the mid-1990s. But it was from the mid-1990s that the system entered explosive growth in both scale and complexity.

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Published

2010-04-05

Issue

Section

Economics of the European Union