Exploring the future of ability to pay in Europe

The principle of ability-to-pay is being in European tax systems is being challenged. While aging calls for a rising tax burden on young generations to cover the increase in age-related public expenditures, internationalization, a growing flexibility of markets, and a rising importance of human capital make it difficult to increase marginal tax rates. Moreover, tax competition induces countries to lower their tax rates on capital income. Trends therefore threaten social cohesion. International information exchange may help to enforce the residence principle. This is important to maintain an effective tax burden on capital owners. In order to sustain a reasonable level of corporate tax rates, corporate tax harmonization may help rescue the principle of ability-to-pay in the taxation of corporate income.