Tax Policy and Tax Collection in Europe

The Laffer curve is a very known economic thesis which represents the basic theoretical principle of the relationship between tax collection and tax rates. According to this theory, any tax revenue is achievable with the application of two rates: one rate is always lower, the other one higher. The first part of the paper summarizes current research outcomes for this topic. In this part, outcomes are presented which were formulated by economists who deal with tax policy. For our own analysis, we use time series data of tax collection, gross domestic product, tax quota and different implicit tax rates (implicit tax rate on capital, implicit tax rate on consumption and implicit tax rate on labor). The tax quota is defined by tax collection divided by gross domestic product which expresses how many euros a country gains from one euro of gross domestic product. This fact enables us to eliminate the influence of the business cycle. We apply the regression analysis to fourteen data sets of cross-sectional data from the period 2000-2013. Cross-sectional data contain information for 23 selected European countries for which data for tax rates and tax quota are available. Data are adjusted in order to perform regression analyses which allow quantification of the relationship between different tax rate changes and the corresponding tax quota which represents relative tax collection.  Data are gained from the Eurostat database. Results of the regression analyses are tested and interpreted for every year specifically. Regression coefficients are presented as a time series which enables us to find out if it is possible to detect the presence of trend.