Digitalization, done right, can equip governments to improve revenue collection and spending efficiency.

International Monetary Fund – September 7, 2023

Digitalization is a transformative force as powerful as the advent of the printing press in the 15th century or electricity in the 19th. Yet some governments have been slow to harness the potential of digital technology to improve delivery of public services and strengthen public finance.
A two-pronged policy approach is required—connecting unconnected households to the internet and accelerating and strengthening the adoption of digital solutions in the public sector. We outline strategies for pursuing these policies in a new staff discussion note on government technology, or govtech.
Encouraging digital adoption
Emerging and developing countries have the most potential to leapfrog their development trajectory by adopting digital technologies. These countries lag considerably behind in internet connectivity, a key enabler for adopting and using digital technologies. Globally, about 2.7 billion people still need to be connected. Within countries, a digital divide persists across age and gender. Bridging this divide and benefiting from digitalization takes adequate digital infrastructure.
Our estimates show that $418 billion of investment in digital infrastructure is needed to connect unconnected households. The bulk of these investment needs are in emerging market and low-income developing economies, with the latter’s requirements estimated at 3.5 percent of GDP. Government support can be crucial in achieving universal connectivity by incentivizing or directly investing in building internet infrastructure, especially in regions where profitability remains challenging.

In addition to infrastructure, affordability and digital literacy are crucial. Internet subscription costs remain high in low-income developing countries, where, relative to average incomes, the average cost is nine times the amount citizens in advanced economies spend. To make internet access more affordable, governments can consider offering discounts or vouchers on subscription fees. Additionally, promoting digital literacy programs is essential to overcome reluctance among specific populations, particularly older individuals, to embrace new digital technologies.

The power of govtech
Digitalization enables governments to leverage technology to enhance revenue collection, improve efficiency of public spending, strengthen fiscal transparency and accountability, and improve education, health-service delivery, and social outcomes. These can be achieved through better decision-making processes, adoption of international standards and practices, transformation of public financial management processes and systems, and improved taxpayer and trader services to support voluntary compliance and trade facilitation.
Adopting govtech in fiscal operations can strengthen public finance on both revenue and spending sides. IMF staff analysis shows that e-filing, e-invoicing and electronic fiscal devices could lead to a significant increase in tax revenues. For example, the adoption of e-invoicing and electronic fiscal devices could improve revenue mobilization by up to 0.7 percent of GDP. Digitalization’s impact on revenue administration is enhanced by expanding digital connectivity and ensuring sufficient staffing and expertise among tax officials. Similarly, the automation of budget payments using digital technologies is associated with more budget transparency. Our analysis suggests that digitalization is generally associated with an improvement in the efficiency of expenditure.
Digitalization can also improve the effectiveness of social spending and the quality of public service delivery. Digital interventions, such as providing students with equipment and software, can improve education outcomes. In healthcare, govtech can help improve quality of care, increase the coverage of underserved populations, and optimize resource utilization. Electronic health records, telemedicine, and digital platforms for patent licensing, procuring medicine, and monitoring infectious diseases are areas of digital innovation in health care.
Digitalization can also help strengthen social safety nets through better identification, verification of eligibility, and provision of delivery mechanisms. For example, integrating digital ID and creating extensive socio-economic data can enable governments to better target and accurately verify beneficiaries receiving social assistance.
But these benefits from digitalization can materialize only if it is done right. Implementing large digitalization programs is a complex undertaking and requires careful planning, adequate resources, political support, and appropriate change management processes. Digitalization may require changes in regulations and established processes, adequate staffing and expertise among officials, and strong safeguards for data security and privacy to protect sensitive information. Without adequate safeguards, implementing complex digital solutions could even be counterproductive and facilitate corruption.
By adopting an approach to digitalization where citizens’ needs are the primary focus and engaging in close collaboration with stakeholders, govtech can help overcome these challenges and unlock its full potential to enhance public services for society. The IMF stands ready to support countries through its capacity development in implementing govtech solutions for public finance.

Authors: David Amaglobeli, Ruud de Mooij, Mariano Moszoro
Compliments of the IMF

The post IMF | Harnessing GovTech to Tax Smarter and Spend Smarter first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Policy brief by John Springford , Sander Tordoir | Published 12 June 2023.

CER study raises concerns about wasteful European subsidies, as shipping costs increasingly discourage imports from faraway countries

European policy-makers are worried about losing out to subsidised production in the US and China in the booming global market for green technologies. A new CER policy brief, ‘Europe can withstand American and Chinese subsidies for green tech’, shows that the EU can be competitive in green goods and should use subsidies to producers with caution.
According to the analysis, the EU has a sizeable share of global exports in green goods, although not as large as China’s – and the US is languishing behind both. China’s share of global exports in ‘low carbon technology (LCT)’ goods has exploded, from 23 per cent in 2019 to 34 per cent last year, but the EU’s share has also grown from 19 per cent to 23 per cent last year, while the US is stuck on 13 per cent of the global market.
The CER also shows that the EU should continue to excel in domestic production of some of these green technologies, because supply chains are shortening as technologies mature, and companies are expanding production nearer to consumers to reduce shipping costs. Across six key categories of green goods that are at the heart of US, Chinese and EU green industrial policy (electric vehicles, batteries, heat pumps, solar, wind turbines and electrolysers), the pull of geographical distance on trade increased significantly in almost all cases between 2017 and 2022. For example, for every 1 per cent increase in distance between two trade partners, exports of electric vehicles fell by 1.3 per cent in 2022, up from 0.9 per cent in 2017.
The EU should be cautious about directly subsidising green production, as the US and China are doing. In a world where distance between trade partners is increasingly important, and where markets for green technologies are rapidly maturing, money will be put into companies that would have robust demand for their products anyway. A subsidies race may also distort the EU single market, weaken incentives to innovate, and create excess production capacity, while any protectionist backlash risks slowing the green transition by driving up the prices of inputs that the EU needs to decarbonise.

Commenting, one of the report’s authors, John Springford, said: “The market for many green goods are nascent, and it is unsurprising that the EU’s policies to cut emissions has led to skyrocketing demand for green tech that EU manufacturers cannot yet fulfil – but they will over time.”
Sander Tordoir, the other author, said: “The EU should focus its subsidies on sectors where short-term help is needed to help infant European industries achieve scale, such as hydrogen, and to avoid dependencies on other countries in markets for goods in which global oligopoly or duopoly might arise, like wind turbines.”
SUMMARY OF THE RESULTS:

In the global market for green technologies, many European countries are worried about losing out to subsidised production in the US and China. However, the EU has a sizeable share of global exports in green goods, although not as large as China’s – and the US is languishing behind both.
Across six categories of green goods that are at the heart of US, Chinese and EU green industrial policy (electric vehicles, batteries, heat pumps, solar, wind turbines and electrolysers), in almost all cases the negative impact of geographical distance on trade increased significantly between 2017 and 2022. The EU should continue to excel in domestic production of some of these green technologies, because supply chains are shortening as technologies mature, and companies are expanding production nearer consumers to reduce shipping costs.
All this suggests that the EU should be cautious about directly subsidising green production, as the US and China are doing. In a world where distance between trade partners is increasingly important, and where markets for green technologies are rapidly maturing, money will be put into companies that would have robust demand for their products anyway. A subsidies race may also distort the EU single market, weaken incentives to innovate, and create excess production capacity. Any protectionist backlash from other trade partners could slow the green transition by driving up the prices of inputs that the EU needs in order to decarbonise.
The EU should focus its subsidies on sectors where short-term assistance is needed to help infant European industries, such as hydrogen, achieve scale. It should also prioritise support to markets for goods, like wind turbines, in which a global oligopoly or duopoly is likely to arise, and in which a dependence on China would be risky. That way, the EU will help new businesses to grow while minimising handouts to those that do not need them.

Download the  complete report here.

Compliments of the Centre for European Reform  CER.

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Blog post by Luis de Guindos, Vice-President of the European Central Bank | Moving towards carbon neutrality as quickly and boldly as possible is by far the best way to slow down climate change. It may take more effort in the short run, but in the long run it will cost less overall, says ECB Vice-President Luis de Guindos. We need to reach carbon neutrality to avoid existential risks to nature, people and our economies. And we need to start making changes soon. Procrastinating may be easier and less costly today, but means we will pay a higher price tomorrow: the damage to our environment and economies from rising temperatures will be much more severe. In fact, the sooner and faster we complete the necessary green transition, the lower the overall costs and risks. This is one of the main outcomes of our second economy-wide climate stress test. Let me talk you through the findings.
The ECB economy-wide climate stress test is a tool that allows us to measure the future impact of climate risk on companies, households and the financial system. Its top-down modelling ensures a harmonised approach and provides unprecedented coverage of companies and financial institutions in the euro area.[1] It uses granular datasets, particularly data on firms’ geographical location and their greenhouse gas emissions. This allows us to identify firms that are vulnerable to transition and physical risk across sectors and regions. The results of the first ECB economy-wide climate stress test exercise were published in September 2021.[2] The first exercise focused on how physical and transition risks increase the probability of companies defaulting on their debt. It showed that the short-term costs of an early green transition are always more than offset by the long-term benefits of avoiding the physical risks of a “hot house world” in which the green transition does not happen.
This second economy-wide climate stress test exercise builds on the previous one, but also focuses on the timing and ambition of transitioning towards net zero and its financial consequences for companies and households in the context of a changing macroeconomic environment. More specifically, it asks two questions. Given today’s circumstances, what are the costs and risks associated with a transition to net-zero emissions in the short and medium-term? And what impact would the different transition pathways have on the economy and the financial system?
What’s new in our top-down climate stress testing framework
We have upgraded and added several features to our stress testing framework since 2021. First, we have constructed new short-term transition scenarios based on the climate scenarios of the Network for Greening the Financial System.[3] Second, we have developed new climate risk models that account for recent developments in the European energy sector, particularly the increase in energy prices triggered by Russia’s invasion of Ukraine. Third, we have calculated the investment needed to successfully transition towards net-zero emissions in a more granular way.
We designed three transition scenarios covering the period until 2030. The “accelerated transition” scenario assumes a jumpstart of the transition with rapid and severe increases in energy prices. Investment in renewable energy sources in the short term leads to a reduction in emissions by 2030. This would be compatible with the long-term temperature targets of the Paris Agreement (+1.5°C increase relative to pre-industrial levels).
In the other two scenarios, current macroeconomic and geopolitical conditions lead to a delay in green transition efforts until the end of 2025. In the “late-push transition” scenario, the green transition starts in 2026 and is intense enough to achieve emission reductions by 2030. The expected results are comparable to those in the accelerated transition, but they come at a higher cost, as the policies needed to achieve them are more ambitious and abrupt. In the “delayed transition” scenario, the transition also starts in 2026 but is more gradual and slower than in the late-push transition. It is therefore not ambitious enough to achieve emission targets in line with the Paris Agreement goals by 2030.
The green transition and potential ways forward
Under the three scenarios, how would greenhouse gas emissions, global temperatures and investment efforts develop? Chart 1, panel a) shows the historical and projected emission pathways compared with a baseline scenario that assumes that nothing will be done beyond currently implemented policies. In the long term the temperature increase in the delayed transition scenario is substantially higher than in the other two scenarios at 2.6°C compared with 1.5°C relative to pre-industrial levels. A delayed transition is therefore expected to lead to much higher physical risk in the long term via more frequent and more intense wildfires and floods than we are already currently experiencing.[4]
The transition towards net zero requires substantial investment in energy-efficient and renewable energy, such as solar and wind energy, as well as in phasing out fossil fuels. Chart 1, panel b) presents the total required investment based on bottom-up estimates for the three scenarios. An accelerated or late-push transition would require companies and households to invest significant funds from the very start of the transition, with green investment adding up to around €3 trillion by 2030. Under the delayed transition, the reduced efforts made until 2030 would result in a smaller increase in the funds needed. However, emission reductions would be lower and accompanied by heightened physical risk in the long term owing to the failure to meet the net-zero target of the Paris Agreement.

Chart 1
Emission pathways and green investment required in the three transition scenarios

Source: ECB calculation based on Orbis, Urgentem, Eurostat, NGFS and International Renewable Energy Agency (IRENA; 2021).
Notes: In panel a), historical aggregated data on emissions are provided by the European Environment Agency and are available until 2020. Quarterly emissions data for 2021 and 2022 are taken from Eurostat and aggregated at yearly frequency to complete the timeseries. Temperature increases refer to the year 2100. Emission pathways until 2050 correspond to the NGFS’s Net Zero 2050 (+1.5°C), the nationally determined contributions (NDC) scenario (+2.6°C) and current policy scenario (>+3°C). In panel b), green investment consists of investment in: i) renewable-based energy, and ii) carbon mitigation activities. Cumulated green investment is based on bottom-up estimates for the 2.9 million European non-financial corporations covered in the climate stress test exercise.

The short and medium-term financial impact of transition risk
The results of the second exercise show that an accelerated transition scenario would lead to the lowest financial risk and lowest long-term physical risk. In all three scenarios, the probability of default of banks’ loan portfolios increases in the short term owing to transition risk (Chart 2, panel a). The accelerated and delayed transitions would lead to similar risk levels by 2030, but banks’ credit risk is expected to increase further in the delayed transition after 2030 because physical risk will develop more severely in the long term.
A late-push transition would be the most severe in the medium-term because of the higher costs of the green transition and the greater impact on companies’ profitability and debt. Expected losses in 2030 under the late-push transition would be almost double those under a baseline scenario (with no further transition risk). A late-push transition would be particularly detrimental for those banks most vulnerable to transition risk. Such banks could face expected losses of 2% of their loan portfolios[5] compared with losses of only 1% for the median bank.
The impact of the green transition will differ greatly across economic sectors (Chart 2, panel b). Energy-intensive sectors such as mining, manufacturing and electricity will experience the strongest effects on their credit risk because they produce the highest emissions and, as such, will come under the most pressure to reduce their carbon footprint and invest in renewable-based energy sourcing and production (particularly the electricity sector).

Chart 2
Accelerated transition leads to lower credit risk and is aligned with the Paris Agreement goals

Source: ECB calculations based on Orbis, Urgentem, Eurostat, NGFS, International Renewable Energy Agency (IRENA; 2021) and Intergovernmental Panel on Climate Change (2022).
Notes: Panel a) shows the median probabilities of default (PDs) of corporate loan portfolios and total expected losses of significant banks in the euro area. Corporate loan portfolio PDs are calculated as the average borrower-level PD, weighted by their loan size. The baseline scenario comprises NGFS current policies only, with no additional transition risk, and serves as a benchmark scenario. In panel b), tail changes represent percentage point changes in borrower-level PDs for the 75th percentile firm in each sector and scenario. ICT stands for the Information and Communication Technology sector.

Green policy measures to achieve net zero
Financing the transition towards a carbon-neutral economy is one of the most pressing challenges facing Europe today. The results of the new climate stress test exercise show that the earlier the transition happens, the lower the costs and risks for the economy and financial system. The effective and coordinated mobilisation of green finance is more necessary than ever to support the European Union’s efforts to take the lead in the transition towards net zero. Here are some of the policy measures that will help achieve this goal.

Phasing out fossil fuels – moving away from high emission and polluting energy sources towards renewable-based energy is essential to achieve the Paris Agreement goal of net-zero emissions. Carbon policies, if well-designed, can compress the demand for fossil fuels and stimulate the production of cheaper renewable energy sources, while containing inflationary pressures.[6]
Filling the green investment gap – firms would greatly benefit from progress towards a capital markets union (CMU), which would help them undertake the massive amounts of green investment required. The CMU would facilitate cross-border access to funds, strengthen risk-sharing, avoid fragmentation and foster integration[7]. There is a need for sustainable finance products, such as green loans and bonds, and funds with environmental, social and governance standards. It is also important to prevent the “greenwashing” of funds.[8]
Setting up reliable transition plans – companies and financial institutions need to align their business models and operations with transition targets. This requires immediate and long-term planning in the form of credible and transparent transition plans. To further foster the green transition, transition plans compatible with EU policies implementing the Paris Agreement should become legally binding and publicly disclosed.[9]
Designing prudential climate tools – the green transition is a potential source of systemic risk, as certain regions are more vulnerable to climate risks with potential spillover effects across sectors and to the financial system. We therefore need tools to address such risks, involving both microprudential and macroprudential measures.[10]

Conclusion
The first top-down economy-wide climate stress test showed that the short-term costs of an early green transition are always more than offset by long-term benefits stemming from the reduced physical risks. By including new elements in the original framework and focusing on transition risk over the next eight years, the second climate stress test exercise shows that acting immediately is more effective and comes at a lower cost in terms of financial stability, transition costs and physical risks. Early and strong policy action – designed properly and implemented timely – is required to mobilise funds for green investments and to support Europe’s transition towards a carbon-neutral economy. If we act now, it will be better all round – for nature and our economies. Let’s take the fast-track to Paris before it is too late.
Compliments of the European Central Bank.The post ECB | Need for speed on the Road to Paris first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Blog post by Fabio Panetta, Member of the ECB’s Executive Board | With rising geopolitical tensions and urgent global challenges such as the climate and digital transitions, Europe needs to bolster its resilience to shocks and invest strategically. In order to achieve this, we need to work together, as a more integrated Europe is better positioned to realize shared goals in a fragmented global economy.
Central to this strategy is the creation of an integrated European capital market — a vision set out by the European Commission in 2015, and commonly known as the capital markets union (CMU).
A fully functioning CMU would both enhance Europe’s economic structure and benefit the euro area. It would do this in three main ways:
It would allow us to reap the benefits of euro area-wide capital markets, and facilitate greater risk-sharing across member countries. At present, barriers between national markets are deterring cross-border investment, leaving European firms and households largely reliant on national funding, as well as overly exposed to domestic economic shocks. By eliminating these barriers, the CMU would help investment flow across the euro area, which would diversify risk and mitigate the effects of local shocks.
There is also a pressing need for the CMU to complement traditional banking channels in financing the innovation vital for Europe’s future growth — notably in the energy and technology sectors. Equity funding and specialized forms of investment, such as venture capital, are typically more suitable than debt funding for the financing of innovation, since such projects often involve high levels of risk and uncertain returns, making it difficult to commit to regular debt repayments.
Finally, a fully functioning CMU would be beneficial for the implementation of the European Central Bank’s (ECB) monetary policy. By fostering deep, liquid and integrated capital markets, the CMU would support the timely, smooth and even transmission of monetary policy to firms and households.
Since the Commission launched its CMU action plan in 2015, progress has been made. For example, the European Union has adopted legislation to develop EU securitization markets, and thereby enhance firms’ access to funding. It has also further harmonized prudential rules for investment firms, and eased investment conditions for European venture capital to promote risk capital funding.
Additional steps are also being taken under the 2020 CMU action plan to simplify the rules for the public listing of EU companies, harmonize national insolvency regimes and address issues related to the taxation of financial instruments, which hamper cross-border investment and make equity funding less attractive than debt financing.
But despite this progress, the results are not yet satisfactory. Europe’s capital market remains fragmented across national borders, and ECB analysis shows that financial integration in Europe is still much lower than before the global financial crisis.
Moreover, Europe’s capital markets are less developed than those of other advanced economies. In the euro area, bond markets as a percentage of GDP are three times smaller than in the United States. And although equity represents firms’ main source of funding in both jurisdictions, in the euro area it is mainly unlisted, while in the U.S. most equity is listed, opening firms up to a greater pool of potential investors.

Chart 1
Sources of external financing of non-financial corporations in the euro area and the United States

(2022; ratio to GDP)

Sources: ECB (euro area accounts); OECD and ECB calculations.

Still, Europe does have a prominent role in certain market segments, such as the green bond sector. But the market for green bonds remains niche, representing less than 3 percent of the global bond market. Moreover, as the green transition accelerates, Europe’s “green advantage” might fade if we don’t make progress with the CMU. For example, venture capital activity, shown to be pivotal for funding green innovation and decarbonization, remains limited in the euro area. And there are signs that Europe’s green bond market is becoming increasingly fragmented, pointing to a lack of common standards and obstacles to cross-border investment.
All of this suggests that simply addressing specific barriers to market integration may not be sufficient to establish a genuine CMU. We must keep our eyes on the broader picture, and there are two critical blind spots in the development of a genuine CMU.
The first is the lack of a permanent European safe asset.
Historically, mature capital markets have been built around a public safe asset. In the U.S., for example, capital markets developed alongside the issuance of federal bonds.
A risk-free benchmark is necessary for critical financial activities. It would enable better pricing of risky financial products, such as corporate bonds or derivatives, encouraging the development of such products. It would provide a common form of collateral that would promote centralized clearing activity and cross-border collateralized trading in interbank markets. It would also help diversify bank and non-bank exposure. And it would support the euro’s international role, helping to attract foreign investors.
Establishing such a permanent European safe asset would be a game changer, but it hinges on Europe having a standing fiscal capacity with a borrowing function. Without that, building a deep and competitive CMU will prove much more difficult.
The second blind spot is the lack of a complete banking union, which restricts European banks to operating in one or just a few national markets.
Banks play a crucial role in the functioning of all major capital markets. They operate — and often have a leading role — in crucial segments like asset management, bond underwriting and trading, initial public offerings and financial advice. They are active traders in securities markets and often provide market-making services. Thus, it is difficult to envisage a genuine CMU without the key players being able to operate throughout the euro area.
The global landscape is evolving rapidly, and Europe must keep pace, if not lead, that change. To be successful, it needs a genuine — and complete — CMU.
Compliments of the European Central Bank.The post ECB | Europe Needs to Think Bigger to Build its Capital Markets Union first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Recent years have seen growing interest in differences between labour and capital income taxation. New stylised effective tax rates show that governments almost always
tax the capital income individuals receive more favourably than wage income. But that is only part of the story, because governments also usually tax labour and capital income at the firm level. After accounting for firm-level taxes, capital is still taxed more favourably than labour in many OECD countries, but in others, the reverse is true.
Interest in the taxation of labour and capital income is growing
Many governments tax labour and capital income differently, in line with prevailing theoretical views that capital should be taxed more favourably than labour. But recent academic findings have challenged these views, with some studies supporting better alignment of the tax treatment of capital and labour. The concentration of capital income among high income earners and concerns about inequality also are driving greater interest in the topic.
Governments tax individuals’ capital income more favourably than labour income, benefitting high earners
In most countries, when looking at taxes payable by individuals at hypothetical high income levels1 (including personal income taxes and employee social security contributions), stylised effective tax rates(ETRs)reveal that dividends or capital gains from shares are taxed more favourably than wage income. Reasons include
that capital income may be taxed under a separate tax rate schedule (e.g. at lower flat rates), may be exempt from tax or employee social security contributions, or attract special tax credits. This preferential tax treatment of capital income generally benefits high income earners who earn a greater share of their income from capital sources. In some countries, the gap between ETRs on labour and capital income also rises with income – the higher the income level, the more preferential the tax treatment of capital
income compared to labour income.
The gap between labour and capital income taxation tends to be smaller when accounting for taxes paid by firms
Governments also levy firm-level taxes on labour and capital income. Firm-level taxes on profits (corporate income tax) are often higher than firm-level taxes on wages (employer social security contributions and payroll taxes), adding to the total tax burden on capital relatively more than on labour. Even after accounting for the combined effect of these firm-level taxes and taxes paid by individuals on wage and dividend income, the tax treatment of dividend income is more favourable than that of labour income in many OECD countries. But the gap between the two is generally smaller than when considering only taxes paid by individuals. However, for some countries and income levels, the opposite result is evident – wage income is tax-preferred after accounting for firm-level taxes.
The differential tax treatment of labour and capital income affects the efficiency and equity of tax systems
The results show that capital income is tax-preferred compared to labour income in many OECD countries, affecting the equity and efficiency of tax systems. Different ETRs for capital income and labour income reduce horizontal equity, since taxpayers earning the same income from different sources are taxed differently. Capital income is concentrated at the top of the distribution, so high earners benefit disproportionately from preferential capital income tax treatment, reducing vertical equity. Differential tax treatment between labour and capital income can also create distortions that may reduce the efficiency of tax systems. Balancing these implications with other policy objectives such as promoting savings and investment is a key challenge for policy makers.
This work highlights the need for further analysis
Differential tax treatment between labour and capital income can open the door to strategies to minimise tax, including income shifting, capital gains deferral and the strategic timing of income realisation. Upcoming OECD work will delve further into how individuals, particularly those with higher incomes, use such strategies to minimise the taxes they pay. Future work will also consider the pros and cons of different tax policy options that governments may consider to enhance the efficiency and equity of their personal income tax systems.
The full article with tables can be read here.
Compliments of the OECD.
 The post OECD | The Taxation of Labor vs. Capital Income: Focus on High Earners first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Blog post by Josep Borrell, High Representative of the European Union for Foreign Affairs and Security Policy / Vice-President of the European Commission
Since the start of the invasion of Ukraine, the EU has imposed 11 rounds of ever-tighter sanctions against Russia. Some people claim these sanctions have not worked. This is simply not true. Within a year, they have already limited Moscow’s options considerably causing financial strain, cutting the country from key markets and significantly degrading Russia’s industrial and technological capacity. To stop the war, we need to stay the course.

Our restrictive measures, to use the technically correct term, are unprecedented in their scope, focusing on key sectors of the Russian economy that are crucial to Moscow’s war effort. In addition, the EU has also imposed travel bans and asset freezes on more than 1,500 individuals and almost 250 entities.
Hard tangible effects across Russia’s economy
These measures are producing hard, tangible effects across Russia’s economy, despite the huge oil and gas revenues Russia used as a buffer in the first year of the invasion. And their effects will intensify over time, as the measures have a long-term impact on Russia’s budget, and its industrial and technological base.

The Russian economy contracted in 2022 by 2.1%. Manufacturing in particular – growing steadily before the invasion – was down 6% at the end of 2022, with high and medium-high technology manufacturing recording a 13% annual loss. The production of motor vehicles was down 48% year-on-year, other transport equipment by 13% and computer, electronic and optical production by 8% while retail trade was 10% lower and wholesale trade 17%.
The outlook for 2023 remains bleak
And the outlook for 2023 remains bleak. According to the latest OECD report, Russia’s GDP is foreseen to shrink by up to 2.5%. All the components of Russian private demand, including private investment and consumption, remain depressed. Only public expenditure related to the war effort, i.e. defence spending, is up.
Russian carriers are no longer able to fly to, from and over EU territory. Most modern aircraft operated by Russian carriers are dependent on European and American spare parts and technical assistance, which have been banned. The ban on new investment across the energy sector and export restrictions on technology and services for the energy industry have undermined the viability of Russian companies. The credit rating agency Moody’s has already downgraded 95 Russian firms (including most energy companies).

Source: European Commission
Compared to 2021, 58% of total EU imports from Russia were already cut off in 2022 – an unprecedented decoupling. Non-energy imports from Russia have fallen close to 60%, with the most visible drops for iron and steel, precious metals and wood. This movement is accelerating: the decline in imports of non-energy goods is above 75% for the first quarter of 2023, and the fall is even greater for energy goods, at minus 80%.

Source: European Commission
Since 10 August 2022, EU imports of Russian coal have stopped completely affecting around one fourth of all Russian coal exports. The G7+ energy sanctions on oil have proven effective. The price of Russian oil has fallen since the start of the EU embargo and G7+ oil price caps. The International Energy Agency (IEA) reports an average Russian crude oil export price at around $ 60/barrel in April 2023, a $ 24/barrel discount compared to the global oil price. The IEA also estimates that total Russian oil revenues are down 27% from a year before. At the same time, as was intended by the G7+ countries, despite falling exports to the EU, the overall volume of Russian global oil exports held up relatively well, helping to keep global markets stable. On gas, Russia’s own decision to cut flows and the EU’s strong diversification efforts resulted in a dramatic fall in volumes. Despite this, we have managed to get sufficient gas stocks ahead of next winter.

Source: European Commission
On the export side, restrictive measures to date cover around 54% of 2021 EU exports, targeting key capital and intermediate goods where Russia has a high dependency on supplies from the EU, United Kingdom, United States and Japan. Overall EU exports of goods were 52% below the annual average before the war in 2022.

Source: European Commission
EU exports on dual-use items and advanced technologies, which are essential to produce the equipment and weapons used by Russia to wage its war, dropped by 78% in 2022 compared to 2019-2021. EU trade restrictions so far exclude products, other than luxury goods, primarily intended for private consumption like pharmaceuticals, food, medical devices and some specific agricultural machinery. However, even in many areas that are not under sanctions, many EU companies have stopped trading with Russia and EU exports in non-sanctioned sectors are down by over 10% on average.
Russia’s war of aggression is the root cause of the global food insecurity
At the same time, the EU is also ensuring that its sanctions do not unduly affect trade in sectors, such as food and energy security, for third countries around the globe, in particular the least developed ones. Specific exemptions and guidance have been established to that effect. Russia’s war of aggression is the root cause of the global supply shock in the areas of food and related items by invading Ukraine, one of the main breadbasket of the world. The fact that Russia decided to exit the Black Sea Grain Initiative last July, attacking since then massively silos and Ukrainian ports, risks to aggravate again the global food security situation in coming months. The EU will continue to counter Russia’s false narrative on these issues and work closely with partners that are negatively affected by Russia’s actions to mitigate these effects.
Russia had an important budgetary surplus for the first half of 2022 due to high oil and gas prices but it has been erased in subsequent months, with the federal budget ending in a deficit in 2022. The fiscal situation is expected to worsen. January-April figures for 2023 showed Russia’s oil and gas federal budget revenues, representing 45 % of Russia’s budget in 2022, dropping 52%. The government is trying to address the revenue slump by extracting high dividends from state-owned enterprises and levying additional taxes on large businesses but these have their own costs and are unlikely to plug the growing fiscal deficit.
While the Russian government still has fiscal space with a public debt that stood at 17% of GDP at the end of 2021 and accumulated assets in the National Wealth Fund (NWF) that remain sizeable (as of April 2023, $ 154 billion, or 7.9% of GDP), it squeezed productive and social spending. In 2023, nearly a third of the federal budget is expected to be spent on defence and domestic security while funding for schools, hospitals and roads is slashed further.
In 2023, the current account surplus has decreased dramatically as import volumes recovered due to the increase in more costly substitution imports. At the same time, sanctions on Russian exports and the G7 price caps effectively reduced the income from Russia’s main exports. Russia has turned increasingly to the yuan as a means of transaction and a store of value – a currency with non-transparent capital controls. This in turn has increased the costs of doing financial transactions between Russia and the outside world.

Benefitting from measures like banning non-residents from transacting in the financial markets and a record current account surplus due to high commodity prices, the rouble appreciated against the euro following the start of the war. The exchange rate thus very much reflected the decoupling of the Russian economy from the global one. With the degradation of the current account, the rouble depreciated again in the second half of 2022 and has further weakened massively in 2023. It is now at its weakest for many years, trading at lower levels than during the pandemic. To try to halt this fall, the Russian Central Bank had to raise sharply interest rates from 7.5% in July to 12% on 15 August. This high interest rate will put an even greater brake on economic activity in Russia in coming months.
Large parts of the reserves of the Central Bank of Russia have been immobilised in the EU and other countries (of the € 300 billion assets immobilised, € 207 billion are in the EU). The EU, together with partners, is working to find ways to use revenues of the immobilised assets of the Russian central bank to support Ukraine’s reconstruction and for the purposes of reparation, while ensuring this is done in accordance with EU and international law.
Russia is trying to counter EU measures
Meanwhile, Russia is trying to counter EU measures. It is turning to non-sanctioning countries in search of technology and intermediate products. Russia’s overall imports fell post-invasion by around 18% from April to November 2022 compared to the same period of 2021. After this slump, Russia’s imports from China increased by 27%, in particular for machinery, electrical equipment and cars. Russia has also been introducing measures that have made it more difficult and costly for foreign companies to leave the Russian market.
While it is questionable if others can fully fill the space left by sanctioned EU goods, it underlines the need to act more firmly against the circumvention of EU sanctions. To this end, we are stepping up our engagement with key third countries, urging them to closely monitor and act against trade in EU sanctioned goods, particularly those found on the battlefield in Ukraine. In this regard, the EU Special Envoy David O’Sullivan will play an important role.
Within a year, sanctions have already limited Moscow’s political and economic options, causing financial strain, cutting the country from key markets, increasing the costs of trading and significantly degrading Russia’s industrial capacity. Looking at Russia’s long-term growth prospects, the technological degradation and the exit of foreign companies will hamper investment and productivity growth for years. The labour market situation was not favourable before the invasion due to Russia’s demographics. Mass conscription has worsened it further and the growing lack of opportunities exacerbates the brain drain from Russia. In short: Russia’s decision to attack Ukraine has obviously pushed the Russian economy towards isolation and decline.
Compliments of the European Commission.
The post EU Commission | Yes, The Sanctions Against Russia Are Working first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

The European Investment Bank (EIB) has published the results of a survey on the investment levels in CEE companies — “Business Model Update: Are CEE Companies Investing Enough?”. The analysis was published as part of the Warsaw School of Economics (SGH) Report, which is to be presented at the Economic Forum in Karpacz (5 to 7 September 2023). The findings show that investment activity is recovering after the crises caused by the coronavirus pandemic and the war in Ukraine. Companies are trying to break away from the old capital-intensive growth model and are looking for new opportunities in this regard, especially those related to the use of modern technologies and innovation. The level of investment in enterprises in the CEE region (77%) is close to the average in the European Union (80%) and the United States (81%).
EIB Vice-President Teresa Czerwińska remarked, “Investment by CEE enterprises in product and service innovation is higher than the EU average. This is a positive trend that will accelerate the development of the region, create new jobs, and certainly increase the region’s competitiveness on the international market.”
“Enterprises in the CEE region, after the crises caused by the coronavirus pandemic and the war in Ukraine, are returning to the path of growth. The vast majority of investments involve the replacement or expansion of production capacity, which will allow enterprises to become more efficient and more environmentally friendly in future,” said EIB Chief Economist Debora Revoltella.
The main investment aim of companies located in the CEE region remains capacity replacement — the same as the EU average (46% of companies in CEE countries and in the European Union). This is followed by capacity expansion (25% of companies in CEE) and innovation (17%). Manufacturing companies (20%) and large organisations (18%) invest relatively more in innovation. Companies from Poland (22%), Slovenia (19%) and the Czech Republic (17%) allocate the greatest share of funds to innovation, investing in the development of new products or services.
Allocation of investment in the last financial year by country (%)

Question: What proportion of your total investment was spent on: (a) replacing production capacity (including existing buildings, machinery, equipment, and IT); (b) expanding production capacity for existing products/services; (c) developing or introducing new products, processes and services? Basis: all companies that made investments during the last financial year (excluding “don’t know” responses and companies that declined to answer).
In contrast to EU and US companies, those operating in the CEE region allocated a bigger share of their investment to machinery and equipment (53% vs. 49% in the EU and 47% in the US), and a smaller share to intangible assets (24% vs. 37% in the EU and 33% in the US). The share of companies intending to focus primarily on product and service innovation in CEE (27%) exceeded the result recorded in the EU (24%) and the US (21%) in this regard. Innovation is an especially important investment priority for manufacturing firms and large companies.
In particular, machinery and equipment dominated the investment expenditure of manufacturing (60% of investment expenditure) and construction companies (59%), while service companies invested relatively more in digital technologies (18%). The share of investment in intangible assets was highest in Latvia, Slovakia, Slovenia and the Czech Republic.
Investment areas by country (%)

Question: In the last financial year, how much did your company invest in each of the following areas with the intention of maintaining or increasing future profits? Basis: all companies that made investments during the last financial year (excluding “don’t know” responses and companies that declined to answer).
The most frequently cited long-term barriers to investment in the CEE region are uncertainty about the future (87%), energy costs (87%) and availability of skilled workers (82%). The average results for the European Union are similar.
Impact of climate change on investment
Companies in the region are concerned about the cost of taking zero-carbon measures, which for businesses means modernising production methods. Due to the high proportion of fossil fuels in energy production in CEE countries, and to energy-intensive production methods, enterprises in the region are particularly exposed to this risk. As a result, the share of CEE companies that see the transition to more demanding climate standards and regulations as a threat is higher than the percentage of those that see this process as an opportunity (36% and 18%, respectively). These figures contrast with the overall situation in the European Union, where the shares are almost the same (threat: 32%; opportunity: 29%). Compared to small and medium-sized enterprises, many more large enterprises view the transition to zero-carbon as an opportunity (14% vs. 22%).
CEE companies are taking steps to adopt a more environmentally friendly business model. Nearly 90% of companies in the region are aiming to reduce greenhouse gas emissions, which is in line with the EU average. The main projects undertaken in this regard in CEE countries are waste reduction and processing (67%) and investments in energy efficiency (55%), which have proven very profitable in recent years. Compared to the EU average, CEE enterprises invested less frequently in sustainable transport (43% vs. 32%). Across the region, companies in Romania (93%) and Poland (90%) were most likely to undertake such projects, while companies in Bulgaria were less likely (70%).
The percentage of CEE companies investing in energy efficiency (nearly 40%) is close to the EU average, despite the fact that the region favours a more energy-intensive business model. Companies in the manufacturing sector (48%) and large organisations (50%) were most likely to undertake such investments.
Investment financing
Own funds (70%) accounted for the largest share of financing among CEE companies in 2022, followed by external sources (25%), with group financing accounting for an average of 4% of overall corporate investment in CEE countries. The percentage of companies using external financing is highest in Romania (32%) and lowest in the Czech Republic (18%).
Three-quarters (75%) of the companies that say they use external financing obtained bank loans in the last financial year, of which 21% obtained a loan on preferential terms. There are significant differences in this regard between countries in the region: Preferential bank loans are most common in Hungary (39%), the Czech Republic (36%) and Romania (36%), and least common in Latvia (5%), Poland (7%) and Estonia (8%).
The proportion of companies experiencing financial difficulties in obtaining external financing is higher in CEE countries (9.2%) than the EU average (6.2%). The main problem reported by companies in the region was the rejection of loan applications (5.8%).
General Information
About the EIB Group Investment Survey
The EIB Group Investment Survey is the EIB’s annual flagship report. It is designed to serve as a monitoring tool that provides a comprehensive overview of the changes and factors driving investment and its financing within the European Union. The report combines the EIB’s internal analysis with the results of collaboration with leading experts in order to explain key market trends and provide a more in-depth look at specific topics. The 2022–2023 survey reflects the EU economy’s resilience to repeated shocks and its capacity for renewal, delivering on the promise of productive public and private investment. Featuring the results of the EIB’s annual investment survey, the report presents the responses of around 12 500 companies across Europe to a wide range of questions about corporate investment and investment financing; it also includes a survey of EU municipalities.
The EIB Group is the long-term lending institution of the European Union, owned by its Member States. It consists of the European Investment Bank and the European Investment Fund. The EIB Group provides financial support for investments that contribute to EU policy goals, such as social and territorial cohesion and a just transition towards climate neutrality.
The EIB is the first multilateral development bank to move away from financing projects connected with fossil fuels, and has pledged to support €1 trillion in climate investment over the course of this decade. More than half of the loans granted by the EIB Group in 2022 were for climate and environmentally sustainable development projects. At the same time, almost half of the projects financed by the EIB within the European Union were located in cohesion regions (i.e. regions with lower per capita incomes), underlining the Bank’s commitment to equitable growth.
Compliments of the EIB – a Platinum Member of the EACCNY.

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Growing trade restrictions may reverse economic integration and undermine the cooperation needed to protect against new shocks and address global challenges.
In a shock-prone world, economies must be more resilient—individually and collectively. Cooperation is critical, but greater protectionism could lead to fragmentation, and even split nations into rival blocs just as fresh shocks expose the global economy’s fragility.
While estimates of the cost of fragmentation vary, greater international trade restrictions could reduce global economic output by as much as 7 percent over the long term, or about $7.4 trillion in today’s dollars. That’s equivalent to the combined size of the French and German economies, and three times sub-Saharan Africa’s annual output.
More deliberate global cooperation clearly is needed. International institutions can play a vital role, bringing countries together to help solve global challenges, as IMF Managing Director Kristalina Georgieva writes a new essay for Foreign Affairs.
There are signs cooperation is faltering. As the Chart of the Week shows, new trade barriers introduced annually have nearly tripled since 2019 to almost 3,000 last year.

Other forms of fragmentation—like technological decoupling, disrupted capital flows, and migration restrictions—will also raise costs. In addition, global flows of goods and capital have leveled off since the global financial crisis. IMF research shows geopolitical alignments increasingly influence both foreign direct investment and portfolio flows.
The IMF continues to underscore that the international community, supported by global institutions such as ours, should pursue targeted progress where common ground exists and maintain collaboration in areas where inaction would be devastating.
“Policymakers need to focus on the issues that matter most not only to the wealth of nations but also to the economic well-being of ordinary people,” Georgieva wrote in Foreign Affairs. “They must nurture the bonds of trust among countries wherever possible so they can quickly step up cooperation when the next major shock comes.”
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The European Commission adopted today the rules governing the implementation of the Carbon Border Adjustment Mechanism (CBAM) during its transitional phase, which starts on 1 October of this year and runs until the end of 2025.
The Implementing Regulation published today details the transitional reporting obligations for EU importers of CBAM goods, as well as the transitional methodology for calculating embedded emissions released during the production process of CBAM goods.
In the CBAM’s transitional phase, traders will only have to report on the emissions embedded in their imports subject to the mechanism without paying any financial adjustment. This will give adequate time for businesses to prepare in a predictable manner, while also allowing for the definitive methodology to be fine-tuned by 2026.
To help both importers and third country producers, the Commission also published today guidance for EU importers and non-EU installations on the practical implementation of the new rules. At the same time, dedicated IT tools to help importers perform and report these calculations are currently being developed, as well as training materials, webinars and tutorials to support businesses when the transitional mechanism begins. While importers will be asked to collect fourth quarter data as of 1 October 2023, their first report will only have to be submitted by 31 January 2024.
Ahead of its adoption by the Commission, the Implementing Regulation was subject to a public consultation and was subsequently approved by the CBAM Committee, composed of representatives from EU Member States. One of the central pillars of the EU’s ambitious Fit for 55 Agenda, CBAM is the EU’s landmark tool to fight carbon leakage. Carbon leakage occurs when companies based in the EU move carbon-intensive production abroad to take advantage of lower standards, or when EU products are replaced by more carbon-intensive imports, which in turn undermines our climate action.
For more information
Carbon Border Adjustment Mechanism (CBAM)

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A new law to ensure that batteries are collected, reused and recycled in Europe is entering into force today. The new Batteries Regulation will ensure that, in the future, batteries have a low carbon footprint, use minimal harmful substances, need less raw materials from non-EU countries, and are collected, reused and recycled to a high degree in Europe. This will support the shift to a circular economy, increase security of supply for raw materials and energy, and enhance the EU’s strategic autonomy.
In line with the circularity ambitions of the European Green Deal, the Batteries Regulation is the first piece of European legislation taking a full life-cycle approach in which sourcing, manufacturing, use and recycling are addressed and enshrined in a single law.
Batteries are a key technology to drive the green transition, support sustainable mobility and contribute to climate neutrality by 2050. To that end, starting from 2025, the Regulation will gradually introduce declaration requirements, performance classes and maximum limits on the carbon footprint of electric vehicles, light means of transport (such as e-bikes and scooters) and rechargeable industrial batteries.
The Batteries Regulation will ensure that batteries placed on the EU single market will only be allowed to contain a restricted amount of harmful substances that are necessary. Substances of concerns used in batteries will be regularly reviewed.
Targets for recycling efficiency, material recovery and recycled content will be introduced gradually from 2025 onwards. All collected waste batteries will have to be recycled and high levels of recovery will have to be achieved, in particular of critical raw materials such as cobalt, lithium and nickel. This will guarantee that valuable materials are recovered at the end of their useful life and brought back in the economy by adopting stricter targets for recycling efficiency and material recovery over time.
Starting in 2027, consumers will be able to remove and replace the portable batteries in their electronic products at any time of the life cycle. This will extend the life of these products before their final disposal, will encourage re-use and will contribute to the reduction of post-consumer waste.
To help consumers make informed decisions on which batteries to purchase, key data will be provided on a label. A QR code will provide access to a digital passport with detailed information on each battery that will help consumers and especially professionals along the value chain in their efforts to make the circular economy a reality for batteries.
Under the new law’s due diligence obligations, companies must identify, prevent and address social and environmental risks linked to the sourcing, processing and trading of raw materials such as lithium, cobalt, nickel and natural graphite contained in their batteries.  The expected massive increase in demand for batteries in the EU should not contribute to an increase of such environmental and social risks.
Next steps
Work will now focus on the application of the law in the Member States, and the redaction of secondary legislation (implementing and delegated acts) providing more detailed rules.
Background
Since 2006, batteries and waste batteries have been regulated at EU level under the Batteries Directive. The Commission proposed to revise this Directive in December 2020 due to new socioeconomic conditions, technological developments, markets, and battery uses.
Demand for batteries is increasing rapidly. It is set to increase 14-fold globally by 2030 and the EU could account for 17% of that demand. This is mostly driven by the electrification of transport. Such exponential growth in demand for batteries will lead to an equivalent increase in demand for raw materials, hence the need to minimise their environmental impact.
In 2017, the Commission launched the European Battery Alliance to build an innovative, sustainable and globally competitive battery value chain in Europe, and ensure supply of batteries needed for decarbonising the transport and energy sectors.
Compliments of the European Commission.The post EU Circular economy: New law on more sustainable, circular and safe batteries enters into force first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.