Sébastien Lambotte: If the current government was planning a tax reform, it seems that it will not be possible to carry it out during this legislature. Why is that?
: A tax reform should have taken place earlier in the legislature. However, the health crisis has disrupted priorities. This reform was supposed to focus on the individualisation of personal income tax, in other words, the implementation of a taxation of citizens that no longer depends on their marital status, for example. Such an approach would support the employment rate in general and that of women in particular. The other major challenge of tax reform is to support the competitiveness of companies.
Why is this tax reform, which should be tackled by the next government, more necessary than ever?
Flora Castellani: In our view, it is necessary to guarantee the country's future prosperity and the preservation of its social model. It must also support legal certainty and aim for administrative simplification, while providing answers to the labour shortage.
The challenge is not to distribute more, but to align taxation with the country's major objectives, namely the digital transformation of the economy and the transition to sustainable development.
JPO: If this reform is an issue for the next elections, it is already the subject of a first step forward at the level of the tripartite with the recently ratified agreement aimed at widening the scope of the tax credit for investments. The challenge is not to distribute more, but to align taxation with the country’s major objectives, namely the digital transformation of the economy and the transition to sustainable development. It is also important to ensure that we maintain our international competitiveness.
You mentioned the environmental transition and digitalisation. How can taxation contribute to these issues?
FC:This can be done, for example, through tax credit or super tax deduction mechanisms linked to business investments in the field of digital technology or the reduction of the environmental footprint. In Luxembourg, it is good to see that the stakeholders are well aware of this issue, including in the field of taxation, since it was the subject of a recent agreement at the tripartite level. This agreement should lead to a new tax measure applicable from 1 January 2024.
JPO: Moreover, most European countries--22 out of 27--have already introduced this type of tax mechanism to support research and development (R&D) activities, which is now part of a virtuous approach to supporting economic growth. It is essential to invite companies to do more R&D, to help them innovate. Luxembourg should also consider introducing such a tax measure.
Behind the tax reform you are advocating, there is also the issue of the talent shortage. How can taxation help to attract skills more easily?
FC: Taxation must help to maintain the ecosystem in a virtuous dynamic. It can help make companies more attractive. To do this, they must be profitable, competitive and have the possibility of innovating more easily. In this way, they will in turn be able to attract private capital and talent.
Taxation must help to keep the ecosystem in a virtuous dynamic. It can help make companies more attractive.
JPO: Taxation can also facilitate the mobilisation of residents’ savings, whose level has never been so high, to support economic dynamics, through private investment in local companies or startups for example.
What elements will you be particularly vigilant about during the next election campaign?
FC: Taxation is only one lever among others contributing to the development of a dynamic and sustainable ecosystem. There are others, such as housing or administrative simplification, flexibility in the organisation of work, for example, by removing the obstacles to cross-border teleworking. While we are confident in the leverage provided by a tax incentive in favour of digital technology or environmental transition, such measures must be articulated with a set of other decisions, particularly in terms of attracting talent.
JPO: Indeed, we must act with ambition. In order to finance the welfare state, the draft multiannual budget for 2022-2026 assumes a growth in employment of some 10,000 to 15,000 new jobs per year. While this will create additional budgetary revenues for the state, it will also generate significant infrastructure costs, not least in terms of mobility. The pressure on housing costs, which already weigh heavily on the country’s attractiveness, remains intense. In our view, accelerating digitalisation by redirecting private and public resources, in particular through a tax lever, is a more appropriate investment. Through digital technology, we promote innovation and development that is not linked to employment growth. It enhances the attraction of ‘sustainable talent,’ of more productive and fulfilling skills, which will create more prosperity, from which new tax revenues will flow.
In order to invest or carry out major tax reform, the government must have room for manoeuvre. Does it have any?
JPO: We have no choice but to invest for the future. Investing, however, does not mean consuming. The challenge is to support sustainable development, favouring approaches that will have positive effects in the long term, minimising expenditure that will have only a limited effect in the short term. The essence of good tax reform is that everyone should win.
This story was first published in French on . It has been translated and edited for Delano.