By Francesco Guarascio
BRUSSELS (Reuters) - Euro zone governments should cut taxes on labor and offset the dip in revenues by shifting taxation to houses or consumption, the European Commission said as the bloc's member states prepare their budgets for next year.
The appeal comes in a document that the EU executive will present to euro zone finance ministers on Monday when they gather in Brussels for a regular monthly meeting.
Although the technical report is addressed to all governments, it is likely to be read with particular care in Italy, which has some of the highest labor taxes and unemployment levels in the bloc.
"Several member states could explore the possibility to finance a labor tax cut by increasing other less growth distortive forms of taxation," the commission said in its report. This would favor employment and economic growth, it said.
In the 19-country currency bloc, only Germany, Austria, Lithuania and Latvia could afford "an uncompensated" labor tax cut, the commission said, while Italy, together with Belgium and France, would put its public finances at "high risk" if it did so.
In its document addressed to finance ministers, the commission said that taxes on houses are the least harmful to economic growth, followed by consumption taxes. It argues that countries with little fiscal margin, like Italy, should shift to them while reducing labor taxes.
Saddled by the highest public debt in the euro zone after Greece, the Italian center-left government is considering limited cuts to the so-called tax wedge but would not finance them by increasing other levies, over fears that would go down badly with voters a few months before elections to be held by May.
The country has recently scrapped a tax on houses and rules out increasing rates of the value-added tax (VAT), a sales tax, because it says it would undermine the country's fragile recovery.
That goes against EU recommendations to shift Italy's tax burden "from the factors of production onto taxes less detrimental to growth," according to a commission's report published in July.
Brussels is also urging governments to reduce expenditures to finance labor tax cuts. It wants states to cut preferential tax treatments that allow some taxpayers to pay less.
The EU executive commission monitors the respect of EU fiscal rules and can impose sanctions on countries for their excessive deficits or debts.
Euro zone states have already agreed on the need to cut labor taxes, but national governments remain responsible for deciding the most appropriate measures to compensate for the lower revenues.