June 02
2020
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21st April 2020
Banking & Finance Covid-19 General Development Institutional law Tax

Op-Ed: “European Solidarity Requires EU Taxes”

Just before Easter the ministers of finance of the European Union reached an agreement on a package of 540 billion euros to fight the Corona-crisis. The victory by the Union of this umpteenth crisis was not a reason for joy or jubilation. Fortunately the deal made money available for the most immediate needs of the health crisis and its economic consequences. But the question of how to rebuild the economy of the Union and the member states in the long run remained unresolved. If nothing changes, the only prospect is that some time down the road there will be another hair raising crisis, in which the Union may muddle through or may be destroyed. The bets are open. Within one decade we have lived a euro-crisis and a Corona-crisis, and many mini-crises in between. As academics, specialists in taxation, we have come to the conclusion that the present way of decision-making in the European Union is a dead alley. The cause for this blockage in decision-making is a fundamental dividing line between Europeans on the way the European Union is to be financed.

Many Europeans want to keep full national control on the financing of the means that are put at the disposition of the budget of the EU. The main arguments for keeping this full national control are (1) the moral hazard argument of fear of uncontrolled spending by the EU and the Member States, documented by persistent and sometimes large budgetary deficits in those Member States claiming this support, (2) the argument of political accountability requiring approval of taxes and the budget by a democratically elected parliament, which in the opinion of these Europeans is a national parliament, and (3) the lack of transparency of measures taken by the European Central Bank and the European Stability Mechanism resulting in widespread scepticism against European solidarity.

Many other Europeans want more progress for the Union in economic and social integration, by stressing direct solidarity between European citizens in putting financial resources in common at the European level. The main arguments for this approach are (1) the necessity of an effective common economic and monetary policy for the euro, strengthening the EU as a whole in the increasing competition with other large economic powers in the world, (2) the expectation that this solidarity will help the weaker EU Member States to overcome their structural economic and social handicaps, and (3) the necessity of more democratisation at the European level by transferring part of the decision-making power over taxes and budgets to really democratic EU institutions.

These two opposing approaches have been blocking the decision-making process in the EU. The result of this blockage has been uniform economic policy for the whole EU limited to policing of the national budgets of all Member States by the Commission, on the basis of similar criteria.  But there has been no common policy project or framework aimed at deeper and effective economic and social integration among the Member States. The current annual budget of the EU does not allow this. It represents about 1% of the total GDP of the EU, while the annual national budget of most of the Member States represents between 40 to 50% of their national GDP. It is clear that compared to the national budgets of the Member States the bazooka of the EU budget is much too small to make any significant impact for an effective common economic and/or social policy at EU level.

In spite of all the previous crises it is possible to reconcile these differences by starting to recognise at the same time (1) the validity of both of the two approaches, (2) and the inadequacy of the current EU budget at 1% of the GDP of the whole EU, in order to make progress in the further economic and social integration of the Member States. At present the EU budget consists for a small part of customs duties (until 2018, also sugar levies), which can be considered as truly EU taxes and levies. But the lion’s share (more than 80%) consists of contributions from the Member States calculated as a percentage of the national VAT base and on a contribution by the Member States calculated as a percentage of Gross National Income. That way of financing cannot be used to undertake the task of building a more ambitious integrated economic and social union.

The moral hazard argument should be recognised by putting (1) a strict quantitative limit on the size of the European budget, expressed as a percentage of the GDP of the Union as a whole, but taking into account the magnitude of the task of further economic and social integration of the Union, (2) by putting a qualitative limit on the nature of the taxes needed to supply this EU budget and finally (3) by closing the back doors of deficit spending through side-budgets of the EU, except for debt financing in absolute emergencies like Corona.

Within these limits the solidarity argument should also be fully recognised by transferring unconditionally the power to levy specific taxes and to spend them through democratic institutions of the Union. That is only  possible when the present financing mechanism is replaced by a truly European mechanism of limited solidarity, in accordance with the common European ability to pay. This transfer of powers is not a blank check to free spending Member States, it is a vote of confidence in the democratic European institutions, that they will be able to tax and spend well in the interests of the Union, which will benefit all Member States. If, after more than 60 years, the Member States don’t have enough confidence in the institutions of the European Union to meet this challenge, even when this challenge is strictly limited to a few percentage points of their total national tax revenue, certainly the euro-zone, then maybe the whole Union has no future and will muddle through until total disintegration.

As tax specialists we know that this change involves a lot of technical budgetary details, which need to be elaborated in much more extensive documents. Already, in the past, many studies have been made on the question of which EU taxes would be fit to finance the EU budget. This is not a call for higher taxation, but in the first place for a limited and gradual shift in revenue between the Member States and the Union. This reform is not to be implemented in one big bang, but in a gradual process during a long transition period, like the customs union from 1957 to 1968. To keep the Union together we need that minimal glue of truly European solidarity, not more but surely not less.

 

Frans Vanistendael, KULeuven (Belgium), Gianluigi Bizioli, University of Bergamo (Italy), Irene Burgers, University of Groningen (The Netherlands), Francisco Alfredo Garcia Prats, University of Valencia (Spain), Daniel Gutmann, Paris 1 Pantheon-Sorbonne University (France), Peter Essers, Tilburg University (The Netherlands), Werner Haslehner, University of Luxembourg (Luxembourg), Georg Kofler, JK University Linz (Austria), Hanno Kube, Heidelberg University (Germany), Adolfo Martín Jiménez, University of Cadiz (Spain), W. Nykyel, U. Lodz (Poland), Pasquale Pistone, University of Salerno (Italy) and WU Vienna (Austria), Ekkehart Reimer, Heidelberg University (Germany), Edoardo Traversa, UCLouvain (Belgium). 

 

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