Wednesday, June 29, 2005

The EU tax dilemma

A friend of mine asked me the other day a tricky question about Europe and taxes. According to him, taxes can be levied at a local level, state or federal level and since up until now the EU is not a federal government, what is the business of the EU with regards to taxation? Should it mind its own business?

In fact, within the EU, the national governments retain exclusive powers with regard to direct taxation, i.e. the revenue they receive from personal income tax and corporation tax goes to their pockets. But Community policy does not totally stay away from taxation. Community tax policy has an impact on both direct taxation and indirect taxation (e.g. VAT and excise duties), which ultimately are liable to have an immediate impact on the single market. Such interference is in fact more visible in the indirect taxation field, although in recent years the push towards the harmonization on the field of direct taxation has been substantial.

An important point to take into account in this discussion is the internal market, which is one of the basic elements of the European Union. The internal market is the result of the Treaty of Rome and the basis of the free movement of goods, persons, establishment, services and capital. Community tax policy also aims to ensure that tax regulations do not impair the EU free movements (that being for example the free movement of establishment, capital or even the right of European citizens to work in any EU country). Certain common regulations and directives have also been adopted within the EU to ensure that the single market functions more smoothly and that each Member State receives a fair share of the tax revenue.

But (as you can imagine) there are still many inefficiencies and inconsistencies of having 25 member states and 25 different tax systems. The litigation that these days reaches the ECJ on the field of taxation is a good demonstration of such dilemma. On top of this, the rights of the Member States are protected, as any change made to Community tax rules requires a unanimous vote. This means in practice that it is difficult if not impossible to adopt far-reaching EU legislation on the field of taxation.

At the end, European tax is a dilemma. From one side, national governments must have sound public finances and respect the main EU economic policy objectives. For this they set the priorities for their own spending and taxes that they apply to generate the necessary revenue. They are also free to set the rates of corporation tax and personal income tax, as well as the taxes applied to savings and capital gains. They can set the rates of value added tax and excise duties according to their needs. BUT they have to abide to the EU internal market rules. Their tax regulations should not impair the EU free movement and the scope of that free movement is still in the process of being designed by the ECJ. That is why the dilemma grows by the time the scope of the internal market increases. The necessity to find a middle ground requires in my view rethinking the taxing powers of the EU. Stay back or go further. "Mind your own business or start a new business" in the words of my friend.

To overcome that dilemma the EU would need to acquire new competences of stabilization and redistribution. This would also presuppose a tax and spending capacity of the EU, which would be independent from the member states. And that my friend is a far, far of becoming reality!


Post a Comment

<< Home