Guest blog post by Margit Schratzenstaller, Alexander Krenek (Austrian Institute of Economic Research), Danuše Nerudová, Marian Dobranschi (Mendel University Brno).
The debate about EU taxes, which as “genuine own resources” may replace (partially) current own resources funding the EU budget (primarily consisting of national contributions) is an old one. It has been pushed by the European Commission in its various reviews of and reform proposals for the EU system of own resources for over a quarter of a century now. After the failure of the European Commission’s and the European Parliament’s initiatives to introduce an EU tax together with the EU Medium-term Financial Framework 2014 to 2020, to replace a part of national contributions to the EU budget, a mid-term review of the EU system of own resources was agreed. This mid-term review, which is to be completed by the end of 2016, has been commissioned to an inter-institutional High Level Group on Own Resources (HLGOR), consisting of representatives from the European Commission, the European Parliament, and the European Council as well as from academia. Thus the discussion about the need to reform the current EU system of own resources and about the various reform options, including own EU taxes, has gained new momentum.
Departing from the points of critique predominantly addressed in the literature, a thorough review of the pros and cons of own EU taxes shows that the fiscal federalism as well as the literature considering pre-federal and political economy considerations can provide some arguments why at least part of EU expenditures should be financed by own EU taxes. In particular, some specific candidates for EU taxes may ease the juste-retour thinking or strengthen fiscal equivalence and thus address the current problem of sub-optimal levels of European public goods. In addition, recent empirical research suggests that the coherence of institutional arrangements within fiscal constitutions may be more relevant than the degree of (de)centralisation. From this perspective, the growing divergence of an increasing centralisation of tasks within the EU on the one hand and the lack of revenue autonomy at the EU level (which has even decreased over the last decades) on the other hand, may be assessed as increasingly incoherent and thus taken as another argument in favour of own EU taxes. Altogether, however, these arguments are not able to provide a sufficient foundation upon which a convincing case for EU taxes could be built. EU taxes indeed are theoretically of interest once EU Member States aim at further (fiscal) integration in the direction of a true European federation. This, however, for the near and medium-term future, appears as a rather unlikely scenario, so that some of the arguments from the fiscal federalism literature are less important in the current discussion about the future of the EU system of own resources.
Instead on building on these well-known arguments brought forward by proponents of EU taxes, we develop an innovative framework of sustainability-orientation of taxation which rests on the economic, the social, the environmental, and the institutional/cultural pillar of sustainability. From this perspective, EU taxes are a suitable instrument to reduce existing sustainability gaps in taxation in the EU. These sustainability gaps include a high and increasing weight of taxes on labour, the decreasing progressivity of tax systems, the shrinking importance of Pigovian taxes (e.g. environmental taxes or taxes on alcohol and tobacco consumption), intense company tax competition, and problems of tax compliance and tax fraud.
Granting taxation powers to the EU may contribute to economic sustainability of taxation in two ways. First, introducing taxes at the EU level which cannot be enforced effectively at the level of Member States due to tax flight based on high international mobility of tax bases would improve several sustainability dimensions of taxation. This implication is supported by the traditional fiscal federalism and tax assignment literature, according to which taxes levied on highly mobile tax bases and/or redistributive taxes should be assigned to the central level to avoid their erosion. Such considerations are particularly relevant in the case of Pigovian taxes, whose effectiveness may be undermined by tax flight: legal tax avoidance as well as illegal tax evasion endanger fiscal sustainability. Moreover, it undermines social inclusiveness by putting the redistributive potential of taxation under pressure, and cultural sustainability by reducing the (perceived) fairness of tax systems. The case for assigning Pigovian taxes to the EU level is strengthened further if tax rates due to spill-overs are set at a sub-optimal level at national levels. These conclusions in principle also apply to taxes on mobile capital (incomes) levied on individuals and firms. Carbon taxes as well as taxes on the aviation or the financial sector are examples for such taxes that may be implemented more effectively at the EU level.
Secondly, overall economic sustainability of taxation in the EU can be improved by introducing relatively growth- and employment-friendly taxes at the EU level which substitute for national contributions by Member States and thus allow them to cut taxes which are more harmful for growth and employment. Such revenue-neutral tax shifts involving the EU level and the level of Member States may enhance sustainability with respect to more than one dimension: if, for example, certain environmental taxes are introduced at the EU level so that Member States may reduce their contributions to the EU budget and thus gain leeway to reduce labour taxes.
Assuming this innovative sustainability-oriented view at EU taxes, conventional evaluation criteria put forward in the literature analysing potential candidates for own EU taxes need to be re-arranged and complemented by evaluation criteria reflecting the four dimensions of sustainability in a next step. These sustainability-oriented evaluation criteria can then be applied to evaluate potential candidates for EU taxes. In any case, from a sustainability perspective – which is underlying the Europe 2020 strategy aiming at smart, inclusive and sustainable growth in the EU – there is a strong case for own EU taxes.
This is a short version of Margit Schratzenstaller, Alexander Krenek, Danuše Nerudová, Marian Dobranschi: EU Taxes as Genuine Own Resource to Finance the EU Budget – Pros, Cons and Sustainability-oriented Criteria to Evaluate Potential Tax Candidates, FairTax Working Paper No. 3, 2016, http://urn.kb.se/resolve?urn=urn:nbn:se:umu:diva-121755.Blogactiv Team