Why EU taxes will not work

Open Europe
19.08.2011

In a new briefing published today, Open Europe examines ten of the options for introducing EU taxes, setting out the economic and practical reasons why none of them would work in reality.

EU taxes have been pushed up the political agenda by German Chancellor Angela Merkel and French President Nicolas Sarkozy’s recent proposal for a financial transaction tax, as well as the Commission’s proposal for new taxes to fund the EU budget. Open Europe’s briefing notes that all potential EU taxes are economically flawed and unworkable in practice, with a financial transaction tax potentially costing financial markets across the EU between €24.3 billion and €80.9 billion and across the UK between €17.5 billion and €58.2 billion (£15bn and £49.9bn), using the Commission’s rate of 0.1% for bonds and shares and 0.01% for derivatives and without a burden-sharing system. A large part of these costs will be passed on to consumers.

Open Europe’s Research Director Stephen Booth said,

“While some of the options offer minor benefits, every attempt to give the EU the power to raise its own taxes would be perceived as a major assault on national governments’ tax sovereignty and, ultimately, democratic accountability. EU taxes would have no democratic legitimacy.”

“However, all of the potential options for an EU-level tax also fall short on practical and economic grounds and are either prohibitively complex or come with a hugely disproportionate cost for certain countries, social groups or businesses.”

“The Commission’s push for EU taxes specifically to fund the EU budget ignores the fact that the current complexity and opacity of the budget has more to do with its size and the logic underpinning the EU’s spending programmes than how it is financed.”

To read the briefing ‘Ten ways to introduce an EU tax (and why none of them will work)’ in full, please click here:

- With eurozone leaders looking at new ways to enhance ‘economic governance’ of the eurozone and with negotiations on the EU budget expected to gather pace in 2012, the EU’s role in taxation is set to be an important future political and economic battleground. In this briefing, we examine ten of the options for EU taxes up for discussion, with some well developed and others at an early stage.

- In an effort to rely less on cash transferred from national governments in future, the European Commission has proposed both a new EU value added tax (VAT) and EU financial transactions tax (FTT) to help fund the next EU budget (2014-2020).

- Meanwhile, in response to the eurozone crisis, French President Nicolas Sarkozy and German Chancellor Angela Merkel have suggested both an FTT and a Franco-German common corporate tax base and rate. They have also suggested “Euro area member states should be ready to consider enhanced cooperation for further progress on tax coordination.”

- However, all of the options on offer for EU taxes are economically flawed and unworkable in practice, some more so than others. Many of the options would place a disproportionate burden on certain member states, while others, if linked to the EU budget, would simply add to the budget’s complexity rather than reduce it.

- For example, an EU financial transaction tax would be clearly biased against the UK, which is home to Europe’s largest financial centre, in turn requiring a complex burden-sharing arrangement in order to make it equitable. The World Federation of Exchanges, for example, puts the level of financial transactions in the EU as a whole at $830 trillion (2010). Using the Commission’s rate of 0.1% for bonds and shares and 0.01% for derivatives, we estimate therefore that the potential economic impact of an FTT across the EU-27 would be between €24.3 billion and €80.9 billion and between €17.5 billion and €58.2 billion (£15bn and £49.9bn) for the UK in the absence of a burden-sharing system. The range is due to uncertainties regarding the degree of relocation and evasion following the introduction of an FTT.

- As the Commission itself and other EU leaders have pointed out, the introduction of an FTT at the EU- or eurozone-level, without a global agreement would lead to the relocation of financial firms away from European financial centres – something that would be particularly damaging for London, Frankfurt or Paris.

- The Commission’s proposal for a new EU VAT to fund the budget is the ‘least worst’ option in principle but in practice would limit national governments’ ability to adjust VAT rates to economic circumstances and vulnerable groups.

- The Commission’s push for EU taxes specifically to fund the EU budget ignores the fact that the current complexity and opacity of the budget has more to do with its size and the logic underpinning the EU’s spending programmes than how it is financed. The recycling of taxpayers’ money via Brussels for byzantine regional programmes and outdated farming subsidies has led to a complex web of net contributors, net recipients, rebates and corrections.

- A fundamentally reformed budget, which had the broad support of national governments and European taxpayers, could be financed transparently and fairly through national contributions based on Gross National Income without the need for complex rebates or EU-level taxes. This should be the starting point for negotiations.

EU-level taxes can be divided into three categories – and it is important to distinguish between the three:

- A tax where the rate is set at the EU level and then also raised and spent at the EU level (a direct EU tax)
- A tax where the rate is set at the EU level and then raised at the national level but spent at the EU level (this is what the Commission has proposed as a way to fund the EU budget)

- A tax where the rate is set at the EU level but then raised and spent at the national level (the EU already does this with its VAT bands and has proposed a fixed rate for an EU-wide carbon tax in the past, for example).

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