April 26, 2005

Proposed EU taxes

Following a link from The Village Hampden I found this document on proposed direct EU taxation. I've tried to summarise and analyse it below, but would be interested in anyone else's views on it. Particularly the detailed economic implications.

"Tradition has it that any serious discussion on the financial perspectives of the European Union (EU) also leads to heated debates on the EU's need to decide on its own resources. This is not surprising since the power to raise taxes is often seen as a central element of state sovereignty"[page 6]
the EU plans to become a sovereign state, strait from the horses mouth. It also explicitly states that Tax Harmonisation is already happening
"illustrated by the failure to complete harmonisation for the VAT in the Community despite decades of efforts."

They give Eight criteria to judge any EU tax proposal

  1. Would the revenues of the EU tax be sufficient to cover the expenditures of the EU in the long run?
  2. Would the EU tax bring about stable revenues for the EU budget?
  3. Would the EU tax be visible to the EU citizens?
  4. Would the EU tax be simple to administer and involve low compliance costs?
  5. Would the EU tax lead to an efficient allocation of resources in the EU?
  6. Would the EU tax involve income redistribution?
  7. Would the EU tax have an equal impact on equivalent taxpayers across the EU?
  8. Would the EU tax raise revenues from the Member States in line with their economic strength?
point 7 being in direct conflict with the combined effects of 6 and 8. The whole bundle of 6, 7, and 8 being in conflict with 5. Point 1 being impossible until we actually know what the EU spends, something that has not really been known for the last 10 years since the EU accounts last added up enough for them to be signed off by the EU's auditors.

They then go on to describe the various taxes based on the criteria that I have at the top of my post.

taxSufficiencyStabilityVisibilityLow operating costsEfficient allocation of resourcesHorizontal equalityvertical equalityFair contributions
Modulated VAT++++~+~~
PERSONAL INCOME TAX++++/- *~-/+ *~+
*depending on system of collection

The reasons that they give for direct EU taxation are not exactly great

"Creating an EU tax may increase transparency of EU financing and thereby foster the involvement of the Parliament in budgetary matters. This in turn could have positive consequences in terms of efficiency. Indeed, as taxpayers tend to question the use and the amount of the taxes they pay, they also force the tax authorities to better justify the use of their resources and to make the best use of them. Increased transparency may thus impact on the accountability of a government and on overall efficiency. "[page 9]
By vastly increasing the size of the tough it may be harder for Eurocrats to get their snouts in. Or tax payers don't like endemic corruption and waste, so by increasing the amount of money thrown away in this manner the uproar might be enough to force some reforms. However this requires democratic accountability, something in almost as short supply amoungst teh Eurocrats as disliking graft. Personally I would prefer the EU to reform itself before taking any more of my money.

"Operating costs of taxation could particularly decrease in the case of taxes characterised by so-called Òregional arbitrarinessÓ that are transferred to the EU. Regional arbitrariness refers to situation where it is difficult to determine what the exact share is of a tax base that should be attributed to one or other Member State. In this case complex tax-sharing rules have to be defined, e.g. for corporate income taxation, which sometimes prove costly to both taxpayers and tax administrations. In these cases, it may be more efficient to assign the tax to the ÔhigherÕ level of authority, as is for instance the case for customs duties in the EU."[page 10]
There are cases, such as corporation taxes of multinationals, where it is hard to decide which country tax revenues should go to. So it will be easier settle these disputes if neither gets the revenue and it all gets syphoned into the accounts of the EU instead. This is quite clearly already beginning with the Cadbury and Marks & Spencer cases going through the ECJ at the moment, the judgments' from which will almost certainly lead to EU-wide corporation tax harmonisation.

"Taxes may modify the structure of prices in the economy. This may in turn affect the behaviour of economic agents. In some cases, a change of behaviour is precisely the objective underlying the creation of the tax. This is, in particular, the case where there exist market imperfections or externalities, such as in the environment field. In other cases, such a change of behaviour is not desirable and it can be a source of economic inefficiency. This is, for instance, the case when the tax treatment of a specific investment differs according to its location in the Internal Market. The ultimate location of the investment may then be determined by tax rather than by productivity concerns.

"Hence, an EU tax may facilitate the efficient allocation of resources on two grounds. First, it can potentially provide leverage for Community action and foster EU policies in fields where there are cross-border externalities and limited co-ordination of tax policies among Member States. Second, it can also lead to a harmonisation of some tax bases, with potential benefits for the Internal Market. An assessment of an EU tax should take into account these allocation effects."[page 10]
Central planning to facilitate the efficient allocation of resources, have these people ever read any economics? The command economy is back, and with it the EU plans to continue it's unparalleled economic success.

when it comes to assessing an EU tax proposal, the focus is only placed on the tax having an identical impact in the various Member States for a given taxpayer. At European level, this principle has an important symbolic value. Unequal tax treatment of equivalent EU taxpayers across the EU would probably be considered as discriminatory and against the ideals of the European construction.[page 11]
France isn't going to like this one, French people having to pay as much as the Anglo-Saxons? Don't they understand it is their role to be the milch-cow for subsidising the French way of life? It would be good if it where to happen, but the chances are very remote. Most likely taxes will simply rise to the harmonise at the highest level to accommodate bloated social welfare states. But with this in mind consider Excise Duties on Tobacco and Alcohol and the very low scored given to them. Europe á La Francais?

It is quite clear that the preferred method would be through Personal Income Tax. Everybody hates income tax so this will be a hard sell.
The next best 'Environmental' taxes (Energy tax and Aviation tax), these would also be the easiest to sell to the general public by claiming that they are their to help combat climate change, whilst not talking about the fact that the real purpose is to fund the EU. This one is especially likely as the document says
"Corporate income tax, energy taxation and a climate charge on aviation could have an impact on, and help foster EU policies."

After this there is VAT, minimum levels for which are already set by the EU, which is very similar to the current system of EU funding and could therefore be slipped in by the back door with the minimum of fuss of oversight by thoughts pesky national governments.

The document is also clear that the EU need not just limit itself to one tax,
"In principle, this problem of revenue insufficiency can be overcome by combining several resources, including contributions from the Member States, to make up for the needs of the EU budget."[page 37]
it could choose all of them. Which since the EU has never seen any of somebody else's money that it did not like it probably will over time. I think that we can expect VAT harmonisation through the ratchet mechanisms built into the current system, this will naturally lead to Modulated VAT as a basic extension of the current system of funding. Energy and Aviation taxes will also probably be coming out of Brussels in short order, disguised as a way to save the environment when they really have nothing to do with it. The ultimate goal must be EU levied Income Tax, but that is probably some time off, the EU works by stealthy assimilation and that is simply too 'visible'. It should also be noted that the ECJ is working at turning Corporate Income Tax into an EU tax, despite it being rather unsuitable by there own criteria, the only two points where they claim that it would be a good tax are Horizontal Equity, so everybody is stung by the same amount, and (the ironic) Efficient Allocation of Resources, so Old Europe Socialism in play there.

The most dangerous of the proposed taxes seems to be TRANSFER OF SEIGNIORAGE REVENUE, which going from the document seems to be simply allowing the ECB to print as much extra money as is required to run the EU. This is quite clearly very very dangerous, and worrying that the EU is even considering especially considering the ECB's record of (mis)managing the EU economy. We in the UK should not think that this will not be applied to us simply because we are outside the Eurozone,
an equivalent treatment would be applied to the Central Banks of Member States outside the euro area.
If I understand this correctly, and quite frankly I hope I don't, then should the EU ever take this power then it is time to get the hell away since it is about to collapse, and spectacularly, leaving a big smoking hole in the economic map of the world.


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