November 28, 2016
Written by Anouk Canet
Luxleaks and the Panama Papers have made awareness about tax evasion issues mainstream. But as painful for the global economy as it may sound, tax evasion still overshadows the broader issue of tax competition – the relative lowering of tax base and tax rate to attract investments – and the subsequent issue of tax avoidance. At a time when economists pledge for and public opinions broadly support a greater coordination in tax matters, the EU should seize the moment. Its global position and internal decision-making processes could produce a tailor-made, flexible and innovative fiscal model.
A trending concept: fiscal harmonisation
2014 was in many ways a turning point for fiscal matters in the EU. The newly-appointed Commissioner for Competition, Margrethe Vestager, hinted at the Google tax regime as an unacceptable feature in the Single Market. After Luxleaks blew up, Jean-Claude Juncker, an ex-Luxembourgish Prime Minister, was forced to claim “an absolute transparency” in fiscal matters. Similarly, the Commissioner for Economic and Financial Affairs, Pierre Moscovici, is giving countless interviews about the need to improve the fiscal coordination inside the EU, for the sake of European business.
It looks like Brussels wants to capitalise on the anger provoked by the recent scandals and the need for more economic and fiscal justice. The strategy is double-edged. The issue seems important enough to revitalise interest in European politics and policy-making among the people of Europe – and in particular among the left-wing supporters and the people from countries where the tax burden is high. At the same time, the transfer of even more sovereignty to the EU could fuel populism.
So far, the Commission has a margin of manoeuvre. The latest Eurobarometer polls show, for instance, that despite the attacks of the Commission, the support for the Euro and the European institutions has not staggered in countries applying a competitive tax regime – in fact, it has even soared in Ireland since 2014. However, despite the apparent calm, the project is likely to produce deep fractures within the EU.
Dividing lines in Europe
We have come a long way since Buchanan’s Power to Tax, which compared tax to a Leviathan that only fiscal competition could defeat. Economists now largely agree on the importance of the costs stemming from fiscal competition between countries – no less than 2% of the GDP of European countries, according to a recent OECD survey.
Yet, some obstacles lie ahead. First, fiscal competition remains an important tool of economic adjustment for countries which otherwise would be unpopular to investors. In 2011, when Ireland was on the verge of bankruptcy, the Commission was not able to bring its tax policies to their knees – who, then, would have invested money in Ireland and relaunched the Irish economy? Baltic countries, whilst less vocal in the debate, are also heavily relying on an attractive tax system to catch up with their western neighbours.
Sovereignty is another big issue. Tax-system definition is organically linked to sovereignty and has been one of the most powerful leverages of state and nation-building in all European countries. Unifying tax regimes across Europe would imply another surrender of sovereignty, which is a tricky issue even in most Europeist countries.
These lines of arguments are blurred when it comes to actual political discourse. Luxembourg’s Prime Minister Xavier Bettel, who is fiercely opposed to any tax harmonisation, has echoed the Leviathan theory by calling the idea “self-destructive” – even though his country’s GDP is three times higher than the European average.
While using the same rhetorics, one can distinguish two main categories among the sceptics: the free-riders and the peripheries, the latter being in actual need of economic adjustment. Still, the flexibility offered by European law could provide a remedy to these divisive issues.
Thinking ahead: roadmap to a plausible policy
A first step towards harmonisation is the unification of the tax base – which is the amount of asset or financial flow on which tax can be imposed. It varies a lot across Europe and the Commission is now planning to relaunch the CCCTB (Common Corporate Consolidated Tax Base) project.
Harmonising tax rates – the percentage of tax levied on the base – is more challenging. It clearly encroaches on national sovereignty and precludes any kind of economic adjustment for weaker countries, which could further increase the macroeconomic imbalances in the Union and fuel populism across Europe. Hence the proposal by Pierre Moscovici to implement “reinforced cooperation” – in concrete terms a fiscal core applying the same fiscal rules within the EU. This would bring more stability in the core while leaving room for the peripheries to catch up.
Times are favourable for fiscal reform: Europe should further consolidate its credibility in matter of taxation after having taken the first steps with transnational firms tax regimes. However, credibility calls for accountability and legitimacy. There will, however, be no progress if European public opinion is not mobilised through an efficient communications and politicisation campaign. Discussing fiscal matters could indeed bring further legitimacy to the European Parliament while helping to strengthen its institutional role in the decision-making process.
In times of crisis, we can make fiscal policy an instrument of hope rather than another scarecrow.
Image used under CC license, by Chris Goldberg.1989 Generation