Thursday 12 August 2010

Taxing Europe

There's been some debate on introducing some form of European tax over the last few days. Prompted by EU budget commissioner Janusz Lewandowski's interview with the Financial Times Deutschland that "the feelings on the idea of an EU tax had changed in national capitals", the debate seems to have been prematurely started by the Commission. (See the Commissioner's defence of the idea; and the supporting member states' vague arguments). While there are suggestions about a financial tax or environmental, CO2-based, tax, there are no firm, detailed proposals yet, and therefore the Commission seems to be left without a clear basis on which to argue for a tax, simply because it doesn't really know what it might propose come September.

The Commission is going about this the wrong way.

Jon Worth has written on how more direct taxation could be better than the current situation, where most of the budget consists of national contributions, by introducing transparency and accountability into how the EU is funded. It is obvious that the value of the tax depends on the tax and the goals it serves. Along with the sensitivity of the tax issue when it comes to matters of national sovereignty, we can say straight away that any tax proposal needs:

1. To be well thought out and planned. Arguing just that a tax might be a good idea is, at best, a naive way of discussing the issue. Without a clear tax proposal, it will come across simply as a desire for taxation powers for the sake of them, and it leaves the debate so open-ended and vague, that it is hardly the best way to have a good, rational, debate on the pros and cons of a policy. And that's without the poor reception of European political debate in the media.

2. To have a principle and goal behind it. The examples of financial transaction tax and CO2 tax are good, since they have some principle and goal to them, and they show where the tax burden will fall. In this way, we can talk about the pros and cons, the impact on society and their goals for society. Vital to any EU tax proposal is the element of added value. In other words, the EU needs to show that it can add value through the tax in question. Jon Worth has highlighted that aviation fuel tax is a good example, as planes can pick (within limits) where they refuel, and having an EU-wide tax would make it more effective. Any EU tax needs to be shown to be principled, goal-orientated, and one where the EU can add value because otherwise there is little reason to give the EU these powers. Since tax proposals need unanimity (and probably also need to pass an Irish referendum), people need to be convinced that the issue is at heart a European one, before they decide that it's better off being done by the EU rather than their member state.

3. To have a clear place within the EU structure. Does it add to or (partially) replace the national contributions of member states? Connected with point 2, the proposal should show where and how hard the burden of the tax will fall. This would provide certainty of the effect, and open up another side to the debate. At the moment, the budget is largely decided on by intergovernmental negotiations and sizing up the member states' economies in relation to each other. More direct taxes fall more transparently on certain types of activity and have a social and economic rationale that can be more easily open to debate and control. It could also lead to restructuring the tax system - member states could reduce taxes that fall more directly on citizens (though the degree would be tiny, considering the size of the EU budget), and CO2/financial taxes would shift it onto more specific groups for a more specific rationale.

In other words, the utility of direct taxes versus contributions needs to be highlighted and argued. If it can be argued and shown by supporters that a direct tax would lighten the "general burden" and instead have social utility, as well as making how we pay for the EU more transparent, the supporters would be on firmer ground. At the moment certain member states resent having to contribute a certain amount, and having a clear tax on (a) certain type(s) of activity would be a more rational an just way of distributing the burden. Also, an argument that making the EU responsible for more of its resources would make it more responsible with its spending (it depends on the structure, of course, but if spending and taxing is based more on principle and social utility determined through political debate rather than intergovernmental horse-trading, then it will arguably have to think and debate more openly on its priorities. Of course, intergovernmentalism in the budget is here to stay for a long time no matter what).

4. Any tax proposal has to be linked with proposals on the institutional mechanisms. Just as people wouldn't want the EU to tax if there wasn't an added European value to the exercise, so they wouldn't want the EU to have taxation powers unless there were clear limits on the areas and amount of taxation, as well as measures ensuring more democratic control over it. This would mean that the tax would have to be open to constant review and oversight by the European Parliament (with real control and influence on the subject, and there would need to be clear information on how much is raised where, from whom, and in what context [i.e. X from Austria, from airlines, because there where Y flights/Y% of flights from there]. Also, the Council would need a strong say and oversight role too. Above all, the taxation power given to the EU, if any, needs to be limited to the policy pursued.

Obviously this would mean that the debate would be very complex, but in my view the key point is that any taxation proposal needs to win support outside of national governments (particularly in the Irish, and perhaps UK cases, where referendums would be ratification methods). This can only be done if it can be shown that the issue is one that can be dealt with better at a European level and that the power will be limited. The debate we're having at the moment, while showing some of these elements, is nowhere near coherent or organised enough for there to be a rational, relevant debate.

The wider argument is that the internal market means that there are activities that have social and economic consequences, and it should be possible to make decisions on what is economically and socially important to us. Taxation policy, even if limited in scope, is a way of shaping the way we live. It is a tough issue, and a complicated and sensitive issue, so if we're going to debate it, let's do it right.


  1. I like the idea that the watchdog of the four freedoms should receive its revenue not only from customs duties, but also from travel fees and transaction tax. It is somehow very straightforward in my eyes.
    But you're completely right that taxation has to come with better representation. Maybe a direct tax is even a good measure to connect the citizens more closely to the EU. I'm just a little worried that the EU may promote more air traffic and more speculation to increase its own revenue.

  2. It's definitely a danger that with only a few areas of tax policy open, the tempation would be to exploit them more than is wise. I think that member state contributions would offset it to a large degree, though. At least there'd be channels to debate it and challenge tax policy.