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A Single European Tax?

A Single European Tax? Economy Near Us (XI)

The European budget is the main financial tool by which the process of economic integration and convergence is driven within the European Union. In the European construction, we can identify four tools aimed at initiating, conducting, and finalizing such a construction:

  • An axiological tool: the set of European values on which and for which the European construction is initiated and made. Although a properly European set of values is still undergoing crystallization, many of them are in force and guide the formation of purpose and establishment of actions. This tool represents the final cause of the European construction;
  • A political tool: is the most important and productive tool. In fact, the European Union is a deliberative social construction, underwritten by an intellectual project[1]. Moreover, the European construction is based on fundamental political documents – the treaties – as primary macro-norms, which generate all the secondary and tertiary norms (communitarian legislation) to design the path of European construction. This tool represents the formal cause of the European construction;
  • An ideological (philosophical) tool: the European construction should provide to its citizens a “story” or vision, a model of the world (Weltanschauung) to coagulate and create the necessary synergy. This vision is offered by the European ideology or social philosophy (for example, the social model of the economy, or the state of the law). This tool represents the efficacy cause of the European construction;
  • A financial tool: the purposes of the European construction must be financially supported in order to be implemented. Such a support base is the European budget, which is different from the national budgets of the Member States, and is aimed at accomplishing European purposes, not the national ones. This tool represents the material cause of the European construction. 

Issues with current resources 

Regarding the current situation of the revenue system and mechanism of the EU budget some questions must be addressed:

  • there is a conceptual (and methodological) contradiction between the compulsory balanced EU budget and its designated revenue sources (traditional resources, and VAT respectively). Indeed, if the EU budget is based on the traditional resources collected by the Member States, and is therefore dependent on the economic conditions and processes in the Member States, then there is no assurance regarding the EU budget balance. To manage such a situation, we would have two solutions: 1) to proceed with the EU budget in the same way as with private budgets: to first establish the revenues, and secondly to establish the expenditures, so as to achieve the budgetary balance; 2) to introduce a redundancy, as the national contributions based on GNI, to get such a budgetary balance. As is well known, the second solution was been adopted and is working today;
  • the traditional resources of the EU budget depend on the own economic (business) cycles in the Member States, so it is very difficult to have a credible prediction of the EU budget revenues, especially when the multiannual financial framework (MFF) is spread over seven years, as it is today;
  • if the traditional own resources of the EU budget are justified in being transferred to this budget, the national contributions based on the GNI has no justification whatsoever. Indeed, regarding the traditional resources, it can be shown that such resources are added value from EU membership[2], which justifies an EU claim or “right” to ask for a part of this value as contribution. But, instead, regarding the national contributions based on GNI, the impact of EU membership can be found or, at least, no such an impact can be scrupulously assessed;
  • In fact, most of the conflicts among the Member States regarding the revenue system for the EU budget are really predicated on one or more of the above considerations. 

A possible solution: a single European tax (SET) 

As said before, the two fundamental targets for using the EU budget are:

  1. a) achieving the cohesion stance in EU (C)[3];
  2. b) producing the European public goods (EPGs).

If so, then the SET to be proposed must ensure that, by using the EU budget instrument, the two targets are met. The problem is that, while the first target depends on the Member State policies and resources, the second depends on the EU as a whole. Since it is not possible to simply split the two targets, so only the second one stays for the EU budget, while the first one should be thrown into the court of the Member States, we will make the following preparative considerations:

  • Even if the first target mentioned seems to be under the auspices and at the hand of the Member States, in fact the situation is more complicated, because the Member States are functioning under the EU institutions and, presumably, this influences the economic activity of the Member States. So, it is difficult, both theoretically and empirically to separate the “merit” of the Member States from the “merit” of EU membership in achieving the first target;
  • The second target, in its turn, is indeed achieved because of belonging to the EU, but, at the same time, it must be viewed that the EU efforts to produce the EPGs are possible only within the national framework of institutions, culture, resources, etc. So, again, it is difficult to separate the efforts of the Member States from the European institutions, efforts, and resources.

In such a framework, by assuming the impossibility to accurately discern between the two necessary financial efforts assigned to the two targets, the SET should be designed as follows:

  • The amount a Member State owes to the EU budget must be directly proportional with the gap between its real economic convergence stance and the benchmark of the real economic stance of the EU[4]. Why directly proportional? Because the efforts of the Member States (including their capacity to benefit from belonging to EU[5]) must be rewarded, and this reward is the very decreasing of the fiscal toll for the EU budget;
  • The decision to apply this fiscal facility should be taken after maintaining the course of reducing the real economic convergence gap for two years consecutively. This methodological precaution is required in order to avoid rewarding an accidental trend, that is reversible and could be not due to the very efforts of the Member State;
  • symmetrically, if for two years consecutively, the real economic convergence gap rises, then the decision would be to increase the fiscal burden;
  • The EU budget will continue to be established according to the public budget philosophy, that is, by establishing first the expenditures needed, and then the revenues;
  • A crucial question arises now: at what level should we establish the EU budget revenues, once its expenditures are established? So far, the national contributions based on GNI were established so the EU budget may be balanced, by collecting from the Members States the difference between the expenditures and the foreseen revenues. The problem if the EU budget should be balanced is not germane to this article, so we assume that the EU budget must be always balanced;
  • In this hypothesis, the EU revenues will be established at the level necessary for covering all of the programmed expenditures[6];
  • The entire amount of the needed revenues will be, then, distributed onto the Members States. This distribution will address the GDP, not the GNI. This proposal is based on the following considerations:
  • The GDP base for the national contributions currently in use is not compatible with the traditional own resources system because it contains the VAT, which is an indirect tax, that is included in GDP[7]. This is the reason why we use the GNI instead of the GDP, else it would be a double taxation;
  • Since GNI includes the subsidies granted by the state, it follows that the Member States are today penalized for granting such subsidies. Such an issue is very disputable, but would no longer be relevant should GNI be replaced with GDP[8].
  • The amount payable by every Member State will be formed based on the following “algorithm”:
  • 50% of all the expenditures planned is covered by the Member States proportionally with the weight of their GDP in the total GDP of the EU;
  • 50% of all the expenditures planned is covered by the Member states based on the real economic convergence gap recorded vs. the European Union average. 

NB: The illustration of the present article is excerpted from the 1341 Codex Balduini Trevirorum showing seven Electors of the Holy Roman Empire.

[1] The European construction is not at all an emergent, that is, a “natural” process, as some analysts claim.

[2] Maybe less evident in the case of VAT, but this resource accounts of only about 0.3% from all the VAT value collected by the member states.

[3] With its three components: economic, social, and territorial. The main process involved here is the real and nominal economic convergence.

[4] Of course, here comes the need to establish such criteria of the real economic convergence (similar with the criteria for the nominal economic convergence in the Maastricht Treaty), which should be introduced into the Treaties of EU.

[5] For example, to access the European cohesion and structural funds at the level established by the EU budget of the multiannual financial framework (MFF).

[6] Of course, such an analysis will be done annually, although the annual EU budget is part of the MFF.

[7] As it is known, , where  stays for the indirect taxes, and  stays for subsidies. In other words, GDP is expressed in market prices, whilst GNI is expressed in factors cost.

[8] Its relevance remains, of course, within the possible polemic regarding the replacing of the GNI by the GDP.

 
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OEconomica No. 1, 2016