The Politics of EU Tax Harmonisation

This source preferred by Richard Teather

Authors: Teather, R.

Publisher: Friedrich-Naumann Foundation

Place of Publication: Berlin

As a matter of law and constitutional principle, the EU has already taken tax raising powers, and can impose taxes against the will of a democratically elected national parliament through lasting minimum tax rates.

These powers are not just theoretical, but have been exercised; EU-imposed taxes have long been the norm for VAT, and (since 1st July 2005) they now also cover investment income and are expanding into general business taxes.

This is not just a constitutional or political argument, but a practical and economic one. Imposing taxes in the EU can cause capital flight to non-EU countries, reducing investment in Europe.

Furthermore competition between countries for investment has kept taxes lower than they would otherwise have been; harmonisation or minimum tax levels across the EU would stifle this competition and allow governments more freedom to raise tax levels. This would tend to lower investment and damage the economy, with consequent damage to jobs and wages.

The driver for this change is the problem of the Social Model. This is increasingly threatened by choice and inter-jurisdictional competition, as both businesses and qualified individuals leave the EU for more appropriate social regimes.

Although the EU is hoping to minimise this effect by having forced other countries to sign up to its proposals, this is not an exhaustive process and there will still be many countries outside the scheme.

Future generations, and the new EU entrants, could see themselves bound in to the higher tax rates needed to fund the welfare states and pension obligations of Old Europe; their prosperity would be better served by a more flexible approach.

Even Old Europe would be better served by tax competition, by adopting a model based on wealth generation for all rather than redistribution.

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