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Euroland 2015 –The unbearable lightness of European taxation (Excerpt GEAB N°88)

As much in its economic as political dimension, the systemic crisis which the West in general and Europe in particular is going through is rooted in a huge crisis of taxation: states are no longer able to collect taxes efficiently and fairly.

It is a case of reality at work for a long time, which has become critical with the explosion of the US crisis and which will become a major theme of debate from 2015: which solutions to bring to the question of the funding of public authorities in Europe[1]?

GEAB N°88 excerpt (published Oct 15, 204) – The GEAB is LEAP’s onpay confidential bulletin – Subscribe here

The inadequacy of a taxation system with the nation-state at the apex

Tax evasion, tax optimisation, erosion of the tax base, transfer of profits, parallel, black and grey economies, the digital economy, financialization, illegal workers, expatriates, etc.: a large and growing part of real economic activity escape the national tools of taxation.

Fig1

Chart 1 – Average company tax rate, 1993-2010, in %. Source : Crottaz/KPMG.

The internationalization of trade, transnational mobility of businesses and people, and globalization, these three factors alone explain the process. But aggravating factors piggyback on this strong trend – in chronological order:

. a sole objective of interstate tax cooperation: avoid “double taxation” on businesses and individuals working into two tax zones; a policy today accused of being so successful that it has led to a system of “double non-taxation”[2] ;

. regarding Europe, the EU provides a framework conducive to aggressive and competitive tax policies between states that ultimately leads to pure fiscal dumping[3] ;

. a dominant ultra-liberal ideology for the last 25 years which implicitly denies states’ legitimacy to collect taxes, for the purpose of weakening any restrictive stranglehold and optimizing the profits of economic activity;

. a financialization of the economy which internationalises currency flows and firmly takes wealth out of any tax framework;

. the Internet, whose eminently global nature keenly reveals states’ inadequacy in filling the tax collection role – especially in the case of states as small as European ones[4].

The challenge of financing public authorities

The consequences of this technical deficiency are widely involved in the current crisis. Since the crisis’ outbreak in 2008 we are easily surprised at the discrepancy between the evidence of the amount of wealth produced and exchanged in Europe and the increasing inability of states to fulfil their core functions (financing infrastructure, social services, defence…) other than by causing state deficits to explode. And we are right: the crisis in Europe[5] is less economic than fiscal… for the time being still. Governments no longer collect enough to finance their functioning and resort to subterfuges that contribute to the general crisis, especially borrowing which feeds the global financial bubble[6].

Other tricks, with equally dramatic consequences, are government financing through fines[7], (from motor-fining, a particularly lamentable example, to multi-billionnaire fines imposed on banks); and through VAT, which now constitutes the bulk of our states’ resources. Citizen/business sanctions and indirect taxes finance, insufficiently, our governments’ functioning as part of a complete break in any constructive relationship between government and citizens, between states and people. Democracy suffers, where a ruling elite tends to feel be less and less accountable to the population, whilst citizens lose sense of collective interest. No representation without taxation[8], only direct taxation seals a contract[9] between citizens and leaders as an individual contribution to a collective system resulting in rights and obligations for both. VAT, because of its invisible nature doesn’t even seal a contract between consumers and the production system.

Moreover, the unfairness of a system in which the richer and more transnational one is, the less one pays in tax, is so obvious that it explains how almost impossible it has been for European states to implement tax increases as the current crisis logically required. How to tap further into a much reduced slice, and certainly not the richest, of people and businesses already solely financially supporting a huge part of government? Therefore, tax increases have been marginal, insufficient to resolve the crisis, forcing states to borrow more[10].

Fig2

Chart 2 – The non-progressiveness of French taxation. Source : Landais-Piketty-Saez.

Given this situation, voices are rising to question taxation, setting out the principles of reform in this area… but mostly asking only for national solutions, happy to offer “fiscal dabbling”, increasing so many percent here, reducing the rate there, imposing a tax on this, cancelling that one… all in a cacophony of irreconcilable positions essentially party-driven.

Add a new floor to the fiscal structure, why not?

In reality, it is only at European level that there is a way to find and implement solutions. For several decades already the national level has been hopelessly incompatible with a growing share of the system of wealth creation and exchange. As to the global level which, of course, is the ultimate goal for rationalizing tax levies, it is attainable only through the creation of regional fiscal entities initially.

But, of course, everyone is manoeuvring to prevent this kind of development:

. the transnational economic world to begin with, and for obvious reasons which won’t disappear; but should that prevent progress on this track?

. the states themselves, which fear a major loss of sovereignty like the plague[11] ; but, at the stage they are now at, we anticipate that they will have nothing more to lose by 2015.

. European citizens, manipulable by the media controlled by the first two groups (the first one in particular, and the most implacable), made Euroseptic and convinced that European taxation would go hand-in-hand with higher taxes – while it is quite clear that the opposite would happen if conditions for tax collection and the tax base improved.

There are numerous techniques to block any debate about European taxation, for instance focusing debate and efforts on the most difficult issues to better reach the conclusion that “No, really, it’s impossible to change anything.” The international taxation path, considered ideal by all but easy to prove as impossible to implement, kills any debate quickly. And in this area, the attempts at increasing taxation of the digital economy[12] are a splendid reason for despair in terms of tax rationality.

Financial transaction taxation[13], although a little more realistic, allows to create the image of member states willing and united in this goal, but unfortunately strongly opposed by malicious players forever blocking advances in this field.

Principles of a trans-European taxation system

And yet, if the member states are so willing to give themselves the means to further increase the taxable share of economic activity and so united around this cause, why don’t they put this unison at the service of a project which only depends on them: that of trans-European taxation?

Certainly a trans-European taxation system wouldn’t be enough to tax all the money generated in the world. But, already, it would allow part of businesses and individuals’ taxation operating in Europe to be simplified, de facto preventing “double non-taxation” and filling all the cracks created by a fragmented tax system thoroughly exploited by an army of tax experts; that already would be a great improvement.

Our purpose here is not to enter into the detail of a trans-European tax system. Our anticipation is largely focused the appearance of concrete measures in this field starting in 2015. Some tips though:

. the legitimate basis for setting up such a system isn’t the EU but the Euroland; apart from the question of legitimacy, it is also the only group of countries capable of understanding the value of this approach;

. the starting point for the implementation of trans-European taxation would be to materialize and separate the tax de facto paid to Europe (by those who still pay it) through the member states; this would in effect be a simple measure of transparency differentiating this share of national taxes going to Europe, then to have it paid directly to a European body, with all the symbolism of European citizenship that would go hand-in-hand with it;

. to be fair and acceptable to all, a European tax should follow two simple principles: its areas of operation should be the direct collection of Europe’s operating budget[14]; and the direct collection of that which, because of its transnational European nature, escapes national tax authorities or is insufficiently collected by the states. On the second point, a repayment of amounts to the national level could be proposed;

. finally, the prejudice that citizens have when European taxation is mentioned should be defused by explaining that it is not a case of transferring all taxes to the European level and subsequently standardize them[15]: local authorities and countries would continue to collect the taxes that concern them (which they are able to collect and which they need); however the European share of the tax is Europeanized, a share over which Europe would have direct decision-making powers, thus becoming able to build a tax system to manage its collection directly, effectively and equitably, whilst European citizens themselves would become direct contributors and therefore members of a full share of the European entity that de facto governs many aspects of their lives.

A question of democracy as well

As we see, a European tax paid directly is probably the only way so that citizens, instead of states, are at the basis of the European institutional and decisional system, making its democratization obligatory and almost automatic. One better understands why the states have, up until now, blocked this eventuality: keeping control at any price.

But in Europe’s present situation, the states have certainly understood that everyone had finally realized that they no longer had control… and that, unfortunately, no one had, in any case no one “accountable” who could be identified, held responsible and sanctioned.

The states need money to exercise their residual sovereignty and keep what remains of their legitimacy. But if they are no longer able neither to sufficiently tax nor to blow up their debt levels, then they could see European taxation is in their interest, as part of a European tax structure based on subsidiarity which would reinstate sovereignty on all floors[16].

We anticipate that this mental change will become widespread amongst the ruling classes and public opinion by 2015.

Europe, last floor before a worldwide system of collection

A European tax system would also provide the appropriate basis for addressing the issue of collecting taxes on trans-continental commercial activities (Internet and financial particularly) that would initially come about by adding sections of tax cooperation to bi-regional economic and trade agreements ( Mercosur-EU, etc.). Of course, only the economic zones with an interest would join but the fact of initiating a process of tax rationalization on a transcontinental scale is likely to be highly attractive.

This part of our anticipation, is expressed in a scenario of an undisturbed implementation of the 21st century world’s trend to multi-polarization, a trend which we have previously seen was probably in the process of derailment[17]. However, we consider that the remainder of this anticipation is valid regardless of the path taken by Europe: if a European empire is set up, European taxation and not only its project, will see the light of day very quickly, the only difference is that it will be serving a Europe-power (concentration of financial resources and levers of power) instead of serving the reconstruction of the European socio-economic system at the foundation of the European project conceived after the war (distribution of wealth and democracy).

But in any case, the system of government financing by taxes is dysfunctional and by borrowing unsustainable. Europe and the European countries will have, together, to give themselves back the means of their common policy, whatever this will mean.


[1]     Today, we are already seeing an increase in the number of articles and publications trying to address the general problem of taxation quality: the battle against tax evasion has become emblematic of this questioning, with the success which we have seen. In July 2013, the OECD published an interesting report entitled “Action Plan concerning the erosion of the tax base and the transfer of profits”. Source : OECD, July 2013.

[2]     Source :  European Commission.

[3]     Source : Etudes fiscales internationales / Médiapart, 15/04/2014.

[4]     Source : European Commission.

[5]     In the US the situation was the same 20 years ago, but since then the austerity introduced by government impoverishment has led to the impoverishment of the whole population and the crisis really has become economic. Meanwhile Europe won’t take 20 years but rather 5 to make the same transition from a developed economy to a third-world one, hence this anticipated date of 2015 here as that demanding thought about organizing solutions.

[6]     Source : Comptes publics.

[7]     The use of fines as a source of public financing has gone far beyond the framework of traffic: the huge fines imposed on banks by the US and Europe are nothing more than a tax hijacking, a situation that really demands thought on the level of drift of institutional-political systems being reduced to such an extent and on the potential risk coveyed by such dysfunctional systems.

[8]     Reversing the 1765 Boston Tea Party slogan which established the link between taxation and democracy. Source : Wikipedia.

[9]     In the sense of Jean-Jacques Rousseau’s « Social Contract ». Source : Wikipedia

[10]    Currently, we are even seeing an absurd policy of reducing taxes: the US, Australia (which, having undertaken this sort of policy before the others, are already witnessing its total ineffectiveness), the UK, Ireland, France, Austria, etc… Sources : Irish Independent, 07/10/2014 ; BBC, 07/10/2014 ; The Australian, 09/10/2014 ; Kansas City Star, 08/10/2014 ; France3, 16/09/2014 ; Tax-News, 30/09/2014

[11]    Unanimity of decision is the rule in tax matters at European level, making it very difficult to adopt measures in this area.

[12]    Such as Google, Apple or Amazon who make the headlines and are the target of the European Commission’s legal measures, for example… measures doomed to failure since tax evasion by this sort of business is strictly legal (a legality invented by this same European Commission, moreover). A real red flag, ideal for ensuring that the true potential solutions, albeit less exciting, aren’t addressed. Source: The Guardian, 08/10/2014

[13]    The famous Tobin tax which has experienced some real success, including at European level, the only relevant one in this case. Source: Les Echos, 22/09/2014

[14]    To cite just one example of all the issues that could well become the subjects of citizens’ debate: what better way to address the issue of civil servants and MEP’s salaries? Another question, more strategic, would be citizens’ right to examine the nature of investments of a European infrastructure plan as part of an economic recovery, such as that currently proposed by the European Parliament. Source : Euractiv, 03/09/2014.

[15]    Henceforth, the term used is tax « homogenization », as everyone is aware that « stardardisation » is a perfect foil for European public opinion. That said, we believe that the objective of a European fiscal policy has no reason to be uniformisation. Coordination of fiscal policies seems much more promising which would, for example, allow tax competition to be the result of joint decisions aimed at temporarily increasing the economic attractiveness of a given country.

[16]    This enables to assert that sovereignty-based solutions advocated by Marine Le Pen and other “naïve” in government management, wouldn’t resist their actual coming to power: once in power, the evidence of national limits in addressing key-challenges would oblige them all to abandon their national-sovereignty in favour of a Euro-sovereignty.

[17]    See « Europe 2020 : Community or Empire? » in the previous issue of the GEAB. Source : GEAB N°87, 15/09/2014

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