Transcript No social Europe without tax harmonization

By Pierre Defraigne
Honorary Director General at the European Commission
Executive Director of the Madariaga - College of Europe Foundation
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1. the European Social model is an elusive concept : good for the
image of Europe in the world , but with little operational content
within the EU
2. Social models remain indeed national, and the drive towards the
Single Market and the single currency, has exacerbated competition
among them through regulatory arbitrage by transnational firms and
financial markets
3. the cause lies in the ‘institutional inconsistencies’ of economic
governance within the EU and yet more within the eurozone
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Institutional inconsistency stems from a skewed division of labour
between the EU and its MS (distribution of competences
dominated by a pro-market bias):
 Efficiency (growth) is mainly a matter for the EU through the single market,
competition and trade policies
 Stabilization ( trade off between inflation and unemployment) was initially
the responsibility of the MS; but for the eurozone the macro-economic policy
is split up between
 the ECB with regard to monetary policy
 the MS with regard to fiscal (budgetary ) policy , now under the severe
constraints of the SGP and the European Semester
 Equity through redistribution remains in the sphere of the MS: progressive
taxation, social security, equal opportunities
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but with a perverse omission : taxation
remains a matter of national sovereignty
and tax harmonization is limited to the
needs of the single market (indirect taxes)
and is still decided through unanimity
based on the myth of national tax
sovereignty ruined by mobility in a global
economy; Lisbon Treaty though allows for
a bypass: enhanced cooperation
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Tax competition has been corrosive in Europe :
contrary to expectations, it did not contain
expenditures (Bolkenstein) but brought about
 competition distortions among countries and
 an unfair sharing of the tax burden within countries
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What is the outcome of tax
competition ?
 free riders are poaching their partners ‘tax base through lower tax rates or
exemptions;
 free riders are all sorts of tax havens (from respectable ones to
‘uncooperative’ ones):
 within the EU
 tax territories on national ground (e.g.: Isle of Man)
 tax states: Liechtenstein , Monaco …
 every MS for the others :e.g. Ireland, Estonia…but also Belgium with
“notional interests”)
 outside Europe : the offshore places ( black holes for black money)
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What is the outcome of tax
competition ?
 Consequences
 race to the bottom on mobile factors taxation: e.g. corporate tax rate from 35 % to
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25% within EU-15; précompte libératoire on savings limited to 35% even for top
financial revenues;
a extraordinarily complex web of bilateral deals within EU and with third countries
(Switzerland) leads to evasion niches, red tape for overwhelmed and under
qualified taxation authorities and revenues leakages for the States (but this
benefits ‘special interests’ within each country ; this is also why Finance Ministers
display little zeal for tax harmonization)
effective tax rates for large firms (transnational) is half the SMB tax rate ( see CAC
40 firms in France and Bel 20 in Belgium)
large fortunes pay proportionately less than average and small ones
the tax burden has shifted from capital to labour, making the latter relatively
more expensive and thereby hindering jobs creation
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What is the perspective?
 a provisional stopgap : enhanced cooperation on
corporate tax base for the eurozone (arm twisting for
some countries)
 a real solution consistent with the level of integration
and with the emergency imposed by the crisis (public
deleveraging and jobs creation in a context of
sluggish growth) : the optimum taxation area
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What would be a European
optimum taxation area ?
 a huge economic block with a savings surplus , fully integrated
market-wise and monetary wise with converging collective
preferences on macroeconomic policies and the social model
such as the eurozone
 the Eurozone would be endowed with the full-fledged
armoury of a balanced and effective policy i.e. a triple
sovereignty: monetary, tax, and financial sovereignty
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What would be a European
optimum taxation area ?
 taxation power on mobile factors ( capital and transnational firms) would
be exercised by the federal level through co-decision and the product of
the tax distributed between a eurozone federal budget ( research, defense,
trans european infrastructures, and guarantee for eurobonds) and national
budgets ( according to Member States’ contribution to firms’ value added)
 tax territories would be forbidden within the whole EU-27
 capital flows with the rest of the world would remain free , but subject to
surveillance ( this would be the real benefit of a Tobin Tax with an
homeopathic rate : tracking under-taxed under-regulated flows with non
cooperative off shore places)
 making a G20 tax agreement would be an alibi and the threat of capital
flight is not a serious one ( size of the eurozone economy and huge
domestic savings)
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The battle for fair taxation in
Europe is a way to preserve
and modernize our social
model, at the European scale,
is a way to build-up a badly
needed European citizenship.
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