An EU Tax – Overdue Reform or Federalist Fantasy?

1. New ideas for changing the status quo of financing the EU budget

Expenditure by the EU today is financed predominantly by direct contributions from Member States, rather than by taxes or other resources that accrue directly to the EU. This is despite the fact that the Treaty stipulates, in Article 311 TFEU, that the »budget shall be financed wholly from own resources«. Indeed, the trend over the last two decades has been for the share of national contributions to increase and, without any change in the mix resources, it is set to exceed 90 percent beyond the expiry in 2013 of the current Medium-term Financial Framework (MFF). Calls for genuine EU taxes to provide the bulk of the EU’s revenue have been frequently heard over the years and the completion of the mid-term review of the current MFF has again stimulated fresh debate on this matter. EU Budget Commissioner Janusz Lewandowski set the ball rolling in an interview in August 2010 in which he issued a cautious call for an EU tax, then the October 2010 Commission communication on the budget review reinforced the message, putting forward a number of options. National leaders from several Member States were quick to object and, although the European Parliament in particular has regularly advocated the introduction of an EU tax, the »power to tax« is one that neither governments nor national parliaments show much disposition to surrender. Although one of the ideas put forward by Commissioner Lewandowski, using a financial transactions tax (FTT) to fund the budget, struck a chord in some national capitals, it is clear that any attempt to introduce an EU tax will face a steep uphill battle.

2. Criteria for choosing a suitable EU funding instrument: a difficult task

Deciding how to raise the money to finance public expenditure is never easy. Potential resources have to be (and be seen to be) fair, have to avoid adverse economic effects and to fulfil a variety of administrative criteria, and there are political imperatives that have tobe respected. In the EU, the political dimension is often especially salient because of the delicate balances that have to be struck between national and EU-wide interests. In this regard, one of the most contentious issues is how much autonomy the EU level should have in public finance. At present, it has a significant say in shaping public expenditure, with the European Parliament having gained new powers in the Lisbon Treaty. By contrast decisions on EU resources remain firmly in the hands of the Member States through the Council. Inverting the well-known phrase, this model has been characterised as »representation without taxation«. Apart from autonomy, a whole array of other criteria warrant attention. Plainly, a vital one is that any new system should reliably fund EU expenditure, ensuring both stable and sufficient revenue. At the same time, the funding burden has to be fairly distributed. What constitutes fairness in public revenue raising is a difficult question. It implies that citizens in equivalent circumstances should be treated similarly (horizontal equity), and that the burden on different individuals should reflect their ability to pay, with the rich paying proportionally more of their income than the poor (vertical equity). In the EU, two further facets of fairness loom large: an equitable sharing of the burden among Member States and fairness in how the yield from particular taxes is appropriated by different jurisdictions. Some Member States complain, for example, that income generated by their citizens or companies may generate revenue for other countries because of favourable tax regimes. Both the Commission and the European Parliament argue for connecting how the EU is funded to the policies it pursues. The Parliament has also emphasised that the visibility and transparency of EU funding matters because the present system is too easily obfuscated in a way that encourages myths about the burdens imposed on Member States or citizens.

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Iain Begg

About Iain Begg

Iain Begg is a Professorial Research Fellow at the European Institute, London School of Economics and Political Science. His main research work is on the political economy of European integration and EU economic governance. He has directed and participated in a series of research projects on different facets of EU policy and his current projects include studies on the governance of EU economic and social policy, the EU’s Lisbon strategy, the social impact of globalisation and reform of the EU budget. Other recent research projects include work on policy co-ordination under EMU and cohesion policy.