by Enrico Colombatto
An attempt by the European Commission to harmonise tax policy across all European Union countries could scare off business based in Europe. It could also deter entrepreneurs and long-term investment as Brussels bureaucrats crack down on international companies who look to benefit from the different tax regimes in various EU countries.
The European Commission has announced it will launch a new initiative with a view to harmonising corporate taxation and punishing multinational companies which take advantage of the national legislation to avoid taxes. The Brussels’ authorities have also published a new blacklist of tax havens.This report argues that the long-term goal of the European authorities is twofold. It aims to eliminate tax competition and strengthen the supervisory power of the European Commission. This is bad news for growth. Companies need to operate in a friendly institutional environment, rather than confront aggressive technocrats who sometimes rely on populist arguments to stop taxes being reduced. It will discourage entrepreneurship and long-term investment.
European authorities made headlines by announcing an all-out attack against multinational corporations which allegedly keep avoiding paying taxes to governments of EU-member countries.
The news appeared while negotiations on the Greek compromise were still underway and amid a constant flow of far from exciting figures about Europe’s economy.
The European Commission did not detail the actual measures implied by this new offensive but the goals are clear enough.
First, the European Commission is telling European citizens that multinational corporations are too powerful for a single government to tackle. It says that unless national governments delegate enough power to – and unite under – the EU’s institutions, multinational companies will be able to cheat and will contribute to Europe’s ongoing public-finance crisis.
Second, the European Commission has made a vociferous argument in favour of tax harmonisation to ensure that large producers are prevented from choosing the most favourable tax jurisdiction and violating the principle of fairness. This, according to the EU, means paying the maximum amount of tax and getting rid of tax competition.
Third, the image of the European Commission as a fair and all-mighty policeman has been promoted by publishing a new list of alleged tax havens which even the Organisation for Economic Cooperation and Development (OECD) has raised doubts about.
This list furthers the idea that virtuous Europe must unite against a set of common enemies – multinational companies and tax havens – and it evokes the possibility that countries which oppose the move towards tax harmonisation will be included in future blacklists and become subject to future sanctions.
Growth and jobs
So, are these renewed efforts to obtain tax harmonisation desirable? Will they succeed, and what implications do they have in the long term?
Implementing tax legislation requires unanimous approval by all EU-member countries, and some of them – including the UK – will be reluctant to give Brussels the green light.
Large multinational corporations are important for the UK’s economy, and even if these firms do not contribute much to the government budget in terms of corporate-tax revenues, they certainly contribute in terms of growth and jobs, both directly and indirectly.
They ensure, in particular, that the local producers have direct or indirect access to international markets, and often encourage more companies to settle and start new business.
A rise in corporate taxation may not scare away most large multinational corporations already operating in Europe, but it will probably affect their plans for the future. Large corporations have a choice about where to go in the world, especially as far as production is concerned.
The choice is certainly driven by the traditional variables economists usually mention, such as taxation, regulation, infrastructure, the cost of labour and the quality of human capital.
One should not underestimate the role played by a poor institutional environment, or simply ‘hostility’.
Would you work somewhere where you thought you were unwelcome, and where you are often considered the privileged target for populist legislation? Would you feel comfortable in a country which changed the rules of the game frequently after you have suffered significant settlement costs and where previously unforeseen events are an excuse to create tensions, rather than an opportunity for friendly cooperation?
The answer to these questions would probably be ‘no’ if there are alternatives. Multinational corporations act similarly, and they do have a choice. This is why the EU’s confrontational approach may not be the best idea to promote foreign investments and growth.
But if the EU authorities are ready to create tension and discourage investment for the sake of tax harmonisation, why is tax harmonisation so important for the Brussels’ authorities? Are the greater revenues which would follow from harmonisation worth the cost in terms of growth?
It is hard to believe that Brussels is truly convinced that the greater revenues generated by a tax-harmonisation policy can contribute significantly to shoring up the weak finances of a number of member countries.
It is doubtful too that the current policymaking priorities of the EU are a matter of fiscal revenues and quantitative easing.
Encouraging investments and promoting growth are far more important.
The truth is likely to be, regrettably, a mix of bad economics, hunger for power at the centre, and cowardice at the periphery.
Bad economics consists of the idea that monetary discipline can only be enforced if the central authority has fiscal powers. For example, it is believed that the current euro crisis can be solved, or at least alleviated, by financing some countries’ public debt by printing new money; and that if these countries were prevented from running future deficits, everything will be fine and growth will follow.
In this light, tax harmonisation would serve two purposes. It would ensure that taxes remain high throughout the entire EU by killing tax competition, and that fiscal discipline does not require drastic cuts in public spending.
Although harmonisation does not necessarily imply that Brussels would collect and spend the tax revenues directly, it probably means that large numbers of euro-technocrats will settle down in the appropriate ministries of member countries. Their job would consist of giving expert advice on how to legislate in compliance with the principle of harmonisation to ensure coordination with other member countries, and possibly spend those resources according to some euro-fairness principles.
In other words, past efforts to centralise fiscal matters in Brussels have failed. Although in the past the member countries did not object to transferring regulatory powers to Brussels, they have been rather jealous of their fiscal autonomy, and will not give in so easily.
A new approach will therefore materialise. The EU officials will probably go where the tax revenues are as the tax revenues cannot go to the EU.
Will this strategy work? Probably yes, as the recent experience of the European Central Bank demonstrates. ECB experts have already been attending board meetings of major commercial banks, despite their questionable right to do so. They have been cordially invited by the directors of the commercial banks themselves in order to save face. So something similar could be worked out with national fiscal administration.
A generalised tax-harmonisation project will probably fail once again, unless the financial situation of some key countries – including Germany and the UK – deteriorates dramatically and the local authorities are in desperate need of a bailout and are ready to give away fiscal sovereignty in exchange for ECB support.
However, harmonising corporate taxation will probably meet weaker resistance. This is not because it is fair or welfare improving, but rather – and regrettably – because the proposal is put forward in manifestly populist terms – as the reference to the new blacklist demonstrates – and because politicians underestimate the long-term consequences of economic regulation.
Europe will pay a price for these new attempts to strengthen the powers of the EU administration. There is a fine line between tax fairness and animosity against specific categories of producers. Europe needs to present an image of openness and fruitful cooperation to prospective entrepreneurs and investors, rather than an image of hostility.
EU institutions must be – and must be perceived as – partners to enhance entrepreneurship, not a threat. Enforced tax harmonisation driven from the centre goes in the opposite direction, and its accompanying new blacklist will hardly encourage low-tax countries to strengthen their economic cooperation with Brussels, possibly with political consequences as well.
Brussels in particular should not underestimate the role of Hong Kong, which could take the lead in distancing itself from the EU, and send ripples through the rest of China and beyond.
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