Wednesday, March 20, 2013

Allowing EU parliament to set and collect taxes would strengthen democracy

Despite its many laudable achievements, EU is moving from one crisis to another. Currently, a fight is continuing over the federal budget. In many ways it looks like a true democracy in action—there are only a limited number of democracies that are able to pass such a bill without complex and costly negotiations. Unfortunately, another side of story looks less normal. The main issues cannot be solved between political forces inside of the structure (i.e. EU) itself but between EU central structures and the member states. In particular, the countries re-negotiated the budget which was already passed by the EU parliament. I have several concerns about such a process.

First, it is not exactly enhancing European democracy. EU is often accused of suffering from a democracy deficit as most of the important decisions are done by bodies that are not directly accountable to the public. Here we observe an example where a decision by the only directly elected political body in EU must be approved by the Council (governments of member states), a body which is not elected.

Second, the version of the budget, approved by the member states, is smaller. I am not arguing for a big government here, but many weaknesses in Europe today are related to too little federal decision-making. The examples include common foreign and defense policy, immigration policy, ESM and Eurozone banking regulations, and areas such as cellular networks, pensions systems, education systems, etc, which suffer from little coordination and too many incompatible regulations. These are areas where more centralized decision-making has a potential to offer substantial efficiency gains even in the medium run, including lower member-state budgets.

Third, reacting to financial crises, like the bailouts of Greece and Cyprus, proceed in a slow and inflexible way because the consensus of all member states is needed. Such decisions should be made by a central EU body (and potentially approved by EP). That would lead to a lot faster decision-making. However, EU can decide over money only if it is able to collect it.

The only feasible long-run solution I can envision is to introduce real federal taxes (currently, only custom tariffs are determined by EU). By federal taxes I mean taxes levied not to member states but to individuals and businesses across the EU. These should be based on income, value-added or wealth, exactly as most of the
current taxes. In this way the EU would be more a project of "individuals" and less that of the "countries". Obviously, if we want to avoid tax hikes, the member states should lower their contributions accordingly.

EU net budget 2007-2013 per capita
Currently, most of the EU budget is payed by the member states. Dark red states pay the most and the blue ones receive the most of EU money per capita. Europe should move toward more direct taxes, levied directly to individuals and businesses, instead of member states.

I agree this would constitute a major step toward the European Federation. I do not think this will happen soon. But certain steps might be feasible already now. For instance, we could start harmonizing tax concepts—not even rates, but the understanding what exactly constitutes the tax base and how to measure it. In order to introduce common taxes on income or value added, we first have to agree on how these concepts are defined. One might also want to unify tax exemptions, a major reason why tax systems are so hard to understand.

Time to move?