The Wilder View

Euro Area Budget? More on Tax Rates

Megan Greene comments on the leaked plan for a common eurozone budget via Herman Van Rompuy’s draft proposal. Specifically, Megan outlines key reasons why she thinks we shouldn’t ‘hold our breath’ on a common EZ budget anytime soon (a .pdf link to the proposal via Peter Spiegel at the FT).

Her points are well taken. I look at this draft proposal and wonder how can they credibly attack any of these issues in detail at the 18-19 October Summit. I digress and expand on Megan’s statement:

The German government has signaled support for rerouting taxes (including corporate and value added tax) to Brussels. How will the German (and Dutch, Austrian, and Finnish) electorate feel about this when they are paying higher taxes that are then redistributed not only to basket cases like Greece but also to Ireland, which benefits hugely from a low corporate tax rate?

There are two additional points worth noting. First, of the 15-odd euro area countries that are listed in the OECD tax database, Ireland has the lowest corporate tax rate in 2012. However, as regards the 2011 cross-country VAT tax rates, the Irish rate ranks the 5th highest.

Exhibit 1: 2012 Corporate Income Tax Rates

Exhibit 2: 2011 VAT Rates

Normalizing taxes across national borders will be a difficult task. One would need to establish a ‘federal rate’, thereby allowing the 17 municipalities (countries) flexibility to set their own policies but with bound budgets (i.e., no support for local, or municipal budgets).

This brings me to my next point. To my knowledge, it’s not clear whether Rompuy is proposing a pan-euro taxing authority or simply subsidizing the budget with national contributions. This makes a difference. A pan-euro taxing structure would be much more opaque, whereas national contributions would be more widely televised. I suspect that the issue of redistribution of tax payments from core to periphery economies (see Megan’s point above) would be less meaningful if the budget was funded via a federal tax net rather than national contributions.

Have a wonderful weekend! Rebecca Wilder

4 Responses to “Euro Area Budget? More on Tax Rates”

barfOctober 6th, 2012 at 5:19 pm

it says "sort by date, rating" and "last activity." which do you prefer? or is it simply "all of the above"? anywho my name is "barf" and i'm a dog…(arf! arf!) and i'm sniffing a euro-stinker in this piece. upon what basis will there be a euro wide IRS? Obviously we know the consequences in the USA…they go by the name "God" and are an integral part of the President's health care bill. (they collect the tax.) while it is hard to call the IRS constitutional in any way…thus offering hope for a euro-wide equivalent i might add…it's hard to argue given the scope and scale of the debt and deficit issues the fact that the IRS was created can now be considered a success. Wouldn't the European Sovereigns look at this issue the same way? Arf! Arf!

Patrick_VBOctober 8th, 2012 at 8:30 am

Hi Rebecca, My guess is that the mode of financing would stay the same, but applied to another configuration of EU member states (the euro area). The EU budget is financed by national contributions, which are computed on the basis of import duties, the (capped) VAT tax base and GDP (in fact, GNI). I suppose a similar "contibution key" would be found to finance a new "Euro Area Multi-annual Financial Framework", with a corresponding reduction in the EU's overall budget.

EvolutionWritersJuly 21st, 2013 at 10:20 pm

While I agree that austerity does not contradict growth, I don't think raising taxes on consumers is the solution. Euro crisis occurs because of the structural problems in their economy, rigid labor market, excess social benefit that destroys initiatives, large governmental bodies, etc. Tightening the belt on its own would most likely to send the economy into a downward spiral.

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