THE COST OF TAX HARMONIZATION

The Irish Independent reports about the Charlie McCreevy's resistance to tax harmonization revenue proposals enforced by the European Commission.

The real aggregate tax burden in the EU is very high, both in historical and contemporary perspective. Back in 1980s, German policymakers instituted a 60 percent corporate tax rate. In Sweden, the top individual income tax rate exceeded 90 percent in the early 1980s. After new member state joined the EU, the picture of European economic performance is rather lingering, marred by low output growth, high structural unemployment and high tax rates penalizing the productive behavior.

However, within the EU, there're few examples where competitive pro-growth economic and tax policy significantly helped to boost the economic performance resulted in sound parameters, such as income per capita and wealth created per head. For instance, Ireland set the corporate tax rate at 12,5 percent and has seen a significant inflow of foreign direct investment. Nevertheless, Ireland is now the second wealthiest country in Europe, after Luxembourg according to the GDP per capita. Ireland's tax-to-GDP ratio is 30,8 percent compared to EU27's 37,4 percent. Fiscal sovereignity, the basis that brought the clash of punitive tax rates on corporate and individual income, is the very fundamental source of international tax competition opposed to tax harmonization, where statutory tax rates are set on a cross-national basis.

The fact that the aggregate tax burden of the European economy would increase sharply if tax harmonization efforts were implemented is not the only threat in this respect. Sluggish growth, diminished economic performance of European economies and higher tax rates on productive behavior are certainly among the forefront implications of tax harmonization.

First, high tax burden and output increases are negatively correlated, which means that higher taxes penalize each additional unit of gross domestic product.

Second, the statement of EU's taxation commisioner Lazslo Kovacs that the aim of tax harmonization is to simplify tax collection and make it less costly, is false and does not hold the real arguments. In fact, the cross-national organization of revenue service would deepen the budgetary spending and make it temporary since hiring labor to match the demands of the European Commission regarding tax harmonization pressures would result in public-guaranteed wages outlayed without with almost no effects of gains of productivity.

And third, the proposal of the European Commission that tax collection is ought to be conducted on a Europe-wide basis is a flawed suggestion erasing the real impact of fiscal sovereignity regarding the enforcement of competitive tax rates on labor and capital income and further eliminating the fruits of tax competition associated with individual liberty and the question of privacy.

See also:
Martin Feldstein: Economic Problems of Ireland in Europe, NBER Working Paper No. 8264, May 2001 (link)