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Corporate tax has fallen dramatically (tens of percent) in most countries. In addition, large multinational companies engage in aggressive tax planning, which further reduces tax revenues by at least a hundred billion euros a year in the EU. The EU has not been of any assistance in overcoming the tax war between member states. If anything, the tax “competition” has been more severe in Europe than elsewhere or globally. At the same time the EU itself is in a legitimation crisis and its disintegration threatens to continue. The EU would need full fiscal capacity and proper fiscal policies in order to improve economic developments and make a real and positive difference to the lives of its citizens. A common European corporate tax could be an opportunity to hit two birds with one stone.
The S&D group organized a workshop on these issues in the European Parliament on 7 March 2017 (my powerpoint-presentation can be found here and some photos here). Following the workshop, I was asked to provide 4-5 concrete scenarios on how the Commission’s 2015 proposal for a Common Consolidated Corporate Tax Base (CCCTB) could be improved and contribute to the EU budget as an ‘own resource’.
Before proceeding to the scenarios, a few words of explanation. The proposed CCCTB would largely abolish corporate tax planning in Europe by creating a single set of rules for how EU corporations calculate their EU taxes. The location of capital, labour and sales would determine objectively where corporations pay their taxes. On the other hand, corporate tax rates in the EU would not be changed by the CCCTB. The member states would continue to have their own corporate tax rates.
These limitations notwithstanding, even attempts at tax harmonization are often seen by the member states as efforts to limit their ‘fiscal sovereignty’. Thus also the CCCTB has turned out to be politically too ambitious. This has led to the idea that the CCCTB should be a two-stage process – first only a CCTB should be created. In other words, although there would be an agreed definition of what would be taxed, no “consolidation” would take place. What this means in practice is that a lot of tax planning would still be occurring in the absence of an objective basis to determine where corporations should pay their taxes.
These discussions and struggles are taking place in a world-historical context where strong disintegrative tendencies are at play both in Europe and worldwide. The disintegrative tendencies are related to growing uncertainty and disparities between social classes and geo-economic regions in the world. The trends that we have been seeing – of which the declining corporate tax rate is indicative – may be difficult to reverse. For instance, Thomas Piketty argues that “we can now see [world wars] as the only forces since the Industrial Revolution powerful enough to reduce inequality” (for a discussion see here). Do we really want to repeat the tragedies of the past – in Europe or globally? New solutions are required both in the EU and in our globalizing world more generally, and a key question is: how to tax corporations, capital and wealth?
Moreover, the sustainability of the Union requires, in all likelihood, full fiscal capacities. Without them, it is difficult to do anything significant to prevent the disintegrative tendencies from gaining more strength in Europe. Commission’s recent White Paper on the future of Europe is useless. Its scenarios promise nothing but standstill, further disintegration or more of the same. Even DiEM25, the pan-European movement initiated by Yanis Varoufakis and others, “does not contest the proposition that perhaps Europe is past the point of no return” (see the summary of the European New Deal). My scenarios 2-4 below develop a couple of ideas about how it might be possible to overcome this impasse.
Scenario 1: C(C)CTB replacing current ‘own resources’
As is already happening, CCCTB is justified because it largely abolishes corporate tax evasion within the EU and thus increases member states’ tax revenues. However, CCCTB is difficult to achieve under current political circumstances. The first-phase CCTB has similar but much less significant positive effects. The allocation of a slide of corporate tax revenues to EU’s ‘own resources’ is rationalized because a common European system alleviates the unsustainability of the current system of taxation. Rising tax revenues is assumed to give legitimacy to the common EU budget. Nonetheless, this would fall short of increasing the EU budget or creating European fiscal ‘sovereignty’ – and contributions would still be coming from the member states.
Scenario 2: Enhanced cooperation to create CCCTB with some of the revenues channeled to a common fund or euro-area budget
The enhanced cooperation procedure enables a coalition of the willing to create such a system and make it more ambitious than a mere CCCTB. Thus the participating states agree on a common minimum tax rate – say 30% – which is substantially higher than the average corporate tax rate in the EU in 2017. They treat a part of the revenues as a common European tax. They channel this common part to a specific European fund and/or create, in effect, a euro-are budget. The money is meant for common European purposes such as public investments and social benefits for the EU citizens (e.g. through an unemployment benefit scheme with genuine redistributive effects). This system creates a moral dilemma for the outsiders: they benefit both from (i) the increased common budget and (ii) tax war against other EU-members, the latter now being plain for all to see.
Bearing in mind the slogan of the American Revolution, according to which there should be “no taxation without representation”, the governing body of the fund is organized democratically by involving representatives from civil society, national parliaments and member states’ government; or alternatively the euro-area budget is tied to a euro-area parliamentary assembly drawn from the European Parliament. This further strengthens the idea of a common good.
Scenario 3: ESM-style special arrangement outside EU law with some of the revenues channeled to a common fund or euro-area budget
Developments as in scenario 2, but in this scenario the common system is created outside EU law. The legal model provided by the European Stability Mechanism is not particularly good from the point of view of rule-of-law and democracy, but it does have two benefits. The first is that in case of blocks and obstacles emerging within the EU system against using the common part of the revenues for union-wide purposes, a special arrangement created outside the EU law will have more degree of freedom to operate. The second is that such a system could be geo-politically wider than the EU. The tax evasion problem does not stop at the borders of the EU. Ultimately a global solution is needed.
Scenario 4: Developing full fiscal capacity for the Union, involving CCCTB, common minimum corporate tax rate and a European capital or wealth tax
Recent macrohistoric experience is widely taken to indicate that (post)Keynesians have been right all along about the unsustainability of the current EU institutional arrangements. Capitalist market economy is unstable, including in such ways that processes of uneven growth and growing inequalities tend to be self-reinforcing. Complex capitalist market economy cannot function without a common state and its active fiscal policies. Thus developments through scenarios 2 or 3 are explicitly meant to ground Treaty revision, creating full fiscal capacities for the EU. A CCCTB with a common minimum tax rate is coupled with an attempt to create first a European and then a global capital or wealth tax. At the same time actors conclude that it is time to question many of the wisdoms of the neoliberal era. For instance, has it really been a good idea to broaden the corporate tax base (also to compensate for lower levels), if the result is a decline in real investments and rise in inequalities? Thus a new corporate tax regime encouraging investments and discouraging share dividends is developed.