The EU’s inter-institutional wrangling over the next seven-year spending plan is a bit like a married couple arguing about money – it’s not really about money. Instead, it is about control and power, reflected in their competing visions of EU integration.
Currently, the European Commission has plans to generate more tax revenue to finance the next Multiannual Financial Framework (MFF), the long-term budget that runs from 2028 to 2034. The almost €2 trillion proposal includes five ideas for revenue streams envisioned for to collect 58.2 billion euros every year; these so-callednew own resources‘ will introduce taxes on carbon imports and carbon emissions trading, e-waste, tobacco consumptionand corporate turnover.
But the truth is that without serious reforms, the EU is not ready for new taxes. Instead, the bloc should adjust existing fiscal levers.
On the surface, the MFF aims to balance income and expenditure. But basically, it’s a renewed exercise in stealth integration. The commission proposes new powers. Parliament demands more budgetary control. Member countries adhere to the powers defined in the treaties.
Commission President Ursula von der Leyen is backing these tax increases, saying it is time to “match Europe’s priorities with Europe’s means.
Like other proponents, von der Leyen claims that the EU needs more of its own taxes to avoid increasing capital contributions. While this makes sense to reduce conflict with EU countries, it has little economic justification. Simply changing who pays the tax in the EU says nothing about how the tax will affect growth, and therefore those advocating it have other motivations.
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According to the plan, the negotiations on “own resources” do not reflect a serious political debate, but rather a rough battle for EU power. With policy proposals structured to advance institutional positioning rather than economic growth, taxpayers are left with a reckless debate.
That’s because, essentially, all forms of taxation involve trade-offs: what you tax and how you tax it have a far-reaching impact. Some might hope that a government with such discretionary authority would have the best interest of the public in mind – but that doesn’t seem to be the case here.
Case in point: most economists agree that sales tax is an inefficient way to raise revenue and particularly harmful to economic growth. Yet that is exactly what is being considered under the Corporate Resources for Europe (CORE) proposal, an ugly tax that would require highly profitable businesses to pay an annual contribution to the lump sum. While it is one of the Commission’s top five ideas for a new source of revenue, and supported by Parliament, CORE is braided with economic design flaws.
Furthermore, the wider ‘own resources’ debate focuses on the policy framework and static revenue potential while ignoring the economic consequences that can come from poorly designed policies. This is why the marketing of policy ideas like CORE, windfall taxes and wealth taxes focus on revenue potential rather than explorative showing how these punitive measures drive people – and businesses – away.
Revenue maximization and pro-growth tax policy are not always the same. Policy makers need to consider not only how much income is coming in, but where it is coming from.
Unfortunately, none of this should surprise European taxpayers. For decades, the EU has created catchy nicknames for taxes to make them more legally enforceable, politically acceptable, or even to allow for different voting rules. Whether we call them taxes, solidarity contributions, corporate contributions or regulatory mechanisms, they all have economic effects on growth and investment decisions, just like any tax. Ignoring these economic realities breeds distrust in the EU’s ability to deliver a competitive economy and will only make it harder to create a true fiscal union over time.
If EU leaders want to deliver broad value to all EU citizens, then ‘own resources’ should be similarly designed as broad sources of income. Value added tax (VAT) ‘own source’ has contributed to a declining share of EU revenue over the years. This should be reversed. The own source of VAT is the strongest example of a shared revenue flow in member states that supports the work of the EU.
Instead, the focus is too often on narrow corporate taxes or behavioral taxes, where the aim is to have a shrinking tax base over time (eg plastic, tobacco or carbon taxation).
Well-designed tax systems are self-sustaining ecosystems; they give back to current and future generations by supporting economic growth and adequately funding spending commitments. Conversely, poorly designed tax systems do the opposite. They sacrifice growth for headlines on justice and taxes that directly distort markets.
To create a genuine fiscal union with tax powers at the EU level, the EU must first undergo institutional reform. Otherwise, the Commission’s ‘own resources’ proposals will continue to prioritize domestic power games over economic success.
Sean Bray is Director of Tax Policy at the Tax Foundation in Europe.
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