It is a common assumption in the standard theory of customs unions that, by the elimination of tariffs and quotas, trade within an integrated area becomes free (but for the existence of the common external tariff). It is also assumed that foreign trade is fostered by relative differences in national production functions and resource endowments. This is merely an illusion. It is not only the tariff and quota systems that distort the free flow of trade, but fiscal impediments such as subsidies and taxes also create distortions. 1 The focus of the 1985 White Paper (European Communities, 1985) and the 1992 Programme was mostly on the elimination of frontier controls. After the creation of a genuine internal market in 1993 and steps towards EMU, light needs to be shed on tax harmonization in the EU. Should taxes be unified throughout the EU, or should they be set independently by each country and markets left to equilibrate trade flows and, supposedly, introduce approximation in taxes? Or should national preferences derived from a variety of geographical or social reasons be reflected in tax diversity among the EU countries?
This part of the book deals with the structure and harmonization of taxes, as well as the budget of the EU. It starts with fiscal-policy issues. Sections 3 and 4, respectively, present a discussion of direct and indirect taxes. An analysis of the EU budget is contained in section 5. At the end, the conclusion is that there is a great deal of room for improvement in the fiscal and budgetary integration in the EU.
The fiscal policy of a country deals with considerations regarding the demand, size, revenues and expenditure of the public sector. It influences both the provision and consumption of a range of goods and services. In addition, it affects the allocation of resources (efficiency), economic stabilization (reduction in the fluctuation of macroeconomic variables around desired, planned or possible levels) and equity in the distribution of the national wealth. Fiscal policy can also reflect strategic behaviour of national governments. By offering a preferential tax treatment to transnational corporations (TNCs), governments may change/improve their competitiveness in relation to other countries. Applied to an EMU, fiscal federalism (a supra-national fiscal authority) needs to take care of a certain transfer of resources from the prosperous countries/sectors to the needy ones, as well as to promote mobility of resources.