Toward a Common Tax Regime for the European Union Countries

By Liapis, Konstantinos; Rovolis, Antonios et al. | European Research Studies, July 2012 | Go to article overview

Toward a Common Tax Regime for the European Union Countries


Liapis, Konstantinos, Rovolis, Antonios, Galanos, Christos, European Research Studies


1. Introduction

According to the work of Peeters Bruno (2009,2010,2011), Schwarz Peter (2007), Smith Eric and Webb J. Tracy (2001), Munin Nellie, (2011), and Edouard-Jean Navez (2012), the tax system applied in a country has a serious impact on cross-country competiveness, something that, in turn, impinges strongly on the actual economy of common markets such as the European Union (EU) and the differences among tax regimes diversifies homogeneity (4). From the other hand the mobility of productive factors is directly related with country tax-regime differences, government budget funding from tax revenues and rates are the main fiscal policy tools.

We argue that there are significant differences among the tax regimes of EU countries and that no policy has been implemented to ensure tax homogeneity across the EU, nor is there any likelihood of such. The anarchy in fiscal policy is an obstacle for the European Integration. Budget deficits have an impact on taxation and countries, invariably, manage the recent debt crisis by selecting different taxes as fiscal policy tools.

Our article shows that the type and the level of economic growth affects the structure of taxes at work and alters the performance of different types of taxes; is also wishes to explain the factors that differentiate tax regimes by using multi dimensional criteria and thus contribute to the debate for a common tax regime between EU countries. It presents, also, the groups of EU counties with similar tax regimes and analyze the characteristics of structure among applied tax regimes and thus contribute to debate which type of tax regime is more suitable as a common tax regime.

According to Stuckler et al. (2010), taxing the rich is a policy based to increase taxes against the recent financial crisis and carries a considerable populist appeal (as many hold those involved with the bank system responsible for the crisis and believe they should pay its price, though this happened only in the case of Ireland and not in other PIIGS countries).

A key problem with the current debt crisis is public spending is increased less than decreased tax revenue. However, some commentators Wilkes, (2009) argue that taxing bonuses and high incomes may stifle incentives for entrepreneurship and innovation. Enforcing a more progressive tax system is politically challenging in light of the lobbying strength of the wealthy, but may most directly address the current debt crisis. While more progressive taxation is a less viable option in countries with already highly progressive systems, like Sweden, there is scope for raising revenues in the UK, Greece and other EU countries. In fact, the current governments of EU countries have adopted a quite different approach, increasing VAT--a regressive indirect tax whose burden falls disproportionately on the poor.

There are also some simple, albeit politically difficult, changes that would bring the corporate taxation in line with other countries, to yield very large sums for continued government spending. In many countries, like Ireland, the economic development policy is based on a low corporate tax and, thus, it is difficult for this tax to be in line for all EU countries. Increasing taxes on alcohol, tobacco and sugary drinks further could represent viable revenue-generating options, benefiting both health and the economy. In the short run, these options may disproportionately hurt the poor (although there are disputes about the net effect on their overall welfare), and Keynesian economists worry that such taxes will diminish aggregate demand and slow down recovery. Thus, in Roosevelt's New Deal, prohibition on alcohol was lifted not only because drinking was popular, but mainly because it would reinvigorate consumer spending and increase tax revenues. The health costs of this aspect of New Deal policy (and, in turn, subsequent downstream costs) were never assessed. Further limitations include the scope for tax evasion due to imports from other EU countries, as well as smuggling of goods such as cigarettes, an activity in which the tobacco industry has been complicit. …

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