By Pierre Defraigne Honorary Director General at the European Commission

1. Brussels - September 20, 2011Brussels - September 20, 2011No Social Europe without tax harmonization By Pierre Defraigne Honorary Director General at the European Commission Executive Director of the Madariaga - College of Europe Foundation 1

2. 1. the European Social model is an elusive concept : good for the image of Europe in the world , but with little operational content within the EU 2. Social models remain indeed national, and the drive towards the Single Market and the single currency, has exacerbated competition among them through regulatory arbitrage by transnational firms and financial markets3. the cause lies in the ‘institutional inconsistencies’ of economic governance within the EU and yet more within the eurozone 2

3. Institutional inconsistency stems from a skewed division of labour between the EU and its MS (distribution of competences dominated by a pro-market bias): • Efficiency (growth) is mainly a matter for the EU through the single market, competition and trade policies • Stabilization ( trade off between inflation and unemployment) was initially the responsibility of the MS; but for the eurozone the macro-economic policy is split up between • the ECB with regard to monetary policy • the MS with regard to fiscal (budgetary ) policy , now under the severe constraints of the SGP and the European Semester • Equity through redistribution remains in the sphere of the MS: progressive taxation, social security, equal opportunities 3

4. but with a perverse omission : taxation remains a matter of national sovereignty and tax harmonization is limited to the needs of the single market (indirect taxes) and is still decided through unanimity based on the myth of national tax sovereignty ruined by mobility in a global economy; Lisbon Treaty though allows for a bypass: enhanced cooperation 4

5. Tax competition has been corrosive in Europe : contrary to expectations, it did not contain expenditures (Bolkenstein) but brought about • competition distortions among countries and • an unfair sharing of the tax burden within countries 5

6. What is the outcome of tax competition ? • free riders are poaching their partners ‘tax base through lower tax rates or exemptions; • free riders are all sorts of tax havens (from respectable ones to ‘uncooperative’ ones): • within the EU • tax territories on national ground (e.g.: Isle of Man) • tax states: Liechtenstein , Monaco … • every MS for the others :e.g. Ireland, Estonia…but also Belgium with “notional interests”) • outside Europe : the offshore places ( black holes for black money) 6

7. What is the outcome of tax competition ? • Consequences • race to the bottom on mobile factors taxation: e.g. corporate tax rate from 35 % to 25% within EU-15; précomptelibératoire on savings limited to 35% even for top financial revenues; • a extraordinarily complex web of bilateral deals within EU and with third countries (Switzerland) leads to evasion niches, red tape for overwhelmed and under qualified taxation authorities and revenues leakages for the States (but this benefits ‘special interests’ within each country ; this is also why Finance Ministers display little zeal for tax harmonization) • effective tax rates for large firms (transnational) is half the SMB tax rate ( see CAC 40 firms in France and Bel 20 in Belgium) • large fortunes pay proportionately less than average and small ones • the tax burden has shifted from capital to labour, making the latter relatively more expensive and thereby hindering jobs creation 7

8. What is the perspective? a provisional stopgap : enhanced cooperation on corporate tax base for the eurozone (arm twisting for some countries) a real solution consistent with the level of integration and with the emergency imposed by the crisis (public deleveraging and jobs creation in a context of sluggish growth) : the optimum taxation area 8

9. What would be a European optimum taxation area ? a huge economic block with a savings surplus , fully integrated market-wise and monetary wise with converging collective preferences on macroeconomic policies and the social model such as the eurozone the Eurozone would be endowed with the full-fledged armoury of a balanced and effective policy i.e. a triple sovereignty: monetary, tax, and financial sovereignty 9

10. What would be a European optimum taxation area ? taxation power on mobile factors ( capital and transnational firms) would be exercised by the federal level through co-decision and the product of the tax distributed between a eurozone federal budget ( research, defense, trans european infrastructures, and guarantee for eurobonds) and national budgets ( according to Member States’ contribution to firms’ value added) tax territories would be forbidden within the whole EU-27 capital flows with the rest of the world would remain free , but subject to surveillance ( this would be the real benefit of a Tobin Tax with an homeopathic rate : tracking under-taxed under-regulated flows with non cooperative off shore places) making a G20 tax agreement would be an alibi and the threat of capital flight is not a serious one ( size of the eurozone economy and huge domestic savings) 10

11. The battle for fair taxation in Europe is a way to preserve and modernize our social model, at the European scale, is a way to build-up a badly needed European citizenship. 11