Tuesday, 13 February 2018

The European Federation

My time here in Luxembourg has raised awareness of the scale of tax evasion that is going on here. I've never considered it before, but according to the Financial Secrecy Index (FCI) developed by the Tax Justice Newtowk in 2013, Luxembourg is the second most used place for tax evasion, just behind Swizerland. Luxembourg is also the most common place of Finnish tax evasion which surprised me. Over 200 million euros of Finnish household savings are located here, not to mention different subsidiaries from well-known Finnish companies like Huhtamaki and SRV who were revealed as tax evaders in 2014 (LuxLeak).

After that I soon started to find information on why. Why here? The corporate tax rate here is 30 % and income taxes are not that low compared to other Middle-European countries. Again returning to my second blog-post about tax evasion, I started to think again that how tax evasion could be reduced? Despite several attempts, the OECD hasn't managed to end tax evasion for good in 10 years. Also tax-havens like Liechtenstein and Monaco have just simply refused to collaborate with the OECD to deal the problem.

As long as there exist differentiation in the taxation between countries in the Euro-are, there always (repeat: ALWAYS) exists some form of tax evasion from wealthy individuals and corporations. Would a solution be to remove this differentiation and for simplicity have common fiscal policy and common tax regulation in Europe. I would say yes.

In the map above you can see the general opinion towards the issue country by country. The European Federation has been an idea that politicians have been developing since the 15th Century. It was not long ago when Martin Schulz, the leader of the Social Democratic Party of Germany has been demanding that the European Federation would be established by the year 2025. This would even more tighten the European collaboration and increase stability in Europe.

When you look at it through economics, everything seems good on paper. But it would be a political nightmare.

A common tax system would increase transparency and presumably decrease tax evasion. This would bean more government revenue for government spending and transfer payments. At least in theory this should also increase the equality in the distribution of European income. Also criminal activities such as money laundering and other hidden economic activity would be easier to monitor and prevent.

The Federation would also introduce common guidelines for international trade. Everyone would play with the same rules and trade within the Eurozone could become even more transparent. On the other hand common guidelines for trade would in theory increase the willingness of the Federation into protectionism in trade to keep the large domestic industry going. This is what is already going on: The EU is currently fighting against China in the World Trade Organization for anti-dumping regulation.

The process could be started by first soothing out the VAT's and corporate tax rates in the EU. After that the price level and PPP would probably need some time to adjust before quick changes into income tax-scheme could be introduced. In the same time a common social security system should be developed.

You are probably seeing that arranging this would be a political nightmare in Brussels. 28 member states with 28 different cultures when it comes to decision-making, freedom, independence, equality, culture etc. It would just not going to work. Already we can see that things are going exactly to the opposite direction: Populism and anti-EU politics are on the rise. Just take a look at Brexit and Catalonia.

The European Federation would be the solution where the welfare and the stability of the European Union could improve for sure. But if we just want to ban tax evasion and increase welfare, other options exist as well. If we want to increase the European Cooperation and transparency between states, I would see that this is the only way. To answer the question on whether the European Federation would be a good idea, the politicians would need first to ask themselves that what do they want to achieve with the whole idea in the first place.

Text SW

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