September 13, 2004, VILNIUS (Lithuania) – Harmonization of direct taxes in the European Union (EU) would prompt increased spending by governments of member states, while competitiveness of the EU economy and efforts to conduct immediate social and economic reforms would falter, say analysts from the Lithuanian Free Market Institute (LFMI), a leading think-tank in Lithuania, a new member state.
LFMI welcomes the fact that the meeting of ECOFIN has not come to the decision to harmonise taxes in the entire Union which would have imposed the will of the big EU member states on the countries of new Europe. Different opinions and heated debates give hope that EU’s position is likely to change in the future. Nevertheless, LFMI urges EU authorities to abandon attempts at harmonising taxes whatsoever and breaking up the European tax cartel.
Initiatives to harmonize corporate taxes, recently stepped up by some old member states, are adequate to calls for creating a cartel among EU governments, which would make life easer for national governments at the expense of European people. Undermined tax competition would markedly reduce incentives of EU governments to enhance performance of the public sector and to collect and allocate EU budget more effectively. For this reason, LFMI encourages governments of the EU member states to discard plans to harmonize direct taxes. Instead, governments should take measures to carry out social and economic reforms, which would lead to more favourable conditions to boosting people’s initiatives and economic growth.
The ongoing debates over the need to harmonize direct taxes across the EU indicate politicians’ stereotyped belief that tax competition is harmful. They maintain that – seeking to create a more favourable investment climate – national governments are forced to cut taxes below the optimal level which is indispensable to finance the public needs. Tax harmonization is also seen as a proper means to halt capital movement inside the EU.
LFMI says that the arguments for tax harmonisation are not farsighted. Harmonisation of direct taxes would certainly raise the tax level in the EU, and indeed would benefit the neighbouring non-member states with lower tax rates. This would surge the investment climate in the EU’ neighbours and, potentially, cause reallocation of capital from the EU to non-member states.
Proposals of the old member states somewhat run counter to the principle of solidarity, although it is one of the declared virtues of the EU. Even the displayed diplomacy does not hide the old Europe’s itch for shaking the competitiveness of the new member states. But, most regrettably, such proposals reveal a surprising poverty of virtues of these European democracies: instead of alleviating the tax burden for its citizens, some old EU member states attempt at forcing the remaining ones to increase the tax burden.
However, such attitude and decisions may turn around against the old European countries themselves. Taxes are not the only factor that might determine the investment climate. LFMI believes that currently the old EU countries should be more concerned about a faster wage growth in the new member states. This can be ensured only by a rapid economic development, however, tax harmonization would clearly choke it off.
It is also noticeable that some of the old EU member states that use the “card” of tax competition are simply trying to throw off the responsibility for the rampant public sector, a drastic increase in taxes, and a groundless surge of social benefits which undercut people’s incentives and retard structural reforms and changes in the public sector. These factors are the primary reasons why the EU economy is at a standstill and doesn’t grow at the same pace as it has been before.
LFMI thinks that hints about possible cutting of EU funds for the new member states that have low corporate taxes are not intimidating. Long-term benefits of the common market are more important than short term benefits gained from EU funds, which, inter alia, will also bring negative results for economies of the new member states.
The Lithuanian Free Market Institute (LFMI) is a private, non-profit and non-political organisation established in 1990 to advance the ideas of individual freedom and responsibility, free market and limited government. From the outset, LFMI has been at the forefront of free-market thought and economic reforms in Lithuania. The Institute’s team pursues its mission by conducting research on key issues of public policy, developing conceptual reform packages, drafting and evaluating legislative proposals, submitting policy recommendations at the legislative and executive levels, and conducting educational work in Lithuania. LFMI’s activities also include sociological surveys, publications, conferences, workshops, and lectures. Visit LFMI at http://www.freema.org/.