Neumark vindicated: the three patterns of Europeanisation of national tax systems and the future of the social and democraticRechtsstaat

doi:10.1017/CBO9781316227510.005

4 Neumark vindicated: the three patterns of Europeanisation of national tax systems and the future of the social and democratic Rechtsstaat

To Juanma Barquero: Thou shouldst be living at this hour.

Conversely, however, the cause of European integration would be retarded if monetary integration were to be pursued but the attempt were to fail. The potential dangers of monetary integration stem from the loss of power of altering the national exchange rate; such a loss could threaten the more stable countries with excessive inflation and/or the more inflationary countries with a loss of prosperity that would be the more intractable because it would be manifest as a regional problem rather than a balance of payments problem. This danger is particularly acute in the European context because different national traditions and institutions could give rise to inconsistent trends in unit costs in different national ‘regions’. This development would be so disastrous, if released, that it would inevitably lead to the destruction of monetary union.

Altiero Spinelli, The European Adventure

The whole legal establishment of the office of the judge advocate was magnificent. Every state on the brink of total, political, economic and moral collapse has an establishment like this.

Jaroslav Hašek, The Good Soldier Švejk

Introduction

This chapter aims at tackling two closely related questions:

What role did the set of European norms governing national tax laws play in the gathering of the European crises?
What changes should be made into the European framework of taxation to overcome the crises?

The first question tends not to be posed because taxation is regularly depicted as one of the last trenches behind which national sovereigns resist the incoming European tide (but see Genschel and Jachtenfuchs Reference Genschel and Jachtenfuchs2010; Menéndez Reference Menéndez and Eriksen2005; a comparative perspective on transformation of tax systems in Steinmo Reference Steinmo1993). This assumption is simply wrong. National tax systems have in fact been deeply and thoroughly Europeanised since the very moment the European Communities were established (Section I). The persistent myth of the untrammelled national sovereign is largely the result of an optical illusion. Resulting from the (wrong) reduction of the power to tax to the power to collect taxes (when the power of shaping these taxes at the constitutional and legislative levels is also a key part of that power) and from the belief that the abandonment of the original pattern of Europeanisation of national tax systems in the early 1980s. Actually, as I show in Section II, the end of harmonisation was not the end of the Europeanisation of national tax systems; on the contrary, Europeanisation became deeper and faster, only it proceeded by very different means. National taxes were homogenised by the pressure exerted by economic actors making use of their revamped economic freedoms to challenge, one after the other, national tax laws that were said to create obstacles to the exercise of economic freedoms. This shift fostered the financial, fiscal and macroeconomic weaknesses that became open crises in 2007.

The present European crises and the way in which they have been governed have resulted in the radicalisation of the pattern of Europeanisation of national tax laws. The absorption by exchequers of massive amounts of financial risks (a good deal of which were the direct result of asymmetric monetary union) has made many member states of the Eurozone indebted states. These states have been required by European Union law to place their tax systems at the service of repaying principal and interests of massive piles of debts, so as to protect the interests of creditors, even if at the cost of abandoning the constitutional commitments of the social and democratic Rechtsstaat.

In Sections III and IV I argue that if integration through fiscal consolidation gets entrenched, Europeans will be forced to choose between this form of European integration and the social and democratic Rechtsstaat. This is why we need a very different Europe, and indeed a very different tax Europe. In particular, we do not need more Europe, i.e., the transferring of tax collecting powers to the European Union, but a radically different Europe, i.e., a Europe that becomes (again) the servant of the social and democratic Rechtsstaat by means of rescuing the capacity of member states to make autonomous and democratic use of their tax powers.

I The original tax paradigm of European integration: integration through tax harmonisation

Establishing ‘an internal market in the form of a common market’ (Art. 2 TEC) implied redrawing and redefining economic borders. Taxes were (and remain) a fundamental instrument in the creation of economic borders. Consequently, European integration could not but entail the transformation of national tax systems.

The national constitutions which authorised and mandated European integration as well as the founding Treaties (which should be interpreted in the light of the former, Fossum and Menéndez Reference Fossum and Menéndez2011) required tax integration aimed at the simultaneous realisation of three goals.

First, national tax systems had to be made integration friendly. Economic borders had to be made porous to the goods and economic actors from all member states. This involved four main things:

Substituting national by European customs duties, or, what is the same, removing customs duties inside the Communities, enacting a European customs code and transferring the power to collect duties at the external borders of the Communities to the supranational level (Art. 3(a) and 3(9) EC).
Redesigning national consumption taxes – including turnover taxes and excise duties (Art. 99 EC in light of Art. 95 EC) so that they would not become customs duties by other means; this required assigning the power of legislative design of consumption taxes to the Communities (Art. 99 EC).
Harmonising other tax figures when that would be required in view of the stage of economic integration reached (Art. 100 EC).
Coordinating the use of taxes as macroeconomic levers (Arts 103 and 105 EC).

Secondly, the Europeanisation of national tax systems should shelter, not undermine, the social and democratic tax state. If post-war constitutions mandated integration, this was not for the sake of integration itself, but as a means to realise the normative ideals of the social and democratic Rechtsstaat. The tax system was expected to discharge three functions, closely related to each of the pillars of the social and democratic Rechtsstaat (Musgrave et al. Reference Musgrave1945; Musgrave Reference Musgrave1959; Neumark Reference Neumark1974; Barquero Estevan Reference Barquero Estevan2002). The Rechtsstaat ideal required the provision of revenue with which to pay for public goods and services. A key operationalisation of the democratic state was the use of taxes as macroeconomic pulls and levers with which to steer the economy, so as to ensure that the democratically forged will was effectively implemented and not hampered by the structural power of market actors.Footnote ¹ Finally, the social state required that the kind of taxes to be collected and the pattern of distribution of the tax burden not only generated revenue with which to fund public goods and services (aimed at ensuring material, and not only formal, equality) but at the same time taxes contributed to the redistribution of income, so as to keep inequality in check.

This required in particular that:

The harmonisation of national taxes (and even more so the assignment of tax collecting powers to the European Communities) had to be the result of political decisions with strong democratic legitimacy. Thus the requirement of unanimous agreement within the Council (Art. 100 EC) and of a quasi-constitutional decision to assign tax collecting powers to the Communities (Art. 201 EC in finem).
The autonomy of national tax legislators should be preserved (Von der Groeben Reference Von der Groeben1968). The design of the tax system, the tax mix (the different taxes to be collected), the design of each tax, the objectives to be realised through each tax were questions that had to be tackled in a highly contextual fashion. The socio-economic and political context, but also the history and culture of each country had a role to play (European Commission 1962: 98–100). This was clearly established in 1953 when the High Authority affirmed that restitution of turnover taxes at the border did not constitute price discrimination (European Commission 1953: 109), but actually was necessary to ensure that member states remained capable of determining the level of turnover taxation to be applied in their territory (Haas Reference Haas1958: 60 et seq.; Regul Reference Regul1966: 88–97). The reconciliation of integration and national tax autonomy was also reflected in the understanding of free movement of goods and the other economic freedoms as operationalisations of the right to non-discrimination on the basis of nationality. The goal of creating a common market did not by itself predetermine the substantive content of national regulations, very especially those aimed at realising socio-economic goals, but only that nationals and goods from other member states would be treated as nationals were treated.
The use of national taxes as macroeconomic levers should be coordinated; indeed, the further integration proceeded, the stronger was the case for coordination, as the effects of national steering policies would likely be felt in the common market as a whole, not only within single states.

Thirdly, an autonomous supranational power to tax should be developed. In the short and mid runs, the Communities needed a minimum set of tax collecting powers to fund the running costs of the Communities (Art. 172 ECSC and Art. 201 EC). In the mid and long runs, the size of the supranational tax collecting powers had to be proportional to the policies and tasks of the Communities (Art. 201 EC, analogically). Explicit mention was made to financial assistance to member states experiencing a balance of payments crisis (Art. 108(2) EC).

The constitutional philosophy of integration through tax harmonisation was perhaps most clearly articulated in the Neumark Report of 1962. The report was penned by leading public finance experts, both European and non-European (for a collection of related papers, see Shoup Reference Shoup1967). Its chairman Fritz Neumark cut a remarkable figure. He was born and educated in the turbulent interwar Germany. He was then forced into exile in Turkey from 1933 to 1952, to return then to Frankfurt and become the doyen of German and indeed European public finance (Fuentes Quintana Reference Fuentes Quintana and Neumark1970). Extremely well read in the (then leading) US public finance literature, deeply knowledgeable about the post-war transformation of European national tax systems, active participant in the recasting of the tax system of Turkey (Andic and Andic Reference Andic and Andic1981; Andic and Reisman Reference Andic and Reisman2007), Neumark exerted a decisive influence in the Committee, and contributed to the normative articulation of the implications of the social and democratic tax state for European integration (compare European Commission 1962 with European Commission 1967).

Significant pieces of harmonising legislation were passed in the first two decades of the common market. A common customs code was in force by 1 July 1968.Footnote ² The key principles of a common system of turnover taxation, in particular of Value Added Taxation (VAT) were agreed upon in 1967Footnote ³ (as we will see, the VAT tax base would be further harmonised in 1977). The Directive concerning indirect taxes on the raising of capital was approved in 1969.Footnote ⁴ Despite the spectacular clash in 1965 between the Commission and the French Republic over the assignment of tax collecting powers to the Communities to fund the common agricultural policy (European Commission 1965), a modest set of tax collecting powers were transferred to the Communities in 1970 on the understanding that they would make the Communities financially autonomous.

At the same time, the Court of Justice played a relevant but thoroughly supporting role. The Court acted as enforcer of the Treaty provisions that established the concrete tax steps to be taken to create the common market, including standstill clauses on customs dutiesFootnote ⁵ and, crucially, the provision prohibiting the introduction of measures equivalent to quantitative restrictions.Footnote ⁶ From 1968, the Court started to review the validity of national tax norms by reference to the now directly effective right to free movement of goods.Footnote ⁷ The Court was keen to go beyond a formal analysis of the way in which national legislators taxed goods, and engage in an analysis of whether formal equality cloaked discrimination in material, economic terms.Footnote ⁸ However, the Luxembourg judges restrained themselves from both reviewing the validity of tax norms that had not been yet harmonised (thus staying clear of all personal taxes) and from quashing national tax norms that affected the exercise of economic freedoms but did not discriminate against economic actors or goods from other member states.

This slow and politically mediated process of harmonisation of taxes was clearly compatible with the consolidation of the social and democratic Rechtsstaat, and, in particular, of the welfare state. While both public spending and taxation were largely stable in relative terms (the latter despite the programmed decline of customs duties, eliminated for intra-EC trade, and lowered for international trade, see Table 4.1), sustained and high economic growth meant a steady increase in actual resources. And indeed the weight of social expenditure over total public expenditure tended to grow in a context of very low unemployment (Table 4.2).

Table 4.1 Tax revenue, 1965–1971, European Communities

	1965	1968	1971
Germany	31.6	32.2	32.0
France	33.6	33.8	33.1
Belgium	30.6	34.2	34.4
Netherlands	30.9	33.8	34.9
Italy	24.7	26.1	25.5
Luxembourg	26.4	25.9	24.4

Source: OECD.

Table 4.2 Social spending, selected European countries

	1950	1954	1958	1962	1966	1970	1974	1978
Germany	16.63	17.18	20.51	20.70	22.49	23.55	28.67	30.89
Belgium	12.57	13.55	15.90	19.27	22.55	25.10	28.70	37.27
Italy	9.39	12.23	15.25	17.36	20.17	21.11	23.53	26.54
Spain	4.07	3.18	3.90	3.98	5.06	9.98	12.05	16.68
Portugal	3.21	3.78	4.33	4.67	4.79	6.08	8.60	11.90

Source: Espuelas 2012.

Parallel to the supranationally induced harmonisation (as was the case with consumption taxes), there were signs of a process of slow convergence of national tax systems (through what now may be fashionable to refer as a process of mutual learning). The key four (personal income tax, corporate income tax, social security contributions, general consumption taxes) became even more so the pillars of national tax systems. Idiosyncratic tax formulae (as the Belgian personal tax applied to both corporations and physical persons) tended to be repealed. And, by the late 1960s, a new German government was experimenting with a modest set of tax measures to steer the economy (Leaman Reference Leaman1998). All this goes some way to account for the fact that when the newly democratised Greece, Spain and Portugal had to think about what shape to give to their tax systems, the template to be found in the Neumark report was the obvious one to consider.Footnote ⁹

II From integration through tax harmonisation to integration through the removal of tax obstacles

The monetary and economic crises that hit Europe in the early 1970s pushed the process of European integration off balance. Economic integration had proceeded quite a long way, but national socio-economic structures were still rather different. Consequently, the crises had different impacts in different member states. Moreover, the Communities lacked sufficient institutional, structural and financial means with which to give a coordinated response to the crises. So the very different impact of the crises was further compounded by the uncoordinated national policies applied to contain and overcome them (Scharpf Reference Scharpf1991). Under such conditions, it was only a matter of time before the background conditions that had made it possible to reconcile integration with the consolidation of the social and democratic Rechtsstaat would start to deteriorate. By the end of the 1970s, it would be the very socio-economic consensus around the social and democratic Rechtsstaat that will be seriously challenged. Ordoliberal ideas were ascendant in Germany, and the apparent success of the Bundesbank in the fight against inflation was seen by many as turning the German socio-economic constitution (as understood by ordoliberals) into a model (Leaman Reference Leaman2000). Even more decisively, the British socio-economic constitution underwent a radical mutation after the electoral victory of Thatcher in 1979 (Gamble Reference Gamble1988; Fry Reference Fry2008; but see Rogers Reference Rogers2013). Neo-liberalism had come to stay.

It was against this background that a fundamental shift in the means and goals of integration came to happen. The very fact that integration was politically mediated (and decisions subject consequently to unanimous consent within the Council of Ministers and the European Council) came to be seen as a key part of the problem. This created the conditions under which the DG Common Market persuaded the ECJ that it was time a new understanding of free movement of goods was endorsed (Grin Reference Grin2004). In Cassis de Dijon the ECJ widened quite drastically the bite of free movement of goods by establishing that it will be ready to quash national laws that placed obstacles to the exercise of that freedom, even if those obstacles were not discriminatory.Footnote ¹⁰ This was interpreted by the Commission as opening up a new path of integration alternative to that mediated by politics, i.e., integration through mutual recognition of national legal standards (European Commission 1980).Footnote ¹¹ On the face of it, this seemed a radically pluralistic option. As a matter of fact, mutual recognition implied empowering economic actors to foster the homogenisation of national laws by means of challenging their validity on the basis of their economic freedoms. This new approach, with its sharpest corners somehow cut, underpinned the policy programme of the European Commission from the mid-1980s (European Commission 1985). The goal of establishing an internal market was no longer defined by reference to the regulatory ideal of the common market, but by reference to that of the single market. And still, l'Europe par le marché was conceived as a ‘neutral’ goal which could be appealing to otherwise increasingly antagonistic socio-economic visions (Jabko Reference Jabko2009; Van Apeldoorn, Reference Van Apeldoorn2002). This paradigmatic shift in the goals and vision of European integration led to a transformation of the European framework governing national tax laws.

No more tax harmonisation

1970s: tax harmonisation stalls

During the 1970s, the élan of integration through tax harmonisation was still strong enough so as to lead to the approbation of some important pieces of legislation. First, a much tighter common definition of the tax base of VAT was introduced in 1977, making it possible to make a fraction of VAT a European tax from 1979.Footnote ¹² Secondly, the institutional and economic means to provide financial assistance to countries experiencing balance of payments problems were created.Footnote ¹³ Italy (in 1974) and Italy and Ireland (in 1976) were recipients of that assistance. Thirdly, member states agreed to introduce changes in their national tax legislation so as to make it technically possible to coordinate tax increases or decreases as a means of coordinated macroeconomic steering.Footnote ¹⁴ Fourthly, arrangements to exchange data between national tax administrations were put in place in 1977, as a means of counteracting the growing extent to which the most mobile forms of capital income and wealth were disappearing from the radar of national tax authorities.Footnote ¹⁵ Fifthly, mechanisms of assistance in the cross-border collection of taxes were created.Footnote ¹⁶

Still, with the single exception of the VAT directive, these decisions either did not have a lasting impact or remained simply without any real effect. Moreover, many other tax proposals gathered dust. Including, in particular, Commission proposals concerning the harmonisation of corporate income taxation, which failed to be seriously considered by the Council of Ministers.Footnote ¹⁷

1980s: tax harmonisation is abandoned for good

The systematic failure to broker the required unanimous agreement in the Council, coupled with growing divergence of views about the point of European tax norms, led to the Commission renouncing the ambition of enacting a comprehensive set of European laws ensuring the harmonious interaction of national tax laws.Footnote ¹⁸

Indeed, the choice for the single market led to a radical new understanding of the relationship between integration and the power to tax. The Commission came to expect that the convergence of national tax systems would not be the result of political agreements, but of the unilateral adaptation of national laws to the dynamics of market integration. This new approach would come to be labelled in the mid-1980s ‘tax coordination’ or ‘tax cooperation’ (European Commission 1997a). This was to a large extent the tax equivalent of the single market.

Although regulations and directives were still needed, the Commission will now put forward minimalistic proposals, tackling rather narrowly the tax distortions unlikely to be wiped out by ‘market-led’ integration. This was the spirit in which the Parent Subsidiary DirectiveFootnote ¹⁹ and the Merger DirectiveFootnote ²⁰ proposals (finally approved in 1990) were drafted. And this was the vision underlying the Ruding report on corporate income taxation (European Commission 1990). Moreover, when possible, mechanisms of social integration other than law were to be preferred to coordinate tax systems. Instead of a directive on transfer pricing, the Commission ended up proposing an arbitration convention.Footnote ²¹ And instead of a directive on corporate income taxation, a ‘code of conduct’ and a rather informal procedure (the first instance of what later came to be known as the open method of coordination) were tried.Footnote ²²

Tax cooperation was expected to result in leaner and narrower secondary norms. It was hoped the minimalistic character of these regulations and directives would make it easier to approve them. This was not the case. Few and far between tax proposals ended up in the Official Journal.

Turning private actors (largely multinationals) into enforcers of integration through the removal of tax obstacles

The 1980s and early 1990s: widening the set of national tax laws the validity of which was reviewed by the ECJ

The new understanding of economic freedoms as operationalisations of a substantive conception of private property and freedom of enterprise, first fleshed out in Cassis de Dijon, had a double impact on the review of the European constitutionality of national tax laws.

First, the Court became willing to review the validity of all national tax laws and not only national laws concerning taxes that had been previously harmonised. The leading cases were Avoir FiscalFootnote ²³ and Schumacker.Footnote ²⁴ They entailed a massive increase in the breadth and depth of the Europeanisation of national tax systems because Europeanisation became fully autonomous from political decision-making. Whether the relevant tax had been harmonised or not, the European validity of national tax laws could now be reviewed.

Secondly, and simultaneously, the ECJ was careful to calibrate the impact that the vast expansion of tax laws susceptible of being challenged on the basis of eventual breaches of economic freedoms had. The ECJ introduced limits to the scope of economic freedoms by acknowledging the extent to which the coherent functioning of the tax system was a fundamental collective interest. In Daily Mail, the ECJ affirmed that the freedom of establishment did not entail the right to reincorporate in another state to avoid paying the taxes due on capital gains not realised at the time of the transfer.Footnote ²⁵ This reflected the premise, made explicit in the case by Advocate General Darmon, that freedom of establishment only extended to activities with a genuine economic link, and not to activities aimed at avoiding the full application of laws. In Bachmann,Footnote ²⁶ the ECJ showed its readiness to limit the freedom to provide services so as to protect the coherence of the Belgian tax system. Even if the ruling left largely unspecified what was exactly meant by coherence of the tax system, the decision had the potential of reorienting the case law of the Court, and make it more sensitive to the relational and redistributive character of the tax system (Menéndez Reference Menéndez, Letelier and Menéndez2009: 201 et seq.).

The late 1990s and early 2000s: taxes as obstacles to economic freedoms

The final step in the transformation of the pattern of Europeanisation of national tax systems was triggered by two decisions of constitutional importance: the reconfiguration of free movement of capital as a full-blown economic freedom and the launch of an idiosyncratic and asymmetric economic and monetary union.

Directive 88/361 liberalised all capital movements, particularly movements of a purely financial nature, unrelated with the exercise of any other economic freedom. In its turn, the Treaty of Maastricht expanded the freedom to movements of capital to and from third countries. The purpose of this massive extension of the breadth of the freedom to move capital was to maximise the chances that financial markets operated as a disciplining force on national fiscal policies within EMU (Dyson and Featherstone Reference Dyson and Featherstone1999).
Asymmetric economic and monetary union came hand in hand with not only free movement of capital but also with rules disciplining fiscal policy, and, indirectly, public spending and taxation. The Protocol attached to the Maastricht Treaty on the excessive deficit procedure established ceilings of 3 per cent GDP for the deficit and 60 per cent GDP for public debt.Footnote ²⁷ Thresholds that were reiterated and procedurally fleshed out in the Stability and Growth Pact.

It was after these two transformations were in place that the Court of Justice took a further step and started to regard all tax laws, whether or not discriminatory, as potential obstacles to the exercise of economic freedoms. The cases where the Court first shifted its approach were FuturaFootnote ²⁸ and Verkooijen.Footnote ²⁹ This multiplied the possibilities for challenging national laws taxing capital income by means of rearranging all investments and corporate structures as cross-border ones. At the same time, the Court restricted the extent to which the collective interest in the efficiency of the tax system would justify the infringement of an economic freedom. If Bachmann opened the door to understanding cohesion as a property of the tax system as a whole, and thus related to the relational and redistributive character of the tax system, coherence was soon reduced to a property of the relationship between the tax system and each individual taxpayer; what mattered was the coherent treatment of each taxpayer, which left out the relational and redistributive character of the tax system. The leading cases in that regard were WielockxFootnote ³⁰ and, perhaps even more clearly, Svensson and Gustaffson,Footnote ³¹ with VerkooijenFootnote ³² closing the argumentative turnaround.

This led to a maximalist interpretation of economic freedoms that the Court itself (partially) rectified. This came via a combination of the private law notion of ‘abuse of rights’ (of economic freedoms) and of the affirmation of ‘tax sovereignty’ as an overriding interest that might justify the restriction of economic freedoms, as in Marks and Spencer,Footnote ³³ CadburyFootnote ³⁴ or Thin Group Litigation.Footnote ³⁵ Still, the Court remained reluctant to overcome its formalistic approach to the tax implications of the ‘obstacle’ conception of economic freedoms. Indeed, the creation and recreation of legal structures for the purpose of not paying taxes would only constitute an ‘abuse’ of economic freedoms under rather exceptional circumstances. It is worth quoting at length from Cadbury:

It follows that, in order for a restriction on the freedom of establishment to be justified on the ground of prevention of abusive practices, the specific objective of such a restriction must be to prevent conduct involving the creation of wholly artificial arrangements which do not reflect economic reality, with a view to escaping the tax normally due on the profits generated by activities carried out on national territory.Footnote ³⁶

Or, what is the same, partially artificial arrangements did not constitute an abuse of economic rights. The ‘genuine economic link’ required by Advocate General Darmon in Daily Mail was no longer required.

Abandoning plans to transfer taxing powers to the EU

Diluting the 1970 decision to transfer tax collecting powers to the EU

The long labours of transferring tax collecting powers to the European Communities were rather quickly lost.

In 1984, the British ‘cheque’ was agreed, reintroducing the logic of member states, not individual taxpayers, as the main units of contribution to the European budget.Footnote ³⁷ This trend was further confirmed in 1988. In that year the size of the European budget was increased, but at the price of diminishing the relative weight of European taxes as a source of revenue. National contributions relative to GDP were to become a key component of the European budget, as they are still now. Finally, in 1993, the European rate of VAT was capped at one penny in the pound (and then halved in 2000).Footnote ³⁸

Plans to transfer tax collecting powers to the EU abandoned for good

Blueprints for monetary union and studies on the future shape of European public finances had made invariable reference to monetary union coming hand in hand with a sizeable increase in the tax collecting powers of the European Communities (most clearly, European Commission 1977).

However, when monetary union was agreed in 1992, no new tax collecting powers were transferred to the European Union. In the run up to monetary union, there was a (formally) temporal increase in the monies spent in structural and cohesion funds, a decision (politically) linked to that of launching monetary union. But that was the only decision that was taken.

The decision not to grant new taxing powers and new resources to the supranational level was especially surprising given the fact that the degree of economic heterogeneity among the states that finally made up the Eurozone was very considerable. Standard economic knowledge regarding optimal currency areas (Mundell Reference Mundell1961; Kaldor Reference Kaldor1978) was left aside. Instead, the implicit assumption was that the economic and financial dynamics that monetary integration will unleash will by themselves ensure that the Eurozone would become an increasingly optimal currency area (Rose Reference 125Rose2000; presciently against Gustavsson Reference Gustavsson and Dosenrode2002).

Implications

From taxing according to the ability to pay to taxing according to the ability to evade taxes

Capital unbound entailed the erosion of tax bases and a dynamics of competition between tax systems

The unleashing of capital after the monetary and economic crises of the early 1970s challenged the capacity of states to track capital income and wealth flows (see Table 4.3; Helleiner Reference Helleiner1994). This created not only new structural opportunities to evade taxes, but also many novel opportunities to play out one tax system against the other, triggering dynamics of tax competition (Avi Yonah Reference Avi Yonah2000).

Table 4.3 Size of shadow economies, selected countries

	Currency demand (percentage of official GNP)					Model approach (percentage of official GNP)
Country	1960	1970	1980	1990	1994	1960	1978
Austria	0.4	3.9	5.0	7.2	8.32¹	4.6	8.9
Belgium	7.8⁴	10.4	16.4	19.6	21.4	4.7	12.1
Canada	n.a.	5.8/7.2²	10.1/11.2	n.a.	14.6	5.1	8.7
Denmark	3.8/4.8	5.3/7.4	6.9/10.2	9.0/13.4	17.6	3.7	11.8
Germany	2.0/2.1	2.7/3.0	10.3/11.2	11.4/13.1	14.5¹	3.7	8.6
Finland	n.a.	n.a.	n.a.	n.a.	n.a.	3.1	7.6
France	n.a.	3.9	6.9	9.4	14.3	5.9	9.4
Ireland	n.a.	4.3	8.0	11.7	15.3	1.7	7.2
Italy	8.4⁴	10.7	16.7	23.4	25.8	4.4	11.4
Japan	n.a.	n.a.	n.a.	n.a.	n.a.	2.0	4.1
Netherlands	n.a.	4.8	9.1	13.9	13.6	5.6	9.6
Norway	1.3/1.7	6.2/6.9	10.2/10.9	14.5/16.0	17.9	4.4	9.2
Spain	n.a.	n.a.	18.0³	21	n.a.	2.6	6.5
Sweden	1.5/1.8	6.8/7.8	11.9/12.4	15.8/16.7	18.3	5.4	13.2
Switzerland	1.2	4.1	6.5	6.9	7.5¹	1.1	4.3
United Kingdom	n.a.	2.0	8.4	10.2	n.a.	4.6	8.0
USA	2.6/4.1	2.6/4.6	3.9/6.1	5.1/8.6	9.4	4.6	8.3

Source: Schneider 1997.

1 1996.

2 1975.

3 1978.

4 1965.

When in 1979 the United Kingdom liberalised capital movements, other member states came under enormous pressure to follow suit (especially because they were increasingly reliant on debt to fill the gap between taxation and expenditure, as we will see). Directive 88/361 and the Treaty of Maastricht resulted in the full liberalisation of capital movements. At that point, states entered into a race to attract capital by means of offering non-residents a zero rate on their returns.Footnote ³⁹ In the absence of proper tax cooperation among European states, non-residents could reap a zero-tax at destination, and avoid reporting the capital income at the state of their residence (Lodin Reference Lodin2000). Unsurprisingly, it became part of the financial game that British banks advertised in German newspapers, and German banks advertised in British newspapers, offering attractive investment opportunities with an ‘advantageous’ tax treatment (Mohamed Reference Mohamed2000: n. 57). Similarly, the combined effect of the radical interpretation of freedom of establishment and free movement of capital was to reorganise multinational corporate structures so as to maximise the chances of reducing tax liabilities (Bartelsman and Beetsma Reference Bartelsman and Beetsma2000; Murphy Reference 124Murphy2013).

The dynamics of tax competition became so evident that the Commission was forced into putting forward proposals to deal with it. Quite interestingly, the result was not a re-evaluation of the new pattern of Europeanisation of national tax systems but the development of a peculiar distinction between ‘good’ and ‘bad’ tax competition, the latter being relabelled ‘harmful tax competition’ (see European Commission 1997a; European Commission 1997b). So, quite paradoxically, the acknowledgment of the effects of unleashing capital over tax systems resulted in the further entrenchment of the assumption that the proper relationship between national tax systems should be one of competition.

How tax revenue could keep on going up despite the erosion of tax bases

Despite the growing opportunities to evade taxes, the revenue collected through taxes did not go down, but kept on growing (even if at rates insufficient to cover expenditure) (Table 4.4). How could that be?

Table 4.4 Total tax revenue as percentage of GDP, 1970–1991, selected European countries

	1970	1973	1976	1979	1982	1985	1988	1991	1970/1991
Germany	31.5	35	34.3	36.4	35.5	36.1	36.0	35	+3.5
France	34.1	33.5	36.7	38.1	40.3	41.9	41.2	41.3	+6.8
Italy	24.8	23.1	25.4	25.3	31.9	32.5	34.6	36.8	+8.0
United Kingdom	35.3	30	33.5	30.7	37.1	35.8	34.8	32.7	−2.6
Netherlands	33.5	37	38.2	40.1	40.2	39.9	42.8	42.4	+8.9
Spain	15.5	17.2	17.9	21.4	23.5	26.8	30.1	31.9	+16.4
Portugal	17.6	16.7	20.5	19.9	23.7	24.1	25.6	27.5	+9.9
Greece	19.1	17.3	20.2	21.2	23.5	24.4	23.5	25	+5.9
Ireland	27.6	27.6	31	27.6	32.6	33.7	35.7	32.4	+4.8

The revenue-yielding capacity of the tax system was preserved by means of shifting the criteria of allocation of the tax burden. The tax sacrifice demanded from taxpayers came to be graduated not only by reference to their ability to pay but also by reference to their capacity to avoid taxes. In practice, that meant that the tax burden imposed upon the less mobile tax bases (employed labour through income tax, social security contributions and fees for the use of public services) went up.Footnote ⁴⁰ At the same time, taxes on more mobile tax bases were reduced. Paradigmatic in that regard was the splitting of the personal income tax base and the creation of schedular taxes on capital gains (at a lower and flat rate) (Sørensen Reference Sørensen1994).Footnote ⁴¹ Both the marginal rates and the number of brackets of personal income taxes were reduced (with the revenue effect partially compensated by reducing deductions and tax credits, with rather asymmetric distributive effects) (OECD 2006). The revenue-yielding capacity of corporate income taxes stagnated or declined, despite the fact that the capital share in national income grew constantly.

Revenue was maximised, but only at the price of compromising the structural coherence of each tax and of national tax systems as a whole (Williams Reference Williams1997: 10). This dynamic was hard to stop once set in motion, because integration through the removal of tax obstacles resulted in the impotence of both European and national legislators to rebalance tax systems. In most cases, the European legislator could not intervene, either because no unanimity within the Council could be obtained (as was, for example, the case with the tax treatment of cross-border dividends), or because there would not be a unanimous majority in the Council to amend the existing regulation or directive (as was the case with VAT). National legislative interventions ran the high risk of being challenged again before the ECJ.

The (partial) return of the debt state

Tax revenues were maximised, but total tax revenue lagged behind public expenditure.

This was already the case in the 1970s. However, it did not lead automatically to the growth of public debt. High levels of inflation, plus resort to the monetisation of debt by central banks, curbed the growth of debt. Inflation reduced the weight of the stock of debt, while central bank intervention kept down the costs of financing deficits.

The tax gap became a real problem once deflationary policies were applied to kill inflation.Footnote ⁴² On the one hand, the growth of the structural levels of unemployment reduced the yield of social security contributions while increasing social expenditure. On the other hand, it was decided that the state should only borrow at ‘market’ conditions. Indeed, the prohibition of the monetising of debt via the central bank and/or the acquisition of debt by the central bank was understood to be a precondition for joining the immediate precedent of EMU, the Exchange Rate Mechanism (Bagnai Reference Bagnai2012) Finally, the end of inflation was also the end of the constant erosion of the stock of public debt (Table 4.5).

Table 4.5 Total government spending, 1970–1999, selected European countries

	1970	1973	1976	1979	1982	1985	1988	1991
Germany	38.5	41.6	48.3	46.5	47.5	45.2	45.0	46.3
France				44.9	49.9	51.9	50.1	50.7
Italy	32.7	35.1	38.4	40.6	46.7	49.8	50.4	54.0
United Kingdom	41.7	43.2	48.9	44.8	50.4	48.4	40.0	42.5
Netherlands	43.2	44.6	50.8	53.7	59.1	57.3	56.4	54.9
Spain	22.5					42.7
Portugal				30.8	35.7	37.5	36.1	41.3

Sources: www.cesifo-group.de/ifoHome/facts/DICE/Public-Sector/Public-Finance/Public-Expenditures.html (Germany, United Kingdom, Netherlands), Italia, Raggioneria dello Stato.

Private debt as booster of tax revenue

Private debt grew in most European states at unsustainable levels in the 1990s and early 2000s. This was hardly an exclusively European development, even less a pattern only registered within the Eurozone. It was in fact a general trend of ‘Western’ economies (Wade Reference Wade2008).

The growth of private debt was to a rather large extent the flip side of the repression of wages through which inflation was curbed (as reflected in a constantly declining labour income share since the late 1970s) (European Commission 2007: chap. 5; Bagnai Reference Bagnai2014: 213 ff.) and of the erosion of the capacity of states to tax effectively.

More profits and fewer taxes resulted in more capital in private hands, which in turn had to seek for investment opportunities (Harvey Reference Harvey2014; Bagnai Reference Bagnai2014). This fostered three critical developments:

First, resort to private debt as a means of compensating the loss of available income resulting from the repression of wages and over-taxation. Private individuals started to engage in debt not to pay for long-term investments but to pay for consumption. At the same time, the growth of private debt counteracted the deflationary effect of wage repression, in fact, resulting in a peculiar form of ‘private’ Keynesianism, in a ‘private’ substitute of expansionary fiscal policy (Crouch Reference Crouch2011; Streeck Reference Streeck2014; Bagnai Reference Bagnai2014).
Secondly, unsustainable growth of economic activities which offered high returns in the short run. The paradigmatic example was real estate bubbles, where unsustainable non-financial and financial growth met (Taub Reference Taub2014).
Thirdly, the constant exponential growth of financial assets, with a series of financial bubbles facilitated when not triggered by accommodating monetary policy (Coggan Reference Coggan2011; Lapavitsas Reference Lapavitsas2013).

The specific pattern of growth of private debt within the Eurozone was very much shaped by the economic and financial dynamics of asymmetric economic and monetary union. The decision of German governments to aim at a reduction of the unit labour costs through the repression of wage growth far below the growth of productivity aggravated the structural shortcomings of a far from optimal currency area which lacked institutional and financial means to redress imbalances (Bagnai Reference Bagnai2012; Flassbeck and Lapavitsas Reference Flassbeck and Lapavitsas2015). Germany and the states that followed German wage policy (such as Finland) cumulated growing trade surpluses thanks to low labour unit costs, while other states cumulated deficits. With fixed parities, adjustment via the exchange rate could not happen. The structural consequences of this development were postponed thanks to massive capital flows moving in the opposite direction of trade. This was reflected in the symmetric current account positions of, on the one hand, Germany and the Netherlands, and, on the other hand, Greece, Spain, Ireland and Portugal. In the short run, this resulted in the mirage that asymmetric economic and monetary union could by itself foster convergence and turn the European Union, by the spontaneous action of market forces, into an optimal currency area (Rose Reference 125Rose2000). Massive capital flows were interpreted as proving that if capital was liberated it would seek the best investment opportunities, and, in the process, level off income and wealth levels within the Eurozone. Indeed, the countries at the receiving end of capital flows seemed to be doing better (with Portugal being the odd exception) than those exporting capital (Germany being for a long period regarded as the sick man of Europe; cf. The Economist 2004) (see Table 4.6).

Table 4.6 Current account deficits, 1997–2013, selected Eurozone countries

	Year
Country	1997	1999	2001	2003	2005	2007	2009	2011	2013
Germany	−0.44	−1.31	−0.01	1.9	5.1	7.4	5.9	6.8	7.5
Netherlands	6.22	3.67	2.45	5.27	7.4	6.7	5.2	9.1	10.4
Austria	−2.42	−1.64	−0.80	1.7	2.2	3.5	2.7	1.6	2.7
Spain	−0.09	−2.85	−3.85	−3.5	−7.4	−10	−4.8	−3.7	0.8
Greece	−3.84	−3.41	−6.7	−6.5	−7.6	−14.6	−11.2	−9.9	0.7
Italy	2.72	0.66	−0.06	−0.8	−0.3	−1.3	−1.9	−3.0	1
Ireland	2.35	0.28	−0.64	0	−3.5	−5.3	−2.3	1.2	6.6
Portugal	−5.78	−8.60	−10.23	−6.4	−10.3	−10.1	−10.9	−7	0.5
Eurozone as a whole	n.d	n.d	n.d	0.3	0.1	0.1	−0.1	0.1	2.4

Sources: OECD, Eurostat.

From a tax perspective, the growth of private debt, and, in particular, the specific pattern of growth of private debt within the Eurozone, resulted in the development of various strategies to develop alternative tax bases with which to fill the tax gap without the need of resorting to public debt.

Some states fostered the growth of unsustainable economic activities that in the short run seemed to contribute to high growth and to result in massive tax yields. The real estate bubbles in Spain and Ireland are paradigmatic examples in that regard (McCabe Reference McCabe2011; Naredo and Álvarez Reference Naredo and Álvarez2011). In Greece and Portugal, the economic and fiscal stimulus resulted from the growth of private consumption.
In other states, the rapid growth of private debt in other countries allowed the constant growth of exports, which yielded taxes through personal and corporate income taxation. By 2010, 50 per cent of German GDP was exported. This reflected changes in the way the chain of production was reorganized (most trade remains in Europe and elsewhere intra-firm trade, Pellegrin Reference Pellegrin2001), but also the extent to which the German economic and tax model became dependent on external demand.Footnote ⁴³
Finally, some states have facilitated, through a mixture of an odd form of active neglect and active participation, the development of the legal and economic activities which make possible the artificial circulation of money through their financial institutions, or the establishment of ‘shell’ corporate structures within their territory, with the aim of avoiding the payment of taxes (Palan Reference Palan2002; Shaxson Reference Shaxson2011; Brooks Reference Brooks2014). This does not only undermine the tax collecting capacity of other states, but also allows the countries from which the providers of this legal and economic services operate to tap the tax revenue that results from the location in that jurisdiction of highly paid lawyers and economists specialising in ‘tax management’. The three Benelux countries, Ireland and the United Kingdom have a considerable share of the tax evasion industry.Footnote ⁴⁴ As is well-known, the Lux Leaks investigation has revealed the extent to which the Luxembourgeois government participated actively in corporate schemes to avoid taxes.Footnote ⁴⁵ By 2010, the financial and tax evasion industries had substituted the iron industry in its role as driver of the national economy (Shaxson Reference Shaxson2011).

Integration through the removal of tax obstacles and the gathering of the crises

Integration through the removal of tax obstacles played a role in fostering the financial, fiscal and macroeconomic structural weaknesses of the European Union, which will become open crises when the subprime crisis would hit Europe in 2007.

First, integration through the removal of tax obstacles contributed to the growth of the structural gap between the levels of public expenditure and tax revenue. It also created some of the means through which the tax gap could be dissimulated, such as the different strategies to turn the growth of private debt into sources of tax revenue. The obvious problem was that the tax gap was structural, while the dissimulation strategies were not only bound to be unsustainable, but came with massive hidden costs to the taxpayer (so more than filling the tax gap, they delayed the moment in which the gap materialised). As a result, it can be said that integration through the removal of tax obstacles played a very important role in fostering enormous fiscal weaknesses, which would play a major role in the unfolding of the European crises. The rapid deterioration of the fiscal position of countries such as Ireland or Spain was indeed due to the arrears of tax dissimulation strategies becoming suddenly due. By facilitating the growth of finance to get taxes today, states had ensured massive losses for tomorrow (Shaxson and Christiensen Reference Shaxson and Christiensen2014).

Secondly, integration through the removal of tax obstacles was far from being unrelated to the accumulation of structural financial weaknesses. For one, the unleashing of capital from controls led not only to growth of massive opportunities to evade taxes, but also to the progressive adjustment of the pattern of taxation to the ability to evade of taxpayers. The net result was that the tax system absorbed less of the income accruing to capital owners. And what capital owners saved in taxes further fed the growth of financial assets and the process of financialisation of both economic and social activities. For two, the flip side of the coin was constituted by those taxpayers who saw their tax burden grow to compensate the revenue lost due to the erosion of the capacity to tax mobile capital income and wealth. Because most of these taxpayers were private or public employees, they were affected at the same time by stagnant wages resulting from the structural decline of the wage share since the 1980s. These two trends fostered the growth of private debt, including borrowing to pay taxes. For three, the growing tax gap opened up the way to the financialisation of public finances. The tax gap was only partially filled through the adjustment of the tax system to the ability to evade taxes. A good deal of the gap was filled through public debt first, and through the tax proceedings of economic activities sustained by the growth of public debt later. In both cases the means to make possible state functions came to depend directly or indirectly on financial actors and institutions. As Streeck has highlighted, this had major political implications (Streeck Reference Streeck2014: 79 et seq.). But by itself it further contributed to the growth of financial activities.

Thirdly, integration through the removal of tax obstacles led to making tax systems ineffective tools of macroeconomic steering. For one, the less that tax authorities know about income and wealth flows, the more difficult it is to estimate the impact of tax changes, and, consequently the riskier it is to engage in active intervention through tax policy. For two, over-taxation of ‘honest’ taxpayers and under-taxation of ‘mobile’ taxpayers reduces the margin of manoeuvre for macroeconomic steering. When some taxes are pushed to a level close to those at which they would become simply unbearable for those paying them, and other taxes have to be kept artificially low to preserve the incentive of mobile taxpayers to pay them, macroeconomic steering through taxes becomes close to impossible. For three, the fiscal rules at the core of the Stability and Growth Pact further dented the possibility of macroeconomic steering through taxes. The original rules of 3 per cent deficit and 60 per cent debt were not only rather arbitrary, but prevented proper steering when that would require breaching fiscal rules, while leaving states full discretion to implement pro-cyclical policies as long as they stayed within the fiscal rules.

The long-term tax implications of the massive pile of widow risks

The massive current account imbalances to which I have referred were the result of the rapid growth of cross-border lending and borrowing. Financial integration was led and propelled by cross-border flows of capital. This was not only well received, but regarded as evidence of a well-functioning monetary union. However, it is important to keep in mind that no steps were taken to create either coordinated or supranational structures of supervision of cross-border financial activity or mechanisms either to allocate responsibility for the ensuing cross-border financial risks or to share such risks (Teixeira Reference Teixeira, della Posta and Talani2011).Footnote ⁴⁶ In a rather similar way to monetary union proceeding without fiscal union, the integration of financial markets proceeded without banking union.

This had massive tax implications. A community of risks was created by stealth, through the individual decisions of private financial institutions. But no community of insurance was established. A massive pile of ‘widow’ risks culminated. The (wrong) belief that the new techniques of pricing of risks could do away with risks (Tett Reference Tett2009; Derban Reference Derban2011) made European institutions proclaim once and again that widow risks were quasi-hypothetical risks. In the remote event that such risks became losses, markets will absorb them.

III Integration through fiscal consolidation: taxes in the indebted state

General but asymmetric fiscal crises, 2007–2010

The immediate public finance implications of the crises

The economic crisis pushed almost all member states into deficit positions. However, the fiscal impact of the crises was asymmetric. The degree of deterioration of public finances largely depended on two factors. One was the financial losses that each state absorbed. The other was the degree to which tax revenue had come to depend on economic activities propelled by the constant growth of private debt during the previous decade.

First, the rapid transformation of the financial crisis into an economic crisis led to a rather automatic deterioration of the public finances of all member states of the European Union (Table 4.7). The economic slowdown made tax revenue decline, while employment-assistance (as in Germany) or unemployment insurance (as in Spain) pushed social expenditure up. Some states (but far from all) engaged in significant discretionary fiscal spending. Temporary tax rebates played an important role.Footnote ⁴⁷

Table 4.7 Deficits, 2007–2011, selected Eurozone countries

	2007	2008	2009	2010	2011	2012
Germany	0.3	0	−3.0	−4.1	−0.9	0.1
Netherlands	0.2	0.2	−5.5	−5.0	−4.3	−4.0
France	−2.5	−3.2	−7.2	−6.8	−5.1	−4.9
Italy	−1.5	−2.7	−5.3	−4.2	−3.5	−3.0
Spain	2.0	−4.4	−11.0	−9.4	−9.4	−10.3
Portugal	−3.0	−3.8	−9.8	−11.2	−7.4	−5.5
Greece	−6.7	−9.9	−15.2	−11.1	−10.1	−8.6
Ireland	0.2	−7.0	−13.9	−32.4	−12.6	−8.0

Secondly, national exchequers absorbed a rather considerable amount of the financial risks that had been created through the exponential growth of financial assets in the years preceding the crises. The non-rescue of Lehman Brothers was widely believed to have unleashed a global financial crisis, and to have proven that it was absolutely necessary that states intervened to avoid the collapse of any other major financial institution (no ‘systemically relevant’ bank should be allowed to fail: the too big to fail doctrine). Banks should be underwritten by exchequers, relieved of their troubled assets by the state, or have their capital basis improved by injections of public money (European Council 2008). The fact that this entailed protecting the interests of capital holders, despite the fact that they may have been reckless, was regarded as beside the point. The bail-out of banks, and the consequent full protection of its shareholders, was the lesser evil (Geithner Reference Geithner2014).

This was bound to have massive tax implications, as the costs of bailing out the banks will end up being paid by the taxpayer. However, it was constantly argued that this was not really the case. The crisis of European financial institutions had not much to do with the state of those financial institutions, but was merely a crisis of confidence resulting from the panic imported from the USA after the near meltdown of the US financial system (Trichet Reference Trichet2009). When intervening to bail out financial institutions, states were assuming purely contingent financial risks that once the panic was overcome would report profits to states.

The financial crisis made it impossible to keep on assuming that widow risks were purely hypothetical risks. The solution finally applied in 2010/11 was now preconfigured by two key decisions:

For one, the fundamental decision not to create a community of insurance against financial risks created by cross-border activities. The then incumbent French presidency proposed the creation of a €300 billion fund to deal with banking crises (The Economist 2004). This was summarily rejected by the German Chancellor of the Exchequer. Attempts at ad hoc coordination of bail-outs (Dexia and Fortis) revealed the limits of the contingency plans elaborated before the crisis (for Dexia, see Van de Woestyne and Van Caloen Reference Van de Woestyne and Van Caloen2008).
For two, states took unilateral decisions to support their financial institutions. The obvious conflicts that this entailed with European norms on state aid were first ignored, and then avoided by means of a rather retroactive and very lax construction of state aid norms by the European Commission.Footnote ⁴⁸ A race to the top concerning deposit guarantees, initiated by Ireland, was cloaked as a common decision to increase the guarantee ceilings in the relevant Directive.Footnote ⁴⁹

Thirdly, the enormous fragility of some of the tax compensatory strategies used to dissimulate the tax gap was suddenly revealed (Table 4.8). As the real estate bubbles burst, tax revenue collapsed in Spain (from 38 per cent of GDP in 2007 to 31.6 per cent of GDP in 2009) and took a plunge in Ireland (for the same years, 32.8 per cent GDP to 29.7 per cent GDP). The United Kingdom also experienced an important decline of its tax revenue. To the difficulties of the very tax significant real estate market, there were added the crisis in the massively oversized financial sector. The contribution of the City to total British revenue declined from 17 per cent GDP in 2007 to only slightly more than 12 per cent GPD in 2009 (Table 4.9).

Table 4.8 Public debt, 2007–2011, selected Eurozone countries

	2007	2008	2009	2010	2011	2012	2013
Germany	63.5	64.9 (+1.4)	72.4 (+7.5)	80.3 (+8.1)	77.6 (−2.7)	79.0 (+1.4)	76.9 (−2.1)
Netherlands	42.7	54.8 (+12.1)	56.5 (+0.7)	59.0 (+2.5)	61.3 (+2.3)	66.5 (+5.3)	68.6 (+2.1)
France	64.2	67.8 (+3.6)	78.8 (+11)	81.5 (+2.7)	85.0 (+3.5)	89.2 (+4.2)	87.2 (−2)
Italy	99.7	102.3 (+2.5)	112.5 (+10.2)	115.3 (+2.8)	116.4 (+1.1)	122.2 (+5.8)	127.9 (+5.7)
Spain	35.5	39.4 (+3.9)	52.7 (+13.6)	60.1 (+7.4)	69.2 (+9.1)	84.4 (+15.2)	92.1 (+7.9)
Greece	103.1	109.3 (+6.2)	126.8 (+17.5)	146.0 (+19.2)	171.3 (+25.3)	156.9 (−14.4)	174.9 (+18)
Ireland	24.0	42.6 (+18.6)	62.2 (19.6)	87.4 (+25.2)	111.1 (+27.7)	121.7 (+10.6)	123.3 (+1.6)
Portugal	68.4	71.7 (+3.3)	83.6 (+11.9)	96.2 (+12.6)	111.1 (+14.9)	124.8 (+13.7)	123.3 (1.5)

Table 4.9 Tax revenue, 2007–2011, selected Eurozone countries

	2007	2008	2009	2010	2011
Germany	38.7	38.9	39.4	38.0	38.5
Netherlands	38.7	39.2	38.2	38.9	38.6
Austria	41.7	42.7	42.4	42.1	42.2
France	43.4	43.2	42.1	42.5	43.7
Italy	42.7	42.7	42.9	42.5	43.7
Spain	37.1	32.9	30.7	32.2	31.8
Greece	32.5	32.1	30.5	31.7	32.4
Ireland	31.5	29.5	28.1	28.0	28.2
Portugal	32.8	32.8	31.0	31.5	33.2
United Kingdom	35.7	37.1	34.3	35.0	35.8

Two momentous fiscal decisions that will become decisive later on

The Irish financial sector was not only extremely leveraged, but also extremely exposed. Even if one bank in particular (the Anglo Bank) was especially troubled, all Irish banks had come to depend on the massive inflows of capital from other Eurozone states, which now suddenly dried up. The Irish government proposed, and the Irish Parliament ratified, the extension of a blanket guarantee to all Irish financial institutions for two years.Footnote ⁵⁰ It is important to notice that the blanket guarantee implied that Ireland as state of incorporation of the debtor financial institution would absorb in full all the financial risks generated by the flows of capital incoming to Ireland during the first ten years of EMU.

The cost of underwriting financial institutions had a major long-term effect. The €500 billion plan to support its financial institutions was presented by the incumbent German government as both absolutely necessary (Connolly Reference Connolly2008) and as further proof of the need to introduce a debt brake in the German Fundamental Law. The debt brake proposal pre-dated the crises and was prompted by the chronic fiscal problems of some länder, which forced the federal state to assist them again and again. To put it differently, up to 2008 the debt brake was seen as a German answer to a German problem. But the potential costs of underwriting German banks started to alter the way in which constitutional fiscal rules were seen (see Deutsche Bank Reference Deutsche Bundesbank2011; Hamker Reference Hamker2012; for a critical analysis, see Hein and Truger Reference 123Hein and Truger2014). As we will see, the European fiscal crises of 2010 and 2011 will turn the debt brake into a German answer to a European (but now allegedly non-German) problem.

No changes to either European tax policy or in the case law of the ECJ

Despite the fact that the crises had an obvious and immediate financial impact, there was no major change in European tax policy. The Commission engaged in a new exercise of relabelling. After tax cooperation, now it was the turn of good (even robust) governance on tax matters (European Commission 2009). There was no substantive change and, indeed, no major policy initiative was launched.

Rather similarly, the crises did not seem to have an impact on the case law of the ECJ. The rebalancing of its case law, through reference to the tax sovereignty of member states, pre-dated the crises, and was not significantly affected by it (Pantazatou Reference Pantazatou2013).

From asymmetrical fiscal crisis to integration through fiscal consolidation: 2011 onwards

The time gained in 2007 and 2008 by underwriting financial risks was soon up. By late 2009, the Greek state was on the verge of fiscal collapse. By the fall of 2010, it would be the turn of the Irish state. Portugal, Cyprus and Spain would follow. The mix of causes of the fiscal crises of these states was not exactly the same. But in all cases the massive inflows of capital from other Eurozone states had played a major role in the gathering of the crises. And, in all cases, the way in which the ‘widow’ risks were finally assigned and dealt with played a decisive role in how the crises were solved.

Forging the consolidating tax state through ‘financial assistance’

It was already noticed that the crises hit most rapidly and deeply the Eurozone states that had been net importers of capital during the first decade of monetary union. In the sequence characteristic of external debt crises, the sudden stop of capital flows revealed the fragility of public and private finances. Financial institutions were pushed off balance and had to be underwritten by states. The Treasuries saw the interest rates they had to pay to issue debt grow. Eurozone states were especially vulnerable, because they had lacked since the beginning of EMU the means of last resort to deal with a fiscal crisis, i.e., issue new currency to pay principal and interest on their debt. This is why member states experiencing similar problems but not members of the Eurozone did not experience a fiscal crisis (De Grauwe Reference De Grauwe2012; Wolf Reference Wolf2013). It is important to keep in mind that there is no debtor without a creditor. The eventual non-payment of the public and private debt of the Eurozone states nearing fiscal asphyxia would have inflicted a major blow to the financial institutions of the Eurozone through which capital had been exported during the first ten years of EMU. In particular, German, Dutch and French banks ran the risk of suffering major losses. The German, Dutch and French states were insurers and guarantors of last resort of those banks. So, if losses in proportion to the risks incurred would have been inflicted upon those banks, massive burdens would have resulted for those states (see Table 4.10).

Starting in late 2009, Greece, Ireland, Portugal, Cyprus and Spain came more or less close to fiscal collapse. The causes of the fiscal crises were many, and varied from one country to the other. It could fairly be said that all of them had been weak tax states (although the patterns of transformation had been different) and were especially vulnerable to financial crisis because of their traditional dependence on foreign capital.Footnote ⁵¹ What made the crises really explosive was the rapid growth of their external indebtment since the launch of EMU and the fact that EMU implied that these states lacked any policy lever with which to face a fiscal crisis.

Four key decisions were taken to deal with the fiscal crises of these states.

First, the fiscal and the financial crises were exchequered, or, what is the same, financial risks were absorbed by exchequers (and ultimately made to bear on taxpayers).

States were prevented from defaulting. Even if there was no Treaty provision foreclosing default, European institutions, and very especially the ECB, prevented the Greek government from even considering default. IMF involvement would have required partial Greek default, and indeed some of the IMF board members insisted on that happening (see IMF 2010). Their opposition was overrun and the IMF Articles of Agreement were changed on the hoof to reconcile IMF massive involvement with Greece not defaulting (see Bagnai et al. Reference Bagnai2015). Once Greece did not default, the precedent was set (Bini Smaghi Reference Bini Smaghi2011a).
States were required to underwrite in full their banks, so financial institutions would not default either. We already saw how the Irish state was strongly required to underwrite its banks in 2008. In 2010, pressure was exerted so that Ireland would stand by the blanket guarantee, even if that made it unavoidable that Ireland asked for financial assistance from other Eurozone states (O'Brien Reference O'Brien2011a; O'Brien Reference O'Brien2011b; Collins Reference Collins2012; Honohan Reference Honohan, Murphy, O'Rourke and Whelan2014).

Table 4.10

Table 4.10 Exposure to debtor states of financial institutions, 3rd quarter 2010

Greece

	Public sector	Banks	Non-bank private	Foreign claims	Other exposures	Total exposures	Percentage of total exposures ($277.9 million)
Germany	26.3	3.9	10.1	40.3	29.2	69.4	24.97
France	19.8	1.4	42.1	63.3	28.7	92.0	33.19
Italy	2.6	0.3	1.9	4.7	1.7	6.4	2.30
Spain	0.6	0	0.5	1.1	0.4	1.5	0.54
United Kingdom	3.2	4.3	7.5	15.1	5.3	20.4	7.34
USA	1.8	0.5	4.7	6.9	36.2	43.1	15.50
Japan	0.5	0.5	0.9	1.9	0.1	2.0	0.71

Source: Bank of International Settlements. www.bis.org/publ/qtrpdf/r_qt1103b.pdf.

Ireland

	Public sector	Banks	Non-bank private	Unallocated sector	Foreign claims	Other exposures	Total exposures	Percentage of total exposures ($813.7 million)
Germany	3.4	57.8	92.8	0	154.1	54.3	208.3	25.59
France	6.6	16.83	21.2	0	44.7	33.4	78.1	9.59
Italy	0.8	3.3	10.9	0.3	15.3	9.1	24.4	2.99
Spain	0.3	3.3	9.4	0	13.0	4.5	17.5	2.15
United Kingdom	6.6	37.4	116.1	0	160.2	64.4	224.6	27.60
USA	1.5	17.9	40.3	0	59.7	54.3	113.9	13.99
Japan	1.5	1.8	17.7	0	21.0	1.5	22.5	2.76

Source: Bank of International Settlements. www.bis.org/publ/qtrpdf/r_qt1103b.pdf.

Portugal

	Public sector	Banks	Non-bank private	Foreign claims	Other exposures	Total exposures	Percentage of total exposures ($321.8 bn)
Germany	8.4	18.1	13.6	40.0	8.5	48.5	15.07
France	16.1	6.5	14.8	37.4	8.1	45.6	14.17
Italy	0.9	2.3	1.5	4.7	3.2	7.9	2.45
Spain	8.8	6.1	70.3	85.2	23.4	108.6	33.74
United Kingdom	2.6	6.2	16.5	25.4	8.5	33.7	10.47
USA	1.6	1.4	1.5	4.5	43.6	47.1	14.63
Japan	1.3	0.3	0.8	2.4	0.4	2.8	0.87

Source: Bank of International Settlements. www.bis.org/publ/qtrpdf/r_qt1103b.pdf.

Spain

	Public sector	Banks	Non-bank private	Unallocated sector	Foreign claims	Other exposures	Total exposures	Percentage of total exposures ($1,098 bn)
Germany	29.5	85.8	85.7	0	200.9	41.4	242.4	22.07
France	46.0	55.8	81.3	0	183.1	41.6	224.7	20.46
Italy	3.3	9.0	16.2	0.2	28.7	13.1	41.8	3.80
Spain	–	–	–	–	–	–	–	–
United Kingdom	10.0	34.0	72.4	0	116.3	36.1	152.4	13.87
USA	4.7	20.6	26.3	0	51.6	136	187.5	17.07
Japan	9.7	4.5	10.2	0	24.4	4.8	29.2	2.65

Source: Bank of International Settlements. www.bis.org/publ/qtrpdf/r_qt1103b.pdf.

Secondly, the costs of nationalising financial risks were to be borne exclusively by the exchequer of the states at the receiving end of capital flows. The costs of non-defaulting and of underwriting financial institutions were to be borne by the ‘debtor’ states. The responsibility that stemmed from the miscalculation of the risk they were incurring when lending to ‘debtor’ states or to the financial institutions of ‘debtors’ states was simply set aside. This of course implied the relieving of any responsibility of the states where these financial institutions were established as insurers and guarantors of last resort of these institutions.

Thirdly, taxpayers of the Eurozone as a whole were to underwrite the debt of debtor states. Given that the states which were required to bear all financial risks were already bordering fiscal collapse, further additional debt required underwriting by a third party. Most of this came in the form of financial assistance from the Eurozone as a whole (with the support of the IMF). Formally, this assistance was structured either through ‘coordinated bilateral’ loans (the first Greek programme in 2010)Footnote ⁵² or through the various variants of a European Monetary Fund that followed (plus IMF assistance).Footnote ⁵³ But relief was also provided by means of the ECB buying sovereign bonds in secondary markets.Footnote ⁵⁴ In practice, this meant that the taxpayers of debtors states were required to collect the bill for absorbing financial risks, but the taxpayers of the Eurozone as a whole were required to underwrite the taxpayers of debtor states.

Fourthly, the underwriting was given under the condition of creditors dictating the economic and fiscal policy to be applied by debtor states (this is what the so-called ‘conditionality’ implied). Debtor states were forced to undergo an internal devaluation (which meant a devaluation of labour instead of the impossible currency devaluation) and to engage in fiscal policies fitting into the so-called growth through austerity paradigm (Alesina and Ardagna Reference Alesina and Ardagna1998; very decisively Alesina Reference Alesina2010): or, what is the same, massive cuts to public expenditure (very especially social expenditure, which was in some cases strictly capped by reference to specific figures) combined with a redistribution of the tax burden, by means of a further shift of the tax burden from capital to labour (with the typical mix being an increase of the standard VAT rate, suppression of concessionary VAT rates for essential goods, the increase or introduction of fees for the use of public services; while taxes on capital income were expected to be, if anything, lowered) and the rather rapid sale of public property (Bini Smaghi Reference Bini Smaghi2011b). The rationale was that shock economic therapy will result in the rapid reduction of labour costs and lead to strong trade surpluses. These surpluses would be able to pay external debt and trigger private investment.

These decisions were presented as the operationalisation of European ‘solidarity’ with the debtor states. However, the loans did not support the debtor states as such. Most (when not all) the monies were not spent by the states recipient of financial assistance, but merely transited through them, quickly ending in the hands of the financial institutions that had lent to the debtor states or to the financial institutions of the debtor states (ATTAC Austria Reference ATTAC Austria2013). To label this as solidarity is deeply problematic. Solidarity means literally to bear risks together. Eurozone taxpayers were not being so much solidaristic towards the citizens of debtor states as solidaristic with the financial institutions that loaned capital to debtor states and the financial institutions of debtor states. It is indeed telling that in all assisted countries public debt levels experienced a drastic increase after being recipients of ‘solidarity’. This reveals the extent to which ‘solidarity’ with debtor countries was as a matter of fact solidarity with the financial institutions exposed to debtor countries. The rhetoric of solidarity could be abused because it was not understood that the conflict of interest between capital holders and debtors was transformed through ‘financial assistance’ into a conflict of interest between the taxpayers of debtor and creditor countries. This did not only relieve lenders of any financial responsibility but also created the false impression that the fiscal crises were caused by the fiscal profligacy of debtor states. This diagnosis failed to consider the structural forces at play in the massive cross-border capital flows during the first decade of EMU, and the role played by financial institutions in the gathering of the crises.

Internal devaluation plus growth through austerity had a massive impact on the configuration of debtor states. Debtor states were transformed into indebted states. As such, these states were required to make their tax system a key element in the process of transformation of its socio-economic structure into a more competitive one. Taxes were to regain redistributive and economic steering functions. Only the pattern of redistribution was now aimed at increasing the capital at the disposal of capital owners, and steering consisted in fiscal dirigisme aimed at micromanaging economic policy (Scharpf Reference Scharpf2014) so as to facilitate internal devaluation and ensure automatic corrections in the fiscal position to ensure that the principal and interest of the debt were honoured.Footnote ⁵⁵

Constitutional and legal entrenchment of the consolidating tax state

The blueprint of the consolidating tax state was first forged and developed during the fiscal crises of 2011 and 2012. That this was not intended as a temporary, ‘crisis management’, expedient became very clear during 2012 and 2013, as the changes in the primary and secondary law of the European Union, as well as idiosyncratic quasi-constitutional norms, were approved through formal international treaties codifying the legal basis of the tax consolidating state.

At the constitutional or quasi-constitutional level, it is important to stress the significance of the obligation imposed to patriate and enshrine in the constitution (or norms of constitutional nature) ‘debt brakes’.Footnote ⁵⁶ The ECJ was given the formal power of reviewing the national constitutional or quasi-constitutional norms adopted to comply with this obligation.Footnote ⁵⁷ While many member states have still to introduce the reforms, some followed the ‘German’ debt brake model and reformed their constitutions accordingly (Spain, Italy and Slovenia). The Spanish constitutional reform of September 2011 is especially relevant. The procedure followed was at the very least peculiar, avoiding all the consultations needed to approve even an ordinary law (García Gestoso Reference García Gestoso2012: 79–81). The amended text did not only include a debt brake, but, more transcendentally, a clause giving preference to the payment of principal and interest of public debt over any other public expenditure (including, quite obviously, social expenditure).Footnote ⁵⁸

The tax consolidating state was given concrete shape by the new fiscal rules at the basis of the revamped Stability and Growth Pact. The ‘old’ fiscal rule regarding public deficit was tightened. Public accounts should be in surplus or close to surplus, meaning at most a 1 per cent deficit, and for those states with a far from unblemished fiscal record, the threshold was −0.5 per cent.Footnote ⁵⁹ Moreover, new rules establishing deficit and debt-reduction trajectories were introduced. The latter rule is of enormous importance. It foresees that all states exceeding the 60 per cent debt ceiling should reduce their debt levels, year in and year out, by 5 per cent of the amount in which they exceed 60 per cent.Footnote ⁶⁰ In practice, this implies the obligation for many states to run constant massive primary surpluses. What the memoranda of understanding obliged countries provided with financial assistance to do, this rule requires of states which had not been subject to such discipline, such as Italy (or Spain, receiver of financial assistance in its ‘light touch’ version) (Giacché Reference Giacché2012 argues, quite convincingly, that the decision to impose the debt-reduction trajectory had a major causal role in the 2011 fiscal crisis in Spain and Italy). Moreover, Eurozone states are obliged to introduce automatic correction mechanisms, so that either expenditure goes down or taxation goes up when the yearly fiscal objectives become clearly imperilled by the way in which the economy and public finances evolve.Footnote ⁶¹ Finally, the assignment to the supranational level of the power to supervise the macroeconomic balance of each national economy is bound to result in a further limitation of the space to take autonomous fiscal decisions (Scharpf Reference Scharpf2013).

The bite of these new sets of fiscal rules has been largely trusted to the new procedures of fiscal coordination and supervision within the Eurozone. The sequence of the so-called European Semester implies a radical empowerment of supranational institutions. For one, national budgetary processes are subject to much closer monitoring, to the point that the draft budget is submitted to the Commission before it is submitted to the national parliament. For two, national budgetary procedures are required to become structured not around the yearly budget but around the five-yearly fiscal perspectives, something which drastically reduces not only the margin for discretionary fiscal policy but also for change in fiscal policy resulting from a new democratic majority being elected in a Eurozone state.Footnote ⁶² For three, decisions concerning the monitoring and supervision of fiscal policy are now taken when a qualified minority of Eurozone states supports Commission's proposals.Footnote ⁶³ This largely entails giving de facto power to the creditor states over the debtor states (on the extent to which creditor states have shaped the government of the crises, see Dyson Reference Dyson2014).

The counterpoint: automatic exchange of information?

At the very same time that the pattern of tax integration through fiscal consolidation got entrenched, the fiscal crises have led to legislative initiatives and actual Directives that may point to the recovery of the old integration through tax harmonisation paradigm and, in particular, the reintroduction of dynamics of cooperation between tax administrations.

In 2010, a new Directive on cooperation on the recovery of tax claims (of debts owed to tax authorities) was introduced, drastically widening the scope of the old 1976 Directive and improving the mechanics of cooperation.Footnote ⁶⁴ In 2011, the 1977 Directive on administrative tax cooperation was superseded by a new Directive aiming at automatic exchange of information between member states.Footnote ⁶⁵ The Directive was rendered operative by a first implementing regulation in 2012,Footnote ⁶⁶ and even more clearly so by a second one in 2014.Footnote ⁶⁷ This new framework for tax cooperation came hand in hand with the amendment of the savings income directive, closing a good deal of its loopholes.Footnote ⁶⁸

To be noticed also is the fact that in 2011 the Commission put forward a Directive proposal aiming at the harmonisation of the tax base of the corporate income tax,Footnote ⁶⁹ which revives the understanding that harmonisation going beyond the correction of the failures of homogenisation through tax competition is needed.

IV Reconciling (again) integration and the social and democratic tax state

This book aims not only at increasing the understanding of how the present European crises came about, but also at considering what should be done to contain and overcome the crises. A concrete tax policy agenda cannot but be shaped in the ‘in-between’ that is the political sphere. Consequently, it is a political and not a scholarly task. What can be done here is to sketch five general observations which are perhaps stronger on what should not be done than on what should be done.

First, the degree of Europeanisation of national tax systems is so high that any meaningful reform proposals have to factor that into account. Any tax policy proposal needs to spell out what changes would be required both at the supranational and the national levels, what obstacles to change result from the present configuration of supranational and national constitutional law, and what consequences reform would have at both the European and the national levels.

Secondly, it is quite obvious that one possible alternative is to dismantle in full the European framework constraining and disciplining national tax systems. But two things should be kept in mind. For one, such a dismantlement would only be coherent (and indeed stand a chance of being functional) if it came hand in hand with the redefinition of the overall relationship between the national and the European socio-economic constitutions. As was shown in this chapter, national tax systems have been deeply Europeanised, but not only and not so much as a result of European tax regulations and directives, but mainly through the influence that the present understanding of economic freedoms as operationalisations of the right to private property and freedom of enterprise has structurally exerted over the tax system (plus the structural constraints stemming from the ‘new economic governance’ of the Eurozone in the process of becoming consolidated). Simply opting out from European tax legislation would not recreate national tax autonomy. For two, a complete retreat into national sovereignty (through a radical exit from any form of European cooperation) may not do either. The European framework of national tax law has become a straitjacket due to its structural bias in favour of the consolidating tax state. There is no guarantee, however, that outside of the framework of European integration the structural power of capital would not end up limiting tax choices. This should not be constructed, however, as a plea in favour of the status quo. The status quo (including EMU very especially, but not exclusively, as has come to be shaped in the aftermath of the crisis) is part of the problem, not of the solution (Flassbeck and Lapavitsas Reference Flassbeck and Lapavitsas2015; Streeck Reference Streeck2014; Bagnai Reference Bagnai2014). But the original paradigm of taxation through tax harmonisation is a powerful reminder of the possibility of making European integration and the consolidation of the social and democratic Rechtsstaat mutually reinforce each other.

Thirdly, the cases put forward to transfer tax collecting powers to the European Union since the crises began are hardly convincing. These proposals are the wrong proposals, for the wrong reasons and at the wrong time. Most of these proposals regard European taxes as the source of the financial means with which to postpone (again) the payment of debt (Trichet Reference Trichet2011; Poiares Maduro Reference Poiares Maduro2012). But it is high time we either pay debt, or declare it will not be paid. The case for a European power to tax is also based on wrong reasons. The advocates of European taxes present such taxes as a functional means to solve the crises. But taxes are not a mere expedient to collect revenue, but a key institution in the functioning of democracy. This is indeed the key blind spot in the proposals. Advocates of introducing European taxes to pay for fiscal assistance are rather vague regarding the democratic procedure that will be followed to empower the Union and actually to approve the regulations creating the taxes. Trichet simply avoids the issue, and pretends that a European Treasury could issue debt without collecting taxes (which defies the law of gravity of public finance). Poiares Maduro appeals to the need of avoiding transfers between states, because the latter will undermine the European ‘we feeling’. The alternative is to collect revenue directly from those profiting most from European integration. But leaving aside whether it is wise to fund financial assistance, the need of which will be pro-cyclical, with taxes which are bound to be pro-cyclical (as profits, whether to those profiting from integration or not, are cyclical), it is obvious that no matter how progressive a tax, it should be democratically approved. Poiares Maduro also avoids that key issue. Finally, the proposals come at the wrong time. The way in which the crises have been governed, and, very especially, the way in which the pile of widow risks stemming from cross-border capital flows have been dealt with has strengthened (and recreated) national cleavages. In such a context, European taxes could only be forced upon Europeans in an authoritarian fashion. This would not only be unacceptable, it is likely to result in an outcome opposite to that apparently wished for by the advocates of new European taxes now, as the non-democratic imposition or dissimulation of such taxes is likely to feed disintegration.

Fourthly, European tax norms could play a major role in rescuing the power of member states to take autonomous decisions. Instead of European law hollowing national tax autonomy, European law should be an instrument at the service of recreating the political space for democratic national tax choices. To achieve that three things could be done.

For one, the institutional and procedural means should be created to make tax authorities capable of identifying and quantifying all income, wealth and consumption flows. This requires mutual, automatic and complete exchange of tax information among the member states of the European Union. All relevant tax data should be shared (Zucman Reference Zucman2013: 74 ff.). The new framework of automatic exchange recently adopted is a much better starting point than previous legislation. This is the only way of stopping some states (at present including some member states) literally selling their sovereignty in exchange for a fraction of the proceedings of tax evasion on the side of multinational corporations and wealthy individuals (Palan Reference Palan2002; Palan, Murphy and Chavagneux Reference Palan, Murphy and Chavagneux2009). Moreover, the European Union should make use of its collective bargaining power and subject free movement of capital and goods to uncooperative third countries to the said countries accepting in full automatic exchange of tax data (Zucman Reference Zucman2013: 87 ff.).
For two, economic freedoms should be recalibrated. The recreation of the effective capacity to tax requires recharacterising economic freedoms as the operationalisation of the principle of non-discrimination when it comes to tax matters (and not only). The social and democratic tax state was fiercely opposed in the name of the right to private property and to freedom of enterprise. Its consolidation implied a recharacterisation of both rights, a recharacterisation which was very much at the core of the identity of post-war constitutions. It is high time we stand by what is still the deep constitutional identity of most European constitutions. The ECJ should reorient its case law and return to a less abrasive understanding of economic freedoms when coming into conflict with national laws, especially national tax laws (Menéndez Reference Menéndez, Letelier and Menéndez2011).
For three, some key national tax laws should be harmonised. The objective should not be to homogenise national tax laws but, on the contrary, to create the conditions under which different political choices could be possible. The VAT template could be of use. Wide harmonisation of the definition of the tax base (with room for specific national rules) could be combined with the widest possible latitude in the setting of tax rates.

Fifthly, when, and only when, European law would have proven useful in the recreation of the autonomous power to tax of member states, the time would have come to discuss granting the European Union further collecting tax powers. I have argued that we should distinguish two rather different cases for granting such collecting powers to the European Union (Menéndez Reference Menéndez2004). For one, there is a very strong case to act upon the decision taken in 1970 to fund the current European budget through taxes, not state contributions. At present, less than 15 per cent of the European budget is funded from genuine European taxes, and less than a quarter comes from that and the European share of VAT. Paying for Europe via taxes is indispensable if we want finally to foster democratic debate about what Europe does and what it should be doing (and not doing). Secondly, there is a very good case for having European taxes capable of redistributing revenue across Europe and of serving as a supranational macroeconomic lever. But these very good reasons should be validated democratically, not imposed in an authoritarian manner as faits accomplis (Majone Reference Majone2014). In the present political, economic and legal context the assignment of new tax collecting powers to the European Union cannot but be damaging to democracy.

Conclusions

The long arc of transformation of the European framework of taxation can thus be seen as vindicating Fritz Neumark. The rejection of the active fiscal interventionism characteristic of the Social and Democratic Tax did not result in a liberated market economy, but has ended up condemning Europeans to the fiscal dirigisme of the consolidating tax state. (On the crucial distinction between interventionism and dirigisme, see Neumark Reference Neumark1964 in dialogue with Ludwig Erhard.) Self-stabilising capitalism does not result in economic freedom, but in authoritarian liberalism (Polanyi Reference Polanyi1944; Heller Reference Heller2015).

This economic and monetary union will not last. The European Union may collapse as a result. Or, far worse, it may slowly keep on transforming itself into the liberal authoritarian direction that underpins the consolidating tax state. We need a very different Europe. It would be ludicrous to claim that this different Europe can be engineered through a collection of tax policies only; or, for that matter, a combination of tax and expenditure policies. The problems of Europe are deep and structural and require decisions concerning not only the stock of debt but also the generation of income and wealth; not only redistribution but also changes in production and distribution (Berman Reference 121Berman2006; Wade Reference 126Wade2014; Piketty Reference Piketty2015). But changes in the European framework of taxation could play its role. In this chapter I have made a case against the transfer of tax collecting powers to the European Union as part of the government of the crises. That would be the wrong prescription for the wrong reasons at the wrong time. The assignment of new taxing powers to the European Union in this political context is a democratic non-starter. We do not need more Europe when it comes to taxes, but a very different Europe. What can and should be achieved through action at the European level is the rescue of the capacity of member states to tax the income, expenditure and wealth of their citizens and of those economically active in their territory, by means of drastically reducing the chances of evading the tax net.

The European rescue of the social and democratic tax state is an ambitious task, but it is one that, contrary to the transfer of tax collecting powers to the supranational level of government to postpone the day of the reckoning, has a realistic chance of recreating the cohesion between European citizens without which the European Union is bound to become the nemesis of the social and democratic Rechtsstaat.

Book contents

4 - Neumark vindicated: the three patterns of Europeanisation of national tax systems and the future of the social and democraticRechtsstaat

Summary

Information

Introduction

I The original tax paradigm of European integration: integration through tax harmonisation

II From integration through tax harmonisation to integration through the removal of tax obstacles

No more tax harmonisation

1970s: tax harmonisation stalls

1980s: tax harmonisation is abandoned for good

Turning private actors (largely multinationals) into enforcers of integration through the removal of tax obstacles

The 1980s and early 1990s: widening the set of national tax laws the validity of which was reviewed by the ECJ

The late 1990s and early 2000s: taxes as obstacles to economic freedoms

Abandoning plans to transfer taxing powers to the EU

Diluting the 1970 decision to transfer tax collecting powers to the EU

Plans to transfer tax collecting powers to the EU abandoned for good

Implications

From taxing according to the ability to pay to taxing according to the ability to evade taxes

Capital unbound entailed the erosion of tax bases and a dynamics of competition between tax systems

How tax revenue could keep on going up despite the erosion of tax bases

The (partial) return of the debt state

Private debt as booster of tax revenue

Integration through the removal of tax obstacles and the gathering of the crises

The long-term tax implications of the massive pile of widow risks

III Integration through fiscal consolidation: taxes in the indebted state

General but asymmetric fiscal crises, 2007–2010

The immediate public finance implications of the crises

Two momentous fiscal decisions that will become decisive later on

No changes to either European tax policy or in the case law of the ECJ

From asymmetrical fiscal crisis to integration through fiscal consolidation: 2011 onwards

Forging the consolidating tax state through ‘financial assistance’

Constitutional and legal entrenchment of the consolidating tax state

The counterpoint: automatic exchange of information?

IV Reconciling (again) integration and the social and democratic tax state

Conclusions

Footnotes

References

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