31 August 2010

Relations of the Union and the member states 11 - Taxes

I have dedicated this (probably) last post about the European federation's competencies to a topic which cannot be held to be last (especially in the capitalist world of today); or as a phrase says, money not until in the first place. It is necessary to determine all the needful competencies of the federation but one asks after reading them: who will pay all of that? (Well, the citizens of the federation will do, naturally, the question asks actually how.)

There are two possibilities in principle how to provide paying for operation of the European federation: the federation will accept money from the member states in the form of some contributions reckoned according to certain rules or the federation will get its incomes itself. What is the basis that a selection should be made of? From economic or other standpoints? I see one main reason: independence of the federation. If some competencies are entrusted to the federation, it has to have free possibility to put them into effect, in other words, it has to be independent on the member states; the federal constitution determines division of competencies between the federation and the member states, nevertheless if the federation is dependent financially on its member states, its independence on the member states cannot be talked about and division of competencies between the federation and the member states cannot be fulfilled. In addition to it, two reasons at least in favour of the federation's financing by its own powers can be mentioned. The first reason is the United States of America in the period when their first constitution, the Articles of Confederation, was in effect (1781-1788). The central power, represented by the Congress, could not impose taxes and was so left back on contributions of the member states, that however was not able to compel to pay. The contributions system led to it that the central power had no solid income and ran with debts. Alexander Hamilton, the author of the essay 30 from the cycle The Federalist, a series of essays that were published in a New York newspaper in defence of the USA constitution in 1787/8, mentioned one more reason why the federal power cannot rely on contributions from the states – the federal power cannot be ever liable for its debts because it cannot be positive that it will succeed in getting enough means for its needs. In the following essay 31, he remarks that the competence of procuring incomes is inefficient if asserted towards states in their whole. However, these arguments against financing the federation by contributions from its member states are maybe wholly superfluous because can be probably found no federation that would finance its operation in this way. (For the sake of interest, let us see what the incomes of the European Union of today are: because it is an international organization, there is no surprise that the main source of its incomes (76% in the budget for the year 2010) comes from direct contributions from the member states; but the organization has also its own incomes – 12% are customs duties and agriculture payments, 11% then a share in the value added tax collected in the member states – so it has at least some feature typical for a federation rather than an international organization.)

If it is obvious that it is necessary that the federation secures its incomes directly, not of the member states' will, it follows that the federation has to be competent itself to impose and to collect taxes because it is the main source of state incomes (state can also possess its own property that incomes can go to it from but their amount is usually marginal). Because an idea of any whole-Europe tax rouses horror in many people today and because taxation has been considered generally as a saint garden of nation states, the idea of federal taxes is certainly one of the weighty obstacles of formation of a European federation. (Which can be seen already today when (recently) such an idea about a whole-European tax – in favour of the organization's bodies – arose.)

If we accept the idea of the federal taxes for self-evident (and we cannot otherwise), another question will emerge: which proportion will be between the taxes imposed by the federation and the taxes imposed by the member states? Nobody can think naturally that if the federation starts collecting its taxes, all taxation will move to the federal level. The member states' right to collect their taxes is not annulledd by the right of the federation to collect its federal taxes – in spite of that, it is obvious that no side can collect own taxes totally independently on the other taxating side because overburdening of taxpayers would threaten (though not of big business taxpayers if present tendency of fall of their taxes continues also in the future); therefore it is necessary that the federation on one side and the member states on the other side “share” the taxpayers according to a certain rule. That means, it is necessary to determine either that some taxes will collect the federation and some the member states or that the federation and the states will share the yield of the common taxes (also combination of both approaches is possible).

The federation's power to collect own taxes in relation to the same power of the member states can be written in various ways in the federal constitution. The mention that the federation has the right to collect taxes at all and that taxes can be imposed only by a law, cannot be omitted. That is the absolute minimum of tax provisions in a federal constitution and it is possible to end here in the same way that for example the constitutions of the United States of America („the Congress shall have power to lay and collect taxes“) or Belgium („taxes to the benefit of the State may be imposed only by virtue of a law“) do. But it is also possible to proceed in the way that the constitutions of Germany or Switzerland know: they enumerate the taxes belonging to the federation and the ones belonging to the member states. The question then is what taxes should be granted to the federation in the federal constitution. A right of the federation to custom duties and other incomes connected with import and export in/from the federation's area is unquestionable, I cannot however exactly judge what other particular taxes should be left to the federation. In spite of that I believe that present tendencies of Europe's and the world's evolution forces to shift at least some taxes to the European level. Giant supranational firms (including financial institutions) rule today world's economy, they are able to freely move capital over the whole planet. It holds true no more in the present time that these firms must adapt to economic and social politics of a state that they can run their business in. On the contrary – states bend over backwards to present advantageous offers for these firms in order to attract them in their territory. In order to attract them and keep them, the governments reduce their taxes or give them tax holidays, provide them with inexpensive or free infrastructure, they restrict conditions of the workers because of them and similarly. This fight has been called “increasing of competitiveness” and it is evident from its progress up to now that states are the weaker side in this fight (as constantly descending tax burden of business corporations shows – see for example at http://www.oecdobserver.org/news/fullstory.php/aid/2229/Corporate_tax_warning.html). The governments make more and more policy favourable rather for investors than for their citizens. Therefore it is very desirable that the power to subject firms to taxation is in the hands of the federation because the federation will be a stronger player towards them than individual member states (if it wants naturally); also a fight among the member states for attraction investments of great companies will be limited; Europe cannot become a winner of such a tug of war. Very similar reasons make me to add also taxes on capital transactions to federal incomes for they have similar nature in relation to a nation state.

Without regard to taxes which will be assigned to the federation in the federal constitution a mention about progressivity of the tax system should not be absent in the constitution's text, similarly as we can read it in the constitution of Italy or partially in the Portuguese constitution. A progressive tax involves riches in financing the life of society in the way more corresponding to the magnitude of their wealth than any other form of equal degree of a tax for all income/property brackets; in addition to that, this is necessity in present time when extraordinary transfer of wealth upwards occurs. Just because wealth concentrates to bigger and bigger degree in the highest level of the society, a progressive tax is even necessity because sufficient means for financing the European society's running cannot be acquired by subjecting only other classes of the society to taxation.

The last provision in the section about taxes should say that the taxes should be assessed in that way so as either the federation and the member states are able to adequately satisfy their financial demands because there is always a danger that most taxation comes to the federation which will then subsidize the needs of the member states – that is not impossible to see in the existing federations.