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EU/Eurozone – Start Again or Plod On? – Taxation

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EU/Eurozone – Start Again or Plod On?

Taxation

Taxation is the instrument of State that provides the income to service the functions of government. It can also be used to incentivise investment, to change behaviour, and to redistribute wealth.

Within the EU today each nation state has its own tax regime plus a tax to fund the various organs of government of the EU – notionally VAT.

The disparity of tax regimes and the effectiveness of collection throughout the EU is almost a north/south divide. The Mediterranean nation states have proven poor at tax collection much through corruption and black economies, and thus their current dilemma. The more Northern nation states have reasonably good collection and little or no corruption.

Years of attractive stimulus for businesses by providing complex tax incentives are now coming home to roost. The desperate need by governments for new sources of tax revenues has unleashed wrath on major corporations who are certainly exploiting the available tax incentives albeit, by and large, they are not contravening statute. However politicians are suggesting that these businesses have a moral duty to pay more tax, thus whipping up the flames of anger among the electorate, and working with other governments to do the same in order to close the door on these businesses relocating – a coup. It will be interesting to see how these corporates respond to this approach as they have a right to think it a breach of faith. Not that I support their position as I have seen smaller, developing states essentially raped by corporates forcing their terms onto inexperienced struggling governments just trying to bring some wealth creation to their country. Furthermore I have already mentioned in a previous essay that corporates have a moral duty to the welfare of their staff and immediate environment – something that has substantially diminished as a result of globalisation, but needs to be reintroduced.

I think it justified within a discussion about the EU to include the converse of taxation in the form of nation state subsidies from the EU government. The most contentious of these is the Common Agricultural Policy (CAP) a mechanism created to normalise competition in farming output whilst markets adjusted, but which has not yet gone away. Indeed the CAP still accounts for some 50% of the EU budget. The French appear to use the substantive revenues they receive under CAP to put off the fateful day of much needed social reform in France. It is easier for the French government to plead with the EU Commission to keep this subsidy than it is to break the stranglehold grip over social policy of the trade unions in France. This has been a thorn in the side of EU integration for too many years. A unified tax system throughout Europe, applied equally to all, could address this problem without any reasonable objections from any trade union movement.

If we refer back to our corporate structure described in ‘EU/Eurozone – Start Again of Plod On – A New Government’ it is easy to see that tax revenues yield the income streams that provides for the State to function. A nation state, just as with a corporate, has a Balance Sheet showing all State assets and Liabilities, an income statement showing all tax receipts and the costs government and the social state, and a cash flow statement showing tax receipts versus expenditure on a timeline indicating when the government coffers will be short of funds to meet its commitments (and thus the need to visit with the Central Bank to cover any shortfall), and when it will be in surplus. The theory is that good government will result in balanced books, something Margaret Thatcher was forever reminding her colleagues in the House of Parliament when they wanted yet more money for some social crusade, and something Tony Blair just ignored in favour of expensive social engineering intended to buy popularity and the votes of the people. Thus the infamous note left by Labour MP, Liam Bryne, former Chief Secretary to the Treasury at the time of the general election in 2010 which stated ‘Dear Chief Secretary, I’m afraid that there is no money. Kind Regards and Good Luck’ – a very different situation to the one Labour inherited when they came to power.

What about the rest of Europe? We know that Germany has probably the most austere tax regime, albeit that the Scandinavian countries make take exception to this statement. The most lax at tax collection is probably Greece where, by all accounts, tax officials are readily corrupted, and the ruling elite are part of the problem. As far back as ancient Greece Aristotle knew that no freedom is limitless. The negative aspect of too much freedom of economy was an issue already recognised by the ancient Greeks, and proves to be one of major reasons for the current huge crisis in Greece today. As in ancient Greece it is still typical that very rich people think that is very natural not to pay taxes, and not even to have a conscience about it.

Clearly entrepreneurs and wealth creation are at the heart of any free market economy and must be encouraged and rewarded. Furthermore it is arrogant of politicians in general to think that they can outsmart the clever greedy people. However a united political system in the form of a simple and unified tax structure applied throughout our United States of Europe could close many of the gates to ensure that excessive freedom is not available.

In our United States of Europe the whole tax system would have to be overhauled in the name of equality for all. Thus what might a centralised tax system look like so that it is seen to be balanced between rich and poor states?

Within a framework of subsidiarity the central government would need funds, and each member state would also need centrally allocated funds to operate State policies. Furthermore each member state could raise taxes specific to the requirements of each state, with the consent of the people of the member state. There are a multitude of cultures within Europe having different requirements in the name of well-being and quality of life. These should not be stifled by an overbearing central government, and thus allow the state assemblies to respond to such requirements through a democratic process of state taxation.

Thus we would need State taxation in the form of corporation tax, income tax, investment income tax, duties, levies, etc. The rate of taxation on these sources would need to be the same for everyone, and collection would be controlled by a central government revenue agency. For example all employed people would have income tax and national insurance (for healthcare and pensions) deducted monthly at source thus providing central government with a constant stream of income, easy to collect, and overcoming the existing difficulties presented to citizens in some nation states who are paid their salary gross of deductions and then have to find funds to pay their taxes at the end of the tax year. Income tax thresholds, i.e. the minimum salary to attract any income tax, should be set at a liveable level (thus optimising the tax collection body to a cost effective level), and national insurance contribution up to this level should only include a pension provision – healthcare should be free for the poorest.

VAT could be transformed into a tax to allow for redistribution of wealth to poorer sectors. For example VAT, being a capitalist tax and applied to purchase power (consumption), should have its bounds set such that the essentials of life should not attract VAT. This means that most food, anything to do with rearing children, books, newspapers, etc would be exempt from VAT. Indeed VAT could be seen as a luxury tax and thus only paid by people who had enough disposable funds to afford the items. This means that poorer people would pay little VAT as a percentage of their disposable income, and richer people would pay substantially more. These funds could be used to improve the environment of the poorer people, and help poorer member states to raise the standards of living for its citizen by providing necessary infrastructure to encourage wealth creation.

The essential requirement of the system of taxation within our United States of Europe is that it is seen as unified and fair to all people thus preventing unnecessary competition between member states, and to prevent artificial migration of people. For example, the extreme application of subsidiarity in Switzerland has provided a bizarre situation where people will move just a few streets in the same city for the sole purpose of achieving lower taxation in a different municipal system, but still work in, and enjoy the benefits of the higher tax municipality within that same city. This level of subsidiarity could be compared with tribalism and thus is very undesirable, and should be avoided.

Thank you for your continued interest in this European venture.

This blog is part of a series of blogs called ‘EU/Eurozone – Start Again or Plod On?’ and which examine the framework for a truly United States of Europe, and what would be needed to achieve it. Look at the archive index to find other blogs in this series.

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EU/Eurozone – Start Again or Plod On? – Intro

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EU/Eurozone – Start Again or Plod On?

Introduction

The Eurozone is still in crisis. Greece, Spain, Portugal, etc. all need yet more money, but who is prepared to make these funds available to these seemingly bottomless pits? A recent Top Gear program featuring a race through Spain with so-called budget-priced supercars revealed disturbing images of whole new towns developed to completion, even with the signs of intended occupants above shop windows, but without any signs of life or occupation. One of these urbanisations was on the outskirts of Madrid but was so empty that they could have a 5 km street race. A brand new international airport used for just one year and then abandoned. For once Top Gear actually provided a documentary about the situation in Spain more hard hitting than any visual newsreel that I have seen. The image of budget supercars in the £120,000 – £200,000 price range against this devastating backdrop made the experience surreal.

Do we need another Marshall Plan for the Eurozone, but on what basis – there has been no devastating war or natural disaster. So what went wrong with the EU/Eurozone? Can it be fixed, and if so who is prepared to finance it.

Is it broke beyond repair? If so we can’t just abandon it – there is significant collateral damage in the form of ordinary people living in fear of what their future holds. Unemployment is at unprecedented levels in post-war Europe, and we have a whole generation of young people with no apparent future.

I was fortunate enough some years ago to have Henry Kissinger sitting next to me on a flight to New York. I will always remember one comment he made during that flight. We were discussing the difference in attitude between Americans and Brits. He stated that the people in the USA provided far more economic value during their working life than Brits. His criticism of the Brits was that they gained years of valuable experience in the workplace but, at 60 – 65 years old, they were retired off and sent to the scrap heap. He said that in the USA the workforce retired only when they were no longer capable of valuable function, or they chose to retire. On valuable function, this included mentoring the younger generation to impart their valuable experience and wisdom. He said that Companies in the USA retain the older generation to mentor younger people and thus make the younger generation more valuable faster than conventional training.

This reverberates more today than it did then. In the UK we have the crazy situation of valuable resources and experience wasted only because they are over 50 years of age, and a younger generation out of work because education failed them and thus considered of little value to businesses already watching every penny of cost. Many businesses have a dumbed-down performance because their bright young things just do not have the knowledge and experience to keep standards high – another wasted cost? I accept that there is also a celebrity attitude problem amongst a percentage of the younger generation, but there is also a greater percentage that seriously do want the opportunity to perform. We have started to increase the retirement age, but it will be interesting to see if business will capture the older people and use them wisely, or just find other ways to remove them from the workplace. Why do we need a retirement age at all other than to identify when a State pension will be available. If one thinks lateral on this point the employer could offer a reduced salary to an older person receiving a State pension, rather than retire them off, and thus employ the younger person to be mentored at a nominal cost after applying the reduction in salary of the mentor. Two employment issues resolved in one simple move of increasing valuable contribution.

We also have a Government quietly encouraging businesses to prefer younger people over older people in spite of ageism legislation – for good political reason, albeit short-sighted. Businesses need talented people that can add value. Young people need knowledge and experience to be valuable. Older people have this knowledge and experience in spades. When do we bring the 2 together?

Now look at retirement ages in other Eurozone countries, especially those in trouble. Some of these countries scrap valuable resources years before they do in the UK. How much economic value is wasted in the EU with these crazy policies and attitudes – and at what cost?

How many of the towns in Spain would have been built if they had harnessed the knowledge and experience of the older people rather than promote younger people too quickly and thus making poor decisions. I am sure that this is reflected throughout Europe. Picture a young, bright, but inexperienced loan officer coming face-to-face with a known and wirily developer looking for large debt to equity ratios for his next (speculative) development – the loan officer being overawed. Then superimpose an older, very experienced loan officer into the same situation. I suggest we see the difference between ‘yes’, and ‘maybe’ – if you increase your equity input and show me some credit-worthy presales.

So what is wrong in the Eurozone? Just blaming the banking crisis is convenient for politicians, but otherwise short-sighted. Could it be that the formation of the Eurozone revealed historic cracks in economic policy that otherwise had been quietly hidden by politicians hoping that it would not be revealed on their watch. How many politicians in the Eurozone watched in envy as Margaret Thatcher broke the stranglehold power of the UK trade unions wishing they could do the same in their country. I sense that had Angela Merkel been in power at the same time as Thatcher then the German unions would have suffered a similar fate.

What I want to do over the following weeks, with the help of the blogging community, is to develop a serious framework that could work in Europe, and then examine whether or not the existing EU/Eurozone can be adapted to this new framework, or should the existing model be scrapped, as were the EEC and ERM before, and the whole of Europe move into a structure built more on economic and business-driven sensibility rather than the existing political mishmash.

I will post the outline of this process tomorrow.