Dalibor Rohac: The last thing the European economies need today is an EU-wide tax

Dalibor Rohac is a Research Fellow at the London-based Legatum Institute. Formerly a Weidenfeld Scholar at the University of Oxford, he works on topics related to development and free-market economics.

When the EU commissioner Janusz Lewandowski unveils his proposal to introduce an EU-wide tax in September, he will not be met warmly. Nor should he be, as the idea of a European tax is profoundly misguided, especially at a time when the economic recovery is still fragile. Clearly, the tax is a bad idea regardless of one’s opinion regarding accountability issues at the European level and about the fact that levying taxes has always been a prerogative of nation-states – not of intergovernmental organisations.

It is true that the effects of the tax on European economy would likely be modest, especially if the tax is not levied directly on productive activities but on, say, carbon emissions or air travel. And a financial transaction tax, while potentially popular with voters across Europe, is unlikely to be adopted since Europe needs its financial centres to be strong. Thus, the EU tax will effectively serve as a kind of consumption tax, and as such will not likely introduce major social costs.

Nonetheless, an EU-wide tax is an extremely ill-advised idea for a number of reasons. First, the suggestion comes at a time when many European governments are struggling to contain their own deficit problems without excessive tax rises which could interfere with economic recovery. The EU is mandated to run a balanced budget, and its 2011 draft budget is similar in size to this year’s budget, something for which the EU should be lauded. The very last thing that the European economy needs right now are new taxes that would not even serve the purpose of balancing frail public budgets but would be pocketed instead by the EU institutions.

Second, it would just disingenuous to claim that the objective of the suggested tax is to tackle climate change or to address the “too big to fail” problem – as some might be tempted to argue if the levy takes the form of a carbon tax or a financial transactions tax. In fact, the EU institutions simply seek to raise additional revenue, independent of the contributions arriving from member states. It is true that, when measured by the standards of European nation states, the EU budget is rather small.  In 2011, its expenditures (and revenues) are planned to be €142.6bn, close to 1% of EU’s gross national income. The modest size, however, does not imply that the money is spent well. Quite the contrary.

Before the EU institutions demand additional sources of revenue, they should investigate whether the money that they already have at their disposal is being spent on the purposes the EU has already identified as most urgent. For instance, back in 2000, European leaders set out for themselves an ambitious programme of fostering the knowledge economy and improving Europe’s competitiveness, known as the Lisbon Agenda. Clearly, this programme has been an utter failure. Yet this should not be a surprise given that the EU spends half of its budget on agricultural subsidies and a dominant fraction of the rest is directed towards structural and cohesion funds – large transfer programs to economically challenged regions of the EU. Only slightly more than 10% of the total budget is used towards projects which are at least nominally aimed at improving competitiveness for growth and employment.

Clearly, the Common Agricultural Policy does little to make Europe a more prosperous place – besides making it a net exporter of dairy products. Likewise, in spite of decades of transfers and regional development programmes worth tens of billions of Euros yearly, the structural and cohesion funds have not eliminated some of the most blatant regional disparities existing among the old member states.

This is not to say that the EU should direct more resources into infrastructure or research and development, or that it should supplant the role of national governments in making their economies more flexible and open. The role which the EU institutions can play in improving Europe’s competitiveness remains an open question – and there are reasons to believe that this role is rather small. At the same time, it ought to be clear that this goal will not be attained by subsidizing large-scale farming or by purchasing and subsidizing exports of powdered milk.

We are in a period when more and more Europeans feel disenchanted with what has been done in their name by their governments in the European Union. This strongly suggests that before even contemplating an EU-wide tax to finance its activities, the European Union needs to rethink radically the structure of its own spending and the effectiveness of activities which it is pursuing. Until such rethinking takes place, Mr Lewandowski’s plan should – to borrow from Sarah Palin - emphatically be “refudiated”.