Towards Common EU Taxation Policies Fostering a Fair Balance Between Movers and Stayers in the EU

1. Introduction

In her Montesquieu lecture titled ‘Substantive tax sovereignty under globalisation’, Professor Dagan proceeds in three steps. First, she explains her concept of substantive tax sovereignty, namely that the coercive power to raise taxes is part of a ‘social contract’ between the state and its constituents which includes that the tax revenues will be distributed justly, maximizing the welfare of all residents. Secondly, she points out the ongoing challenges for states to uphold viable and legitimate tax systems in a competitive global environment. Stimulating a ‘marketization’ of interactions between states and (potential) residents, globalisation threatens to undermine substantive tax sovereignty. This may lead to lesser tax revenues to maintain the welfare state, harming the interests of non-moving citizens. Thirdly, while international tax cooperation can significantly contribute to tackling harmful tax competition, Dagan contends that regressive allocation of the benefits of cooperation will bring negative (long-term) outcomes for the weaker states participating. So, Dagan defends that the larger share of benefits of a cooperative pact should be enjoyed by the weaker countries. In her view, cooperative arrangements are legitimate only if they also take substantive tax sovereignty of the weaker states sufficiently into account.

While it would be interesting to examine ongoing (hopeful) initiatives within the G20 towards a minimum tax on ultra-wealthy individuals,¹ assessing these in light of Dagan’s proposition, I will not go down that road because it is far outside my area of expertise. Instead, I will comment and build on the second part of the lecture by Dagan, where she shows how globalisation drives states to develop advantageous tax regimes for mobile actors at the expense of the interests of (and the social contract with) their non-mobile constituents. I will consider this tendency within the context of the European Union, with its internal market based on free movement rights, fueling the competition between EU member states for mobile factors: capital, economic activity and also residents, who are increasingly mobile as well. In line with Dagan’s focus in her Montesquieu lecture, I will not elaborate on debates and measures to combat tax avoidance and evasion by multinational corporations,² but focus on mobile versus non-mobile residents.

2. Towards common EU tax policies for better off taxpayers

As Dagan explains in her lecture, the more mobile and transient, the better off taxpayers are with regard to tax advantages, at least if they are rich and/or otherwise economically strong. This risks undermining the sovereign power of the state to maintain a tax system based on distributive justice by providing a package of public goods and services that maximizes the welfare of all its constituents. Hence, globalization puts before states the choice to either keep taxes high and potentially push the more wealthy and powerful economic actors to another jurisdiction or vice versa, which means less public revenue to maintain the welfare state, which is in the interest of the less well-off residents.

Indeed, a recent report by Zucman, drawing on examples of European countries such as France, the Netherlands and Norway, shows that in these EU/EEA states, billionaires have lower effective capital tax rates than the average person due to failures of the individual income tax (and wealth taxes when they still exist). The reason is that the wealthiest individuals derive their income not from wages, but from assets they own, such as businesses. By avoiding dividend distribution and capital gains realizations; and by using holding companies and similar legal structures, wealth can be structured in a way that allows individuals to report little to no taxable individual income, and thus avoid the individual income tax.³

Moreover, according to a report of the European Commission in 2020, in the context of the integrated EU market where high-skilled workers or ‘high net-worth’ individuals are increasingly mobile, many Member States have set-up specific schemes targeting mobile top earners. This concerns, for instance, expats on a gross income above a certain threshold, or certain professions typically associated with a higher income and/or skill level. Notably, sometimes preferential corporate tax measures are combined with preferential income tax measures.⁴ For example, to facilitate the relocation to a(nother) Member State of high-income individuals in managerial or other specific functions. This is sometimes necessary to meet so-called substance criteria set for being allowed to conduct business activities in a particular jurisdiction. Furthermore, so-called ‘golden visas’ exist in several Member States,⁵ which can sometimes be used to reduce or avoid income tax, or to launder the proceeds of illegal activities.⁶ These special tax schemes for high-income earners, or loopholes to avoid or reduce taxation, are criticized for undermining the progressivity and overall fairness of national tax systems and depriving other Member States of taxes due. Also, these policies and practices distort the functioning of the internal market in the EU, by influencing (re)location decisions through tax benefits/incentives.⁷

In the Summer of 2023, a (unsuccessful⁸) citizens’ initiative call was launched to put the introduction of a European tax on great wealth on the European Commission’s agenda.⁹ The initiative was underpinned by the argument that increasing wealth inequality and the rising cost of living in the post-COVID economy, calls for a joint strategic approach and coordinated action. The great wealth tax would also serve to fund European policies for combating climate change and contribute to the Union’s own resources.

Given the internal market distortion fueled by tax competition between the Member States, the citizen initiative called on the European Commission to make a proposal based on internal market competences. Finding a correct legal base is important. The few articles of the EU Treaty that refer explicitly or implicitly to taxation find their justification in their contribution to Union policies, and, in particular, to the realization of the internal market.¹⁰ However, as unanimity voting is required, chances are low for measures to be adopted.

To tackle that problem, the Commission called in January 2019 on Member States, the European Parliament and all stakeholders to engage constructively in a debate on how to move gradually in EU tax policy from unanimity voting to the ordinary legislative procedure. Such a shift would mean that the European Parliament would become a co-legislator, giving more weight to citizens’ views and increasing accountability. Also, the Commission emphasizes that the aim is not to creep more competences but ‘to allow Member States to exercise their already pooled sovereignty more efficiently, so that common challenges can be addressed more swiftly.’¹¹ As its initiative in 2019 was not successful, recently, the Commission reiterated its call, now in a communication outlining its views on how the EU should prepare for further enlargement. According to the Commission, the challenge of achieving unanimity on tax proposals within the current 27 Member States should be addressed in order to prevent that it would become an even bigger challenge with a larger EU.¹²

3. Rebalancing the interests of ‘movers’ and ‘stayers’ in the European Union

If it is so difficult for the EU to achieve a common tax policy, does it merit consideration to limit mobility rights in order to protect Member States’ substantial tax sovereignty? In her Montesquieu lecture, Dagan argues strongly against that. The problem is not mobility in itself, but ‘the fact that mobility is rewarded, and since mobility is unequal these rewards are not distributed equally,’¹³ according to Dagan. Mobility rights provide an exit option which does not only give individuals the (consumerist) liberty to choose for a jurisdiction that is more responsive to their interests, but also is a healthy check for state power, contributing to political participation. So, the challenge is to ‘navigate a commitment to people’s exit options without undermining the voice of those left behind.’¹⁴

Although the EU has to patiently hope for Member States’ eventual engagement to exercise their already pooled sovereignty more efficiently in tax matters, with regard to (intra EU) exit options it has strong powers. The free movement of people is one of the ‘fundamental’ four freedoms, opening up opportunities for citizens to live, work and study in other Member States. According to the Eurobarometer, a large and stable majority of Europeans (72%) affirm that EU membership is advantageous and that their countries have benefited from being members of the EU.¹⁵ In light of this, one may wonder whether next to protecting these credible exit options, the EU is also responsive to balancing this with the legitimate interests of ‘those left behind’.

Especially since Brexit, it seems that the EU has indeed become aware of the backlash that the asymmetric nature of international mobility of movers can have. Particularly since the stayers (those left behind) have voting power while the movers do not (unless they are not only residing but have also gained citizenship in their host/destination countries). While on the one hand stating firmly that ‘freedom of movement is non-negotiable as long as one is Member of the EU or if Britain wants access to the single market’,¹⁶ the European Commission has ‘learnt from Brexit that many Europeans fear globalisation and want the EU to provide more social protection in the internal market’.¹⁷ Nevertheless, while Brexit gave impetus to the EU pillar of social rights (solemnly launched in 2017), the challenge of balancing a commitment to people’s exit options with the interests of those left behind was only more clearly raised in the recent ‘Letta-report’.¹⁸ Remarkable is the emphasis that mobility is not an end in itself, but an opportunity that remains largely limited to a minority of EU citizens.

The Letta-report highlights that ‘about 135 million people, nearly one third of the EU population, live in places which, in the last two decades, have slowly fallen behind. Residents of regions in decline often feel having no opportunities, but to relocate due to the lack of jobs, access to quality education, and adequate services necessary for cultivating a self-sustaining and dignified lifestyle within their own communities.’¹⁹ Effects of ‘brain drain’ combined with demographic trends result in a sharp working age population decline in some of these regions.

Moreover, according to Eurobarometer, over a third of Europeans (37%) say they have difficulties paying bills; 73% believe that their standard of living will decrease over the next year, with 47% saying that they have already witnessed economic hardship. Also, more than 60 million EU citizens live in regions with GDP per head lower than in the year 2000. An additional 75 million live in regions with near-zero growth.²⁰ These negative experiences and worries feed EU resentment as, according to the Letta-report, people living in areas with low or negative growth, often see only the negative effects of the freedom of movement. Hence, perceptions gain ground that the EU internal market mainly benefits the better off individuals ‘who are already equipped with the means and skills to take advantage of cross-border opportunities’, next to the large multinational enterprises that operate across the EU.²¹

To counter these worrying developments, the report calls for reinforcing a strong social dimension in the EU internal market, promoting ‘inclusive prosperity’. This means that the EU must not only continue to secure the free movement rights of people, but must at the same time ensure a freedom to stay. It is stressed that while free movement is a valuable asset, it should be a choice, not a necessity. According to the report: ‘Freedom to move and freedom to stay are two sides of the same coin, two mutually reinforcing pillars of European integration, that must be developed together. The Single Market should empower citizens rather than create circumstances where they feel compelled to relocate in order to thrive’.²²

Several proposals are made to ensure a freedom to stay, ‘with a newfound focus on solidarity’. For instance, framed as a key precondition is the need to guarantee accessible, affordable, and quality Services of General Interest (SGI) across all EU regions, from urban centres to rural areas. Also, the housing affordability crisis in large parts of the EU is addressed. It is noticed that this endangers the freedom to stay also in receiving areas, not just in the areas that face depopulation. A very concrete recommendation is to review the definition of ‘social housing’ in the SGI Decision (2012/21/EU) as it is too narrow, constraining the capacity of public authorities to expand their public housing policies. Notably, to ensure an inclusive internal market and continued funding of key EU public goods and adequate social instruments, a harmonised EU tax framework is deemed essential, next to the fighting against aggressive tax planning, tax avoidance and tax evasion.²³

4. Conclusion

Dagan argues convincingly that globalization ‘with all its many benefits, threatens each and every aspect of states’ tax sovereignty.’²⁴ The Letta-report shows that the situation in the EU context is perhaps even more challenging: ‘globalisation (and digitization) of the economy, in combination with the concentration of ever greater wealth in the hands of fewer individuals, are problems that directly call European institutions into question.’²⁵ In light of that, the EU Commission is right with its plea to move to qualified majority voting for EU tax policy measures, so that common challenges such as striving for ‘inclusive prosperity’ encompassing both the needs of movers and stayers, can be addressed more adequately. Indeed, creating such ‘pooled’ substantive tax sovereignty could help the EU deliver on the promise of upward socio-economic convergence. This is what the European ‘social contract’ between EU Member States and with EU citizens is essentially about.

Competing Interests

The author has no competing interests to declare.