Tax harmonization in the EU: an extremely dangerous idea

In the last few weeks, there has been a lot of buzz in the European media about the proposal by Angela Merkel and François Hollande to harmonize corporate taxes in the European Union. The specific idea is to introduce a minimum tax rate that all EU member states are required to implement (a detailed plan is expected to be presented on June 17). Such a reform could have extremely serious political and economic consequences for the whole of Europe and is therefore important to analyze closely.

The main idea of the reform is to prevent large multinational companies such as Starbucks, Amazon, Apple and others from continuing to avoid the high taxes of countries such as Germany and France by registering their income in countries with lower tax rates (Luxembourg, the Netherlands, etc.). In many cases, the majority of the turnover of such companies is realized in the strong economies of countries such as Germany, but due to the high taxes there, the companies prefer to register their operational bases in other countries with more favorable tax policies.

This type of reform has been proposed several times in the past, but has never been adopted by the European Parliament due to opposition from a significant number of member states with lower taxes in this area.

But still, if such a reform were to be adopted, what would its potential effects be? Although in itself it does not seem like a very serious reform, the precedent it would set is very dangerous. The danger lies in the fact that the adoption of tax harmonisation for the entire union opens the door to a much more serious and radical centralisation of power in the union. If tax policy in the EU were to be managed at a central level, this would be a serious threat to the individual sovereignty of all member states, especially the smaller ones. Such a move would mean a serious departure from the original goal of the EU – to be a decentralised economic and foreign policy unification of European countries.

But the most important are the potential economic effects. Such a reform would certainly have a negative effect on the group of small countries in the EU with low corporate tax rates, of which Bulgaria is a part. The result, which is very likely to be realized, is the migration of large companies out of these smaller countries because their tax system is no longer so favorable.

In the case of countries like Bulgaria, the favorable tax climate is precisely what keeps them competitive with economic giants like Germany and France. Compared to countries like Bulgaria, Germany and France have a much better developed infrastructure, a much more reliable justice system, lower levels of corruption, etc. In almost every relevant aspect, they are more advanced than us, the only advantage we have in attracting foreign investors is low taxes.

And although the main target of this reform is large corporations, small and medium-sized businesses will actually also be seriously harmed in countries where the tax rate will have to be raised to cover the minimum. Higher taxes mean higher barriers to the creation of new businesses in the market and would increase the costs of existing ones. Small and medium-sized businesses do not have as many resources and capabilities as large corporations, which means that in general the additional costs of higher taxes are quite likely to affect them much more seriously.

It is possible that a higher tax rate will also mean higher prices for consumers, reduced business operations and, accordingly, layoffs and increased unemployment. All of the above negative effects may occur, but which of them will be experienced in reality - and to what extent - depends on three factors: 1) what the specific minimum tax rate will be (if the reform is adopted); 2) how businesses will decide to adapt to the changes; 3) the specific economic situation in the countries directly affected by it.

In Bulgaria, the corporate tax rate is currently 10%. This automatically places us in the group of EU member states whose economies would be most seriously damaged by the reform proposed by France and Germany. Higher taxes mean more revenue for the state treasury and less for private enterprises, and in the case of Bulgaria, given the high levels of corruption and the overall inefficiency of state projects, this money would certainly be more adequately used by the private sector.

Again, it should be noted that the precedent that such a reform would set is of utmost importance. If synchronization were adopted, countries like France and Germany could much more easily push through additional reforms in the same direction in the future. This is precisely why the initial reform, if adopted, may not be so radical. But this is precisely where the danger lies, because it is entirely possible that this is just the beginning of a series of reforms aimed at bringing corporate tax rates as close as possible to those in Germany and France. Needless to say, if something like this were to happen, all the negative economic effects that we have already noted as possible would become even more serious. Just for comparison, if corporate taxes for all EU countries were to be fully aligned with those of Germany and France, for Bulgaria this would mean tripling the tax rate.

All of this would naturally harm the development of countries like Bulgaria, which would subsequently lag even further economically compared to countries like Germany, France, and the UK. One of the main initial goals of the European Union is to stimulate mutual cooperation and support the development of economically more backward member states, but the tax reform proposed by Merkel and Hollande would achieve exactly the opposite – the more developed and richer countries would perhaps gain, but only at the expense of the smaller and more backward ones.

Raising taxes is always a bad idea from an economic and even ethical point of view, but in this case the case is even more serious than usual. The precedent that the proposed reform would set is extremely dangerous – both for the individual sovereignty of EU member states and for the economic development of the more backward European economies, especially if more reforms of this type are introduced in the future. The potential effects of such a reform are extremely significant and its introduction would mean that Europe is embarking on a dangerous path of ever greater political and economic centralization.

[1] http://www.kpmg.com/global/en/services/tax/tax-tools-and-resources/pages/corporate-tax-rates-table.aspx

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