Why an EU tax makes sense – By Alexander Hagelüken

Europe is the perfect whipping-boy, made to order for summer headlines. Germany’s largest tabloid trumpets the “insanity” that “we” are now “also supposed to pay an EU tax.” One feels the waves of indignation rise across the land.

Those up there in Europe seem to have dreamt up a new meanness. It’s not enough that Brussels Eurocrats keep trying to curb daily life with ever new regulations – and then freely distribute billions of Germany’s precious resources from Portugal to Bulgaria. Now they want to reach directly into the wallets of German citizens as well with this additional tax!

So much for the uproar. Yet as is often true when it comes to the EU, the matter requires a more differentiated view. With his proposal for an EU tax, Janusz Lewandowski, Europe’s Commissioner for Financial Planning and the Budget, has merely revived an old idea. As in the past, the idea has some merit, for the EU budget and how it is managed urgently needs reform. Europe’s bureaucracy wastes money and lacks transparency, and there is far too much squabbling among member nations – and far too much distance from the citizenry. Were it properly constructed, a special EU tax could serve as a healing instrument.

By now, the EU annually disburses around €110 billion. That is a lot of money, so where does it go? Most Europeans likely have only the vaguest of notions. EU politicians also go to some lengths to adorn what they expend with nice labels. It goes, they say, for “security” or “economic growth” or “rural development.”

But in reality, the EU’s budget is a collection of outdated subsidies for farmers and underdeveloped regions, legitimized more by tradition than by rational principles. The European economic area continues to spend the biggest chunk of its budget (42 percent) on agriculture, the key economic sector of the 18th century, rather than on education, research and innovation.

The only explanation for this is the lobbying power of the farmers. There is an old habit of supporting them more than other comparable labor market sectors which are also disadvantaged relative to the rest of the world. It is further justified with the vague, inadequate notion that with its subsidies, Europe is somehow supporting the production of foodstuffs that are better or more ecological or in a manner more appropriate (if not friendly) to the animals involved. No genuine debate takes place about these outlays.

The same goes for the second-largest budget item, the structural aid provided to economically weak regions located largely in the south and east. It amounts to 35 percent of the budget. Could Greece catch up with Germany economically because it has been cashing in on regional subsidies for decades? Or does this money instead provide incentives for mismanagement and stagnation? An interesting question. But not one broadly discussed in Europe.

That’s hardly surprising given the machinery producing that budget. Over the last few years, the share of the EU’s resources that are generated from export tariffs or value-added taxes have dwindled. Instead, the EU is largely financed by direct transfers from member states. It’s been claimed that states like France, Italy and Spain demanded money for their farmers in return for opening their industrial or service sector markets – which highly industrialized nation-states like Germany then profited from.

The UK preferred to distance itself from this bargain and insisted on staying out of the fiscal equalization scheme between EU member states. For that reason, it was long the case that all member states paid into the EU’s budget coffers according to their economic strength. Only the UK received a rebate. With the accession of poorer Eastern European members to the EU, the financial burden started to become too great for the net contributors – they were transferring more money into the EU than they were getting back in subsidies. As a result, the rebate principle has now been extended, at least in part, to Germany, the Netherlands and the Scandinavian members.

A straightforward system, right? No, it’s a big muddle.

And as it now stands, it takes an unparalleled effort every seven years to get what have become 27 governments to agree on a long-term EU budget – let alone how to finance it. That is one reason why it is not just EU commissioners but also politicians from Spain, Austria, France and Belgium who call for an EU tax.

There would be one great advantage if citizens had to directly support the EU rather than doing so indirectly through member state contributions: They might more intensively concern themselves with what is happening with their money. Those who pay want to know where their money is going. And the more direct the payment, the more likely the concern.

It is for that reason, for example, that Germans are only moderately concerned about the high health insurance premiums deducted directly from their paycheck but get incensed at the few euros they have to pay directly to their doctor or pharmacist. A direct EU tax would turn the spotlight on the tangle of EU expenditures. Is it really necessary to subsidize farmers to this extent? Shouldn’t regional subsidies have sunset clauses? Aren’t there some needs in Europe that are a little more urgent? All of this should form part of a broad debate.

An EU tax would also relieve the governments of having to fight over budgetary allocations, since part of the financing would already be ensured. Having an independent source of revenue would also be in accord with the political significance of the EU and the European Parliament. Far more important decisions are already being made there over the lives of citizens: The national and state parliaments in Germany, by contrast, are losing their significance. Whether the issue is climate protection, immigration, the fight against terrorism or propping up the markets – if the solutions are to be effective, no major political question can be resolved purely at the national level.

Of course, an EU tax can’t be an invitation to bureaucrats to spend even more than before. It also can’t be an additional tax. If Europeans are to pay directly, then transfers currently made by national governments to the EU also need to be reduced. National governments can then unburden their own citizens. In fact, they must do so, for otherwise an EU tax would simply encumber taxpayers still more.

The EU model is envied by many around the world who live in nationally fragmented regions. But the European Union must reform its financial system if it is ever to tackle the problems of the future with a reasonable chance of success.