Can the EU tax its way to a €2tn budget?

Countries are scrutinising the €58-billion-a-year plan to tax companies, tobacco, carbon emmissions, and e-waste

Can the EU tax its way to a €2tn budget? Countries are scrutinising the €58-billion-a-year plan to tax companies, tobacco, carbon emmissions, and e-waste

The European Commission’s plan to raise €406 billion through new EU-wide levies to fund the next €2 trillion seven-year budget is more political horse-trading than a way to reach EU-level goals.

“The most crucial question that the Council will need to answer in the next year is how to finance [the budget],” said one EU diplomat about countries’ ongoing closed-door budget negotiations. Yet, why this question dominates is less obvious.

All EU money ultimately comes from member states. Currently, two-thirds of the EU budget comes from direct national contributions based on each country’s gross national income (GNI), which can be increased if needed.

New EU levies, the so-called own resources, are in theory meant to raise money directly at EU level and/or incentivise EU policy goals, such as taxing carbon emissions of imported goods. However, the negotiations over the seven-year EU budget are intensely political, and the Commission proposal to raise €58 billion annually from new corporate, tobacco and green taxes, plus changes to customs revenues, is no exception.

Unpopular taxes

Only the proposed CORE levy – a turnover-based tax on large companies that would raise €6.8 billion annually –and some customs changes would raise EU-level money directly, according to an assessment from the European Court of Auditors (ECA) published last week. The remaining €44.6 billion would still have to come from national budgets, they said.

In terms of policy goals, both CORE and the proposed €11.2-billion-a-year tobacco tax (TEDOR) are seen as weak or even counterproductive.

CORE is widely unpopular among EU member states because they argue it conflicts with the bloc’s competitiveness goals. The Court of Auditors also warned it could harm the bloc’s competitiveness in its technical assessment.

TEDOR is also facing strong resistance. It would simply redirect 15% of revenues from existing national tobacco taxes to the EU level, without creating a new incentive for countries or consumers to change behaviour.

“In its current form … it wouldn’t necessarily reduce tobacco consumption,” said Zsolt Darvas from Bruegel, a Brussels-based think tank.

The auditors said the Commission has neither assessed whether the new levies are worth the additional administrative costs nor whether other types of interventions could better achieve the political goals.

Political merit

With tight national finances and new competitiveness and defence priorities, governments have little room for manoeuvre.

In principle, financing more of the EU budget through EU-level taxes could make things easier politically at home, as national leaders could shift blame for new taxes onto Brussels.

But the bigger political selling point is that the plan “changes the balance” of expenses between EU countries, said an EU diplomat.

The proposed levies would shift the financial burden away from richer countries, like France and Germany, towards less wealthy EU countries. This way, the deal becomes more appealing to countries that have the greatest influence on the total budget size.

“Please look at this proposal as a package,” said EU budget chief Piotr Serafin to EU finance ministers back in October. “If we look at the package, then there are good chances that you will see a political opportunity to go ahead with this proposal.”

Alternatives?

Besides the Commission’s proposals, a wide range of ideas have been floated by the European Parliament, capitals, economists or commissioners in a bid to find new revenue for the next budget.

In a recent debate in the European Parliament, lawmakers showed interest in taxing gambling, wealth, crypto, financial transactions, or digital services.

So far, however, these ideas are not part of the Commission’s formal proposal, and Brussels has not signalled it is ready to revise its plan.

“If the generation of fresh money fails or is insufficient, we must also reconsider the expenditure side,” German Vice-Chancellor Lars Klingbeil said last year, adding that the proposed EU budget size is already “significantly too large”.

EU governments hope to agree by the end of June on indicative figures for the main spending areas of the next long-term budget.