To summarize the EU initiatives on tax harmonization, only the VAT rates and the excise duties have achieved a high degree of harmonization with the establishment of the Single Market and the abolition of intra-Community tax controls, following the article 93 (99) EC Treaty and therefore help preventing double taxation, tax avoidance and disturbing of tax competition. In the field of customs duties, EU obtained the most successful level of tax harmonization. Customs duties have been abolished for the intra-Community trade, and in commercial relations with other countries, the Member States practice a common customs tariff.
As it regards the income taxes, the reality reveals the large ranks of asymmetric tax rates that currently exist in the EU. Apart from the tax rates, tax legislation is a very important matter because it is in many cases rather complex and large differences from country to country rise problems to enterprises doing business abroad.
Moreover, the literature on the subject of the harmonization of the income tax (corporate and personal) within EU is fueled by one central question: Is regulated tax harmonization or is market driven tax competition the best solution to the economic growth for the EU state members to take fully advantages of the common market? The existing viewpoints run the gamut from entirely pro-harmonization to pure pro-competition stances. As a whole however, the literature simply reveals the ambiguity of the issue, as reflected by its increasingly complex attempts to convey the reality of the European situation.
The purpose of this article is to present the situation regarding the CIT (corporate income tax) and PIT (personal income tax) rates that currently exist in the EU, in order to have a base for a future discussion on the topic of tax harmonization vs. tax competition in EU.
The EU reality demonstrates a very large range of income tax rates among member states. The new Member States display lower top rates, while the highest rates are typical of Member States with the most elevated overall tax ratios, as seen in Table no. 1.
Regarding the CIT, the difference between the lowest rate (10% in Bulgaria) and the highest rate (35% in Malta) is 25 pp., more even the average EU-28 (22, 8%), as seen in Table no. 1.
Regarding the PIT, the difference between the lowest rate (10% in Bulgaria) and the highest rate (56, 5% in Portugal) is 46, 5 pp., much more even the average EU-28 (39, 3%) (Table no. 1).
Moreover, the new Member States have a different structure of the fiscal system, compared with the old Member States. While most old Member States display a high share of revenues from direct taxes, indirect taxes, and social contributions, the new Member States often display a substantially lower share of direct taxes in the total. Several of these countries have adopted flat rate systems, which typically induce a stronger reduction in direct than indirect tax rates.
There are differences not only between the old and the new Member States, but also among the old Member States, and among the new Member States, as seen in Table no.1.
|Member State||Corporate Income Tax CIT||Personal Income Tax PIT|
Made by author using data from http://ec.europa.eu.
The question 1: What does it mean Tax Harmonization?
Tax harmonization can also be understood as the process, the tools for reaching the selected aim and the result, harmonization of tax legislation itself together.
Once the concepts defined and the asymmetric income tax rates presented, it becomes very clear that full tax harmonization covering 28 countries is a difficult undertaking, since this area remains largely the prerogative of the Member States.
The question 2: Do we need a tax harmonization in EU?
Yes, we need for at least four reasons:
The question 3: If the reasons exist, why is it so difficult to harmonize the income taxes in EU?
I will try to systemize the answers as it fallows:
What will happen in the case of harmonization by adopting the actual average tax rate?
The countries with lower tax rates will lose revenues by moving in the right part of the t∙* (Bulgaria, Cyprus, Czech Republic, Ireland, Latvia, Lithuania, Poland, Romania, Slovenia) and the countries with higher tax rates will lose revenue by moving in the left side of the t∙* (Belgium, France, Germany, Italy, Portugal, Malta, Spain). Therefore, the above solution is not a proper one. (Of course, the shape of the curve is a simplified one.).
Graph.no.1 The Laffer Curve
This article rely on my last year's research on the topic “Discretionary and Nondiscretionary Fiscal Policy of the European Union Member States".
The information provided in this article is for general information purposes only. The information is not intended to be comprehensive or to include advice on which you may rely. You should always consult a suitably qualified professional on any specific matter.
Dr. Mihaela Göndör
Dr. Mihaela Göndör is an Associate Professor PhD at “Petru Maior” University of Tîrgu Mures, Romania. Her educational background includes Bachelor of Economics, Master Degree in Local Public Administration Management, PhD in Economics/Financial Management and a Postdoctoral degree in EU fiscal policies. Mihaela is consultant and Judicial Tax Expert, member of the Chamber of Tax Consultants, Romania. She is awarded with a postdoctoral scholarship from the Romanian Academy with the theme “Discretionary and Nondiscretionary Fiscal Policy of European Union Member States”. She is author and co-author of 10 books, 47 university courses, 29 professional research papers published in international journals indexed in international research bases, 70 publications in international conferences volumes and proceedings. She is in charge of the following academic courses: Public Finance, Public Budget, Comparative Taxes and Fiscal Policies, Financial Policies, International Finance. Her research interests are public finance, taxation, fiscal policy in EU.
She is regularly quoted in local and international research papers, scientific articles, books, and publications.
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