IREF - Index of Fiscal Decentralisation

Why Develop an Index of Fiscal Decentralization?

Debates on the future of European integration usually centre on “what to do next?” Deepening or widening? Or both. The idea that perhaps we have gone far enough is not often explored. One area where it is almost taken for granted that “Europe must progress” is in taxation. Ever since the publication of the PRIMAROLO report much effort has been expended on emulating the OECD on the need to fight “harmful tax competition”. The result has been an extended battle to harmonize withholding taxes on savings and/or to ensure administrative cooperation between tax authorities, culminating in the adoption of the Savings Directive in 2003. Some member states also support the establishment of agreed minimum corporate tax rates, and the German government has even threatened to withhold EU regional and cohesion fund aid from Central European countries which refuse to harmonize their tax systems with those of Western Europe.. Different tax rates across the European single market, not to speak of the single currency zone covering 12 members, are thought to be distorting. They are said to generate inefficient capital and resource flows between member states.

This being the general context, what purpose is served by studying fiscal decentralisation?

The future of European integration is more uncertain than ever. Many member states are currently emphasizing decentralisation or devolution as a better and more democratic form of governing their own societies, while at the same time supporting moves towards greater centralisation at the level of the European Union. This trend is not only paradoxical. It needs to be included in any vision of the future of European integration. Since this question is absent from the text of the Constitutional Treaty Project, it is not too late to launch a debate on the issue.

This is all the more necessary because the current Commission has pursued a strongly centralizing bias, in particular in relation to taxation (nor is this the only area) in order to prevent “harmful tax competition”. However, this harmonization bias at European level runs against the decentralizing trend at member-state level. How much freedom do member states have (or should they have) to “deconcentrate” their own internal domestic tax arrangements? How will greater local tax autonomy at sub-national level impact on the “harmful tax competition” debate? Is the Commission on a collision course with the growing tide of public opinion in favour of more local democracy, especially in fiscal matters? Does institutional competition in fiscal matters lead to a “race to the bottom”, as many fear, or to constraints on the growth of government, as many hope?

Any debate on the future of European integration must also address the question of fiscal federalism within the European Union and with it the question of subsidiarity. At present only a small part of the EU budget comes from truly “own resources” (customs duties), and as trade liberalization progresses, one can assume that this share will diminish with time. The remainder comes from a specified share of VAT, but this is renewable every six years and subject to intense political debate each time. At one moment the question of an independent “European” tax authority will certainly arise, and with it, the extent to which member states can continue to exercise their fiscal independence. Euroland members have, after all, already abandoned their autonomy in matters of monetary and fiscal policy, so fiscal sovereignty logically seems to follow. We definitely need a debate on this question. Finally, social policies at the European level are also on the agenda in any debate on the future of European integration. It seems natural to most people that the European proto-federal state should reflect the normal social concerns that determine social policies at member-state level. However, the question of how and how much social policy is to be shared between Union and state levels has yet to be explored. Again, the question of subsidiarity arises. Perhaps most social policies are best decided and delivered at sub-national level, perhaps not. A serious debate on this question has yet to take place.

The European Union is entering a new phase with the accession of 10 new members, which is sure to accentuate competitive pressures at all levels – in goods and factor markets, naturally, but also at the level of institutions. Since the “widening” of the Union has taken place before the “deepening” one can assume that the pressure for “deepening” will increase, along with the difficulty of forging a consensus among 25 countries. In the meantime, in the absence of such a consensus, institutional competition will dominate. It is therefore of interest to discover the extent of institutional divergence between EU members in matters of fiscal organization. The purpose of our current research on the extent, direction and nature of fiscal decentralisation in different member states of the European Union is to contribute to various aspects of these issues. According to the « Primolo Report », EU Commission (Commission-1997), “une concurrence (fiscale) incontrôlée ayant pour enjeu des facteurs mobiles peut rendre les systèmes fiscaux pénalisants pour l’emploi et entraver la réduction méthodique et structurée de la charge fiscale globale. Elle réduit aussi la marge de manoeuvre pour atteindre d’autres objectifs communautaires tels que la protection de l’environnement. De plus, la concurrence fiscale peut gêner les efforts de réduction des déficits budgétaires … L’intégration des marchés, si elle ne s’accompagne pas d’une coordination fiscale, restreint de plus en plus la liberté des Etats membres de choisir la structure fiscale la plus adaptée