Majority Voting on Taxation Could Prove Explosive for European Integration
The unanimity requirement for EU legislation on taxation in the Council has come under attack. Early this year the European Commission launched an initiative to introduce majority voting for tax-policy decisions. On the face of it, the Commission’s central arguments make sense: Unanimity weakens the ability of the EU to pass fiscal regulations, reaching unanimity is too time-consuming and the veto power of Member States allows national special interests to influence and block EU policy. At closer inspection, however, this criticism is unconvincing and misleading. Unanimous agreements offer immense advantages, especially when it comes to tax policy. Unanimity protects single Member States against majority exploitation and guarantees that only ideas that actually benefit all EU states get signed into law.
These insights are not new. At the end of the 19th century, the Swedish economist Knut Wicksell emphasised the importance of unanimity in finding efficient solutions. Wicksell’s key discovery was that policies that generate more benefits than costs tend to elicit unanimous support. By his reckoning, policymakers can, through adroit negotiation, distribute the costs and the overriding benefits in such a way that everyone agrees to waive his veto power.
This advantageous feature of the unanimity requirement is highly relevant for EU taxation policy. It would be naïve to think that each attempt to harmonise tax policy has been made for the sole benefit of Europe. Studies for the European Parliament have shown that MPs from countries with a high share of government spending relative to GDP want more tax harmonisation. This is because EU harmonisation offers a starting point for curbing burdensome tax competition and making sure that traditionally low-tax countries pay higher taxes. But it is questionable whether an upward convergence of government spending would be good for the international competitiveness of the EU. In addition, current harmonisation projects have redistributive effects. For example, the creation of the common consolidated corporate tax base (CCCTB) currently under discussion would significantly shift tax revenue between Member States. Here, too, a majority of countries could push through a tax base allocation formula just because it may benefit them at the expense of an out-voted minority.
The Commission argues that majority decisions in tax policy can bolster EU cohesion. But this hope is based on an erroneous assumption: In reality, the rejection of unanimity could even prove explosive for European integration. Consider: a major argument of the Brexit campaign was that the UK gives more to the EU than it receives. Though the net difference is small, the campaign’s success shows that even minor fiscal burdens can prompt a country to turn its back on the EU. The potential redistributive effects of expanded EU taxation rights would greatly exceed current net payments into the EU budget. The unanimity requirement ensures that a country does not have to exit the EU to escape unacceptable fiscal burdens.
It was majority voting that significantly increased East-West tensions in EU refugee policy, as countries in Western Europe outvoted states in Central and Eastern Europe in what turned out to be an extremely sensitive policy area. Majority voting in tax policy would most likely generate new animosity between Western and Eastern Europe because Member States in the east often follow a low tax policy. Only unanimous tax decisions can prevent the emergence of substantial political risks and provide a guarantee that EU tax policies benefit all Member States.
Ultimately, it is incorrect to assert that majority voting would largely paralyse EU tax policy. Though the EU has made little progress when it comes to passing new taxes for the EU budget or creating a uniform tax base, it is debatable whether these projects really make sense. Despite the unanimity requirement, the EU has adopted an astonishing number of guidelines to curb tax avoidance by multinationals and tech companies in recent years. This confirms Wicksell’s insight that partners can reach unanimous decisions about proposals if these benefit everyone.
It is true that unanimity requires more time, effort and skill. But all things considered, the rule of unanimity remains appropriate to be used in EU tax policy due to its considerable potential redistributive effects. Only unanimity guarantees that a new tax harmonization step is really a win-win project and not part of a selfish majority agenda. In the end, it is not unanimous but majority voting that can leave outvoted Member States feeling disadvantaged and thereby jeopardise political cohesion in the EU.
Friedrich Heinemann heads the “Corporate Taxation and Public Finance” Research Department at the ZEW – Leibniz Centre for European Economic Research and is a professor for economics at Heidelberg University.
Friedrich Heinemann: Majority Voting on Taxation Could Prove Explosive for European Integration, EconPol Opinion 18, May 2019.