Neumark Vindicated The Europeanisation of National Tax Systems and the Future of the Social and Democratic Rechtsstaat Agustín José Menéndez ARENA Working Paper 4 September 2015 Neumark vindicated The Europeanisation of national tax systems and the future of the Social and Democratic Rechtsstaat Agustín José Menéndez ARENA Working Paper 4/2015 September 2015 ARENA Working Paper (print) | ISSN 1890-7733 ARENA Working Paper (online) | ISSN 1890-7741 Reproduction of this text is subject to permission by the author © ARENA 2015 ARENA Centre for European Studies University of Oslo P.O.Box 1143, Blindern, N-0318 Oslo Working papers can be downloaded from ARENA’s website: www.arena.uio.no Abstract The power to tax is usually regarded as one of the last competences exclusively in the hands of the Member States of the European Union. As shown in this paper, this is a wrong assumption that results from a double optical illusion: the illusion that the power to tax equals the power to collect taxes – when the power to shape taxes through constitutional and statutory norms is also of great importance; and the illusion that with the abandonment of plans to harmonise national tax systems and create taxes that were genuinely European in the 1980s, the power to tax has remained firmly in the hands of Member States. To fully appreciate the extent to which national tax systems have been Europeanised, the author distinguishes three distinct patterns of Europeani- sation: Integration through tax harmonisation (prevalent up to the late 1970s); integration through the removal of tax obstacles (dominant from the 1980s to the explosion of the present European crises); and integration through fiscal consolidation (which is the growingly dominant pattern of transformation of national tax systems). This paper considers the causal role played by integration through tax harmonisation in the present European crises and explores the consistency of the emerging paradigm of integration through fiscal consolidation. The author concludes that what is needed is not to grant taxing powers to the EU, but to make use of European law to recreate the Member States’ capacity to tax effectively and fairly. Keywords Constitutional Norms – Europeanisation – European crises – European Union – Fiscal Consolidation – National Tax Systems – Power to Tax – Tax Harmonization To Juanma Barquero: Thou shouldst be living at this hour Neumark vindicated Conversely, however, the cause of European integration would be retarded if monetary integration were to be pursued but the attempt were to fail. The poten- tial dangers of monetary integration stem from the loss of power of altering the national exchange rate; such a loss could threaten the more stable countries with excessive inflation and/or the more inflationary countries with a loss of prosperi- ty that would be the more intractable because it would be manifest as a regional problem rather than a balance of payments problem. This danger is particularly acute in the European context because different national traditions and institu- tions could give rise to inconsistent trends in unit costs in different national “regions”. This development would be so disastrous, if released, that it would in- evitably lead to the destruction of monetary union. Altiero Spinelli, The European Adventure, 1973, 80 The whole legal establishment of the office of the judge advocate was magnifi- cent. Every state on the brink of total, political, economic and moral collapse has an establishment like this. Jaroslav Hašek, The Good Soldier Švejk Introduction This paper1 aims at tackling two closely related questions: • What role did the set of European norms governing national tax laws play in the gathering of the European crises? • What changes should be made into the European framework of taxation to overcome the crises? The first question tends not to be posed because taxation is regularly depicted as one of the last trenches behind which national sovereigns resist the incoming European tide (but see Genschel and Jachtenfuchs, 2010; Menéndez, 2005; a comparative perspective on transformation of tax systems in Steinmo, 1993). This assumption is simply wrong. National tax systems have in fact been deeply and thoroughly Europeanised since the very moment the European Communities were established (Section I). The persistent myth of the untrammelled national sovereign is largely the result of an optical illusion. Resulting from the (wrong) reduction of the power to tax to the power to collect taxes (when the power of shaping these taxes at the constitutional and legislative levels is also a key part of that power) and from the belief that the abandonment of the original pattern of Europeanisation of national tax sys- tems in the early 1980s. Actually, as I show in Section II, the end of harmoni- 1 This is a longer version of a chapter to be published in The End of the Eurocrats Dream, edited by Damian Chalmers, Mark Jachtenfuchs and Christian Joerges forthcoming with Cambridge University Press. Many thanks to them for giving me the opportunity of being part of a scholarly team which united so as to be able to diverge. I would also like to thank profs. Tuori and Losada (both at Helsinki University) and prof. Rasmussen (at Copenhagen University) for being so kind as to arrange the seminars in which previous drafts of this paper were discussed. Special thanks to Andrés Boix, Jeremy Leaman, Francisco Rubio Llorente, Sergio Ramírez, Pedro Teixeira and Klaus Tuori. ARENA Working Paper 04/2015 1 Agustín José Menéndez sation was not the end of the Europeanisation of national tax systems; on the contrary, Europeanisation became deeper and faster, only it proceeded by very different means. National taxes were homogenised by the pressure exerted by economic actors making use of their revamped economic freedoms to chal- lenge, one after the other, national tax laws that were said to create obstacles to the exercise of economic freedoms. This shift fostered the financial, fiscal and macroeconomic weaknesses that became open crises in 2007. The present European crises and the way in which they have been governed have resulted in the radicalization of the pattern of Europeanisation of nation- al tax laws. The absorption by exchequers of massive amounts of financial risks (a good deal of which were the direct result of asymmetric monetary union) has made many Member States of the Eurozone indebted states. These states have been required by European Union law to place their tax systems at the service of repaying principal and interests of massive piles of debts, so as to protect the interests of creditors, even if at the cost of abandoning the constitutional commitments of the Social and Democratic Rechtsstaat. In Sections III and IV I argue that if integration through fiscal consolidation gets entrenched, Europeans will be forced to choose between this form of European integration and the Social and Democratic Rechtsstaat. This is why we need a very different Europe, and indeed a very different tax Europe. In particular, we do not need more Europe, i.e. the of transferring of tax collecting powers to the European Union, but a radically different Europe, i.e. a Europe that becomes (again) the servant of the Social and Democratic Rechtsstaat by means of rescuing the capacity of Member States to make autonomous and democratic use of their tax powers. I. The original tax paradigm of European integration: Integration through tax harmonisation Establishing “an internal market in the form of a common market” (Art. 2 TEC) implied redrawing and redefining economic borders. Taxes were (and remain) a fundamental instrument in the creation of economic borders. Consequently, European integration could not but entail the transformation of national tax systems. The national constitutions which authorized and man- dated European integration as well as the founding Treaties of the European Communities (which should be interpreted in the light of the former, Fossum and Menéndez 2011) required tax integration aimed at the simultaneous reali- sation of three goals: Firstly, national tax systems had to be rendered integra- tion friendly. Economic borders had to be made porous to the goods and economic actors from all Member States. This involved four main things: 2 ARENA Working Paper 04/2015 Neumark vindicated • Substituting national by European customs duties, or what is the same, removing customs duties inside the Communities, enacting a European customs code, and transferring the power to collect duties at the external borders of the Communities to the supranational level (Art. 3(a) and 3(9) TEC). • Redesigning national consumption taxes—including turnover taxes and excise duties (Art. 99 TEC in light of Art. 95 TEC) so that they would not become customs duties by other means; this required assigning the power of legislative design of consumption taxes to the Communities (Art. 99 TEC). • Harmonising other tax figures when that would be required in view of the stage of economic integration reached (Art. 100 TEC) • Coordination of the use of taxes as macroeconomic levers (Art. 103 and 105 TEC) Secondly, the Europeanisation of national tax systems should shelter, not undermine, the Social and Democratic Tax State. If post-war constitutions mandated integration, this was not for the sake of integration itself, but as a means to realise the normative ideals of the Social and Democratic Rechtsstaat. The tax system was expected to discharge three functions, closely related to each of the pillars of the Social and Democratic Rechtsstaat (Musgrave, 1945; Musgrave, 1959; Neumark, 1970; Barquero Estevan, 2002). The Rechtsstaat ideal required the provision of revenue with which to pay for public goods and services. A key operationalization of the Democratic State was the use of taxes as macroeconomic pulls and levers with which to steer the economy, so as to ensure that the democratically forged will was effectively implemented and not hampered by the structural power of market actors.2 Finally, the Social State required that the kind of taxes to be collected and the pattern of distribution of the tax burden not only generated revenue with which to fund public goods and services (aimed at ensuring material, and not only formal, equality) but at the same time taxes contributed to the redistribution of income, so as to keep inequality in check. This required in particular that: • The harmonisation of national taxes (and even more so the assignment of tax collecting powers to the European Communities) had to be the result of political decisions with strong democratic legitimacy. Thus the requirement of unanimous agreement within the Council (Art. 100 TEC) and of a quasi- constitutional decision to assign tax collecting powers to the Communities (Art. 201 TEC in finem). 2 But it should be kept in mind that ordoliberals, German and not German, contested the wisdom of any form of active interventionism and limited steering to “stabilisation” (Röpke, 1963: chapter VIII). ARENA Working Paper 04/2015 3 Agustín José Menéndez • The autonomy of national tax legislators should be preserved (von der Groeben 1968). The design of the tax system, the tax mix (the different taxes to be collected), the design of each tax, the objectives to be realized through each tax were questions that had to be tackled in a highly contextual fashion. The socio-economic and political context, but also the history and culture of each country had a role to play (European Commission 1962: 98,100). This was clearly established in 1953 when the High Authority affirmed that restitution of turnover taxes at the border did not constitute price discrimination (European Commission 1953: 109), but actually was necessary to ensure that Member States remained capable of determining the level of turnover taxation to be applied in their territory (Haas 1958: 60ff; Regul 1966: 88-97). The reconciliation of integration and national tax autonomy was also reflected in the understanding of free movement of goods and the other economic freedoms as operationalisations of the right to non-discrimination on the basis of nationality. The goal of creating a common market did not by itself predetermine the substantive content of national regulations, very especially those aimed at realizing socio- economic goals, but only that the nationals and goods from other Member States would be treated as nationals were treated. • The use of national taxes as macroeconomic levers should be coordinated; indeed, the further integration proceeded, the stronger was the case for coordination, as the effects of national steering policies would like be felt in the common market as a whole, not only within single states. Thirdly, an autonomous supranational power to tax should be developed. In the short and mid runs, the Communities needed a minimum set of tax collecting powers to fund the running costs of the Communities (Art. 172 TECSC and Art. 201 TEC). In the mid and long runs, the size of the supranational tax collecting powers had to be proportional to the policies and tasks of the Communities (Art. 201 TEC, analogically). Explicit mention was made to financial assistance to Member States experiencing a balance of payments crisis (Art. 108.2 TEC). The constitutional philosophy of integration through tax harmonisation was perhaps most clearly articulated in the Neumark Report of 1962. The report was penned by leading public finance experts, both European and non- European (for a collection of related papers, see Shoup 1967). Its chairman Fritz Neumark cut a remarkable figure. He was born and educated in the turbulent interwar Germany. He was then forced into exile in Turkey from 1933 to 1952, to return then to Germany and become the doyen of German and indeed European public finance (Fuentes Quintana 1974). Extremely well read in the (then leading) US public finance literature, deeply knowledgeable about the post-war transformation of European national tax systems, active participant in the recasting of the tax system of Turkey (Andic and Andic 1981; 4 ARENA Working Paper 04/2015 Neumark vindicated Andic and Reisman 2007), Neumark exerted a decisive influence in the Committee, and contributed to the normative articulation of the implications of the Social and Democratic Tax State for European integration (compare European Commission 1962 with European Commission 1967). Significant pieces of harmonizing legislation were passed in the first two decades of the common market. A common customs code was in force by 1 July 1968.3 The key principles of a common system of turnover taxation, in particular of Value Added Taxation (VAT) were agreed upon in 19674 (as we will see in Section II.1, the VAT tax base will be further harmonized in 1977). The Directive concerning indirect taxes on the raising of capital was approved in 1969.5 Despite the spectacular clash in 1965 between the Commission and the French Republic over the assignment of tax collecting powers to the Communities to fund the common agricultural policy (European Commission 1965), a modest set of tax collecting powers were transferred to the Communi- ties in 1970,6 in the expectation that they will render the EU financially autonomous. At the same time, the European Court of Justice played a relevant but thoroughly supporting role. The Court acted as enforcer of the Treaty provisions that established the concrete tax steps to be taken to create the common market, including standstill clauses on customs duties7 and crucially the provision prohibiting the introduction of measures equivalent to quantitative restrictions.8 From 1968, the Court started to review the validity of national tax norms by reference to the now directly effective right to free 3 ‘Regulation (EEC) No 950/68 of the Council of 28 June 1968 on the common customs tariff’, OJ L 172, of 22.07.1968, pp. 1-402. The original Treaty established a complex division of labour between intergovernmental and Community decisions on the matter. Tariffs were harmonized in 1968, but customs law as such was only harmonized much later, through the 1992 Customs Code. 4 ‘First Council Directive 67/227/EEC of 11 April 1967 on the harmonisation of legislation of Member States concerning turnover taxes’, OJ 71, of 14.04.1967, pp. 1401-1403. ‘Second Council Directive 67/228/EEC of 11 April 1967 on the harmonisation of legislation of Member States concerning turnover taxes, structure and procedures for application of the common system of value added tax’, OJ L 71, of 14.4.1967, pp. 1303-67 5 ‘Council Directive 69/335/EEC of 17 July 1969 concerning indirect taxes on the raising of capital’, OJ L 249, of 03.10.1969, pp. 25-29.   6 ‘Treaty amending certain Budgetary provisions of the Treaties establishing the European Communities and of the Treaty Establishing a single Council and a single Commission of the European Communities, signed at Luxembourg on the 22nd day of April, 1970, 1971 O.J. (L 2) 1; Regulation No. 2/71 of the Council of 2 January 1971 implementing the Decision of 21 April 1970 on the replacement of financial contributions from Member States by the Communities’ own resources, 1971 O.J. (L 3) 1. 7 Cf. Case 26/62, Van Gend en Loos, [1964] ECR 347. 8 Cf. Case 27/67, Fink Frucht, [1968] ECR 223. ARENA Working Paper 04/2015 5 Agustín José Menéndez movement of goods.9 The Court was keen to go beyond a formal analysis of the way in which national legislators taxed goods, and engage into an analysis of whether formal equality cloaked discrimination in material, economic terms.10 However, the Luxembourg judges restrained themselves from both reviewing the validity of tax norms that had not been yet harmonized (thus staying clear of all personal taxes) and from quashing national tax norms that affected the exercise of economic freedoms but did not discriminate against economic actors or goods from other Member States. This slow and politically mediated process of harmonisation of taxes was clearly compatible with the consolidation of the Social and Democratic Rechtsstaat, and in particular, of the welfare state. While both public spending and taxation were largely stable in relative terms (the latter despite the programmed decline of customs duties, eliminated for intra-EC trade, and lowered for international trade, see Table 1), sustained and high economic growth meant a steady increase in actual resources. And indeed the weight of social expenditure over total public expenditure tended to grow in a context of very low unemployment (see Table 2). Table 1: Tax revenue European Communities 1965–1971 1965 1968 1971 GERMANY 31.6 32.2 32 FRANCE 33.6 33-8 33.1 BELGIUM 30.6 34.2 34.4 NETHERLANDS 30.9 33.8 34.9 ITALY 24.7 26.1 25.5 LUXEMBOURG 26.4 25.9 24.4 Source: OECD Table 2: Social spending (selected European countries) 1950 1954 1958 1962 1966 1970 1974 1978 GERMANY 16.63 17.18 20.51 20.70 22.49 23.55 28.67 30.89 BELGIUM 12.57 13.55 15.90 19.27 22.55 25.10 28.70 37.27 ITALY 9.39 12.23 15.25 17.36 20.17 21-11 23.53 26.54 SPAIN 4.07 3.18 3.90 3.98 5.06 9.98 12.05 16.68 PORTUGAL 3.21 3.78 4.33 4.67 4.79 6.08 8.60 11.90 Source: Espuelas 2012. 9 Case 45/75, Rewe, 1976 [ECR] 181. 10 See for example Case 168/78, Commission v. France, [1980] ECR 347.   6 ARENA Working Paper 04/2015