The Role of Tax Policy in a functioning Economic and Monetary Union Panel discussion Giampaolo Arachi Università del Salento European Economic and Social Committee Tuesday 17 June 2014

Global challenges to national tax policies Changes in global economic environment – New business models multinational firms operate as a single integrated enterprise in several countries through separate legal entities management personnel may be geographically dispersed rather than being located in a single central location most of the value of a good or service is typically created in upstream activities where product design, R&D or production of core components takes place, or in the tail-end of downstream activities such as marketing or branding. – Growth of the digital economy productive activities can be located in jurisdictions that are distant from the physical location of customers. – Financial innovation traditional distinctions in tax law (e.g. between interest, dividends and capital gains) are blurred.

Global challenges to national tax policies Consequences for tax policies – Increased mobility of tax bases (e.g. physical capital, skilled labour) risk of a race to the bottom – Difficulties in allocating international taxing rights on income generated by multinational firms (e.g. the taxation of income generated by internet companies) risk of tax base erosion and income shifting

Specific issues in EMU The single currency enhances the mobility of some tax bases (e.g. capital) and further increases the scope for tax coordination Taxes can be used to replicate a currency devaluation

Tax coordination within EMU Taxation of companies – Two main (related) problems: 1.How to allocate international taxing rights on cross- border income in order to avoid both double taxation or double non taxation? EU initiative in this field should be coordinated with the G-20 and OECD action plan on BEPS CCCTB may be a possible solution 2.How to prevent tax competition leading to a race to the bottom? Very difficult to implement bands for effective tax rates A revision of the Code of conduct may provide an effective tool for addressing harmful tax competition among Member States

Shift taxation away from labour income towards consumption Possible motivations: 1.Fiscal devaluation: an increase in VAT coupled with a reduction in tax related labour costs may produce the same effect of a currency devaluation – a Member State can increase the competitiveness of domestically produced goods and services by reducing the tax related costs (e.g. social security contribution) and by compensating the loss in revenue through an increase in VAT (which is levied on imports but not on exports) 2.Make the tax system more conducive to growth – To the extent that consumption has a broader base than labour income, the same revenue could be collected with lower tax rates, thus reducing the overall distortionary effect of the tax system Consumption is financed by a number of sources other than labour income, e.g government transfers, corporate income, previously accumulated wealth

Shift taxation on consumption: an assessment 1.Some empirical evidence that a tax shift (in particular from social security contribution to VAT) may have a positive effect on the trade balance in the short run. 2.No clear evidence that a tax shift has long-lasting effects on the trade balance and the economic growth. 3.There may be a risk of competitive fiscal devaluations as a form of international tax competition – If a fiscal devaluation is carried out simultaneously by many countries the impact on the net exports of each is diminished. – One important reason for the creation of the EMU was to eliminate the opportunity for countries to pursue such a competitive devaluations. 4.A shift from labour taxes to consumption may produce relevant distributional effects – An unanticipated increase in consumption taxes is akin to a to a one-off tax on existing wealth. – Individuals who are beneficiaries of transfers (such as pensioners, unemployed, individuals with disabilities) will be subject to the higher consumption tax, but they will have no direct benefit from the reduction in the labour income tax. The tax shift may be in fact equivalent to a reduction of benefits.