Financing the European model of society. What struck me most in the Verhofstadt memorandum on the Lisbon Strategy (summarised on page 17 of our bulletin of 18 February; complete text in Nr. 2398 of our EUROPE/Documents series of 19 February) is the tax plank. It is true that the Belgian Prime Minister stressed the unitarian nature of his plan, which is valid as a whole and cannot be unravelled into five separate measures, but the tax strand is the most innovative and, potentially, the most significant of them.
The starting point is simple: today, the funding of the European model of society (which it is the aim of the Lisbon Strategy to safeguard) is weighing down the shoulders of production forces, which means industry and the workers (of all categories) by dint of corporate taxation and income tax, which are both pretty steep. Part of this burden should be transferred to indirect taxation. Why? Because indirect taxes: do not increase production costs; do not hit exports; affect imported products just as much as those produced within the Union. Furthermore, Mr Verhofstadt points out that economic studies show that moving a considerable chunk of income tax to consumption tax increases growth in real terms. This gives a double advantage: the costs of the European social model are better distributed, no longer saddling production alone, and growth increases. The countries of the Union have plenty of margin to do this, because indirect taxes represent less than 30% of the tax burden in Germany and Belgium, between 30 and 35% in ten Member States (including France and Italy), between 35 and 40% in five (including the UK) and just over 40% in the others (except Cyprus, which is at 45%). The EU average is 33%, with two thirds of the tax revenue represented by direct taxes and social contributions, which are shouldered by production costs which thus undermines the competitiveness of the Union and worker motivation.
Where's the problem with this reform? In the need to carry it out at the same time in all the Member States, or else consumers will simply go and do their shopping where tax on consumption is lower, as far as they can (as they already do for alcohol, cigarettes, petrol and various other products on which tax varies enormously from one State to the next). The Verhofstadt memorandum proposes a two-step procedure: first, bring the European average for indirect taxation to 40% of revenue, with a very strict timetable; then, direct and indirect taxes will be balanced, 50% for one, 50% for the other. You may have noticed that tax rates are not mentioned: each Member State would remain responsible for setting its own level of tax pressure. But half of total revenue should come from indirect taxes. Guy Verhofstadt feels that without this reform, production would no longer be able to pay for the European model of society, which would be condemned to implode or disappear, together with Europe's industrial infrastructure.
The problem. If the advantages are so obvious, why has nobody ever brought this kind of measure into force? The answer is simple: because only direct taxes are “progressive”, whereas indirect taxes fail to take account of the standard of living and of the wealth of the consumer (a reality which isn't really offset by the few taxes specifically aimed at luxury goods). It's not easy for the Left to include a transfer of direct taxes to indirect taxes in their manifesto. Guy Verhofstadt should consider the problem of presentation. It's by no means certain that this is not the reason the memorandum has not been put forward as Belgium's contribution to the Summit, but as an initiative by its Prime Minister. Putting together a common document by the liberal-socialist majority would have called for negotiations and compromise, with a risk of the message being seriously watered down.
Other ideas. The document as a whole represents an attempt to answer the EU's “structural weaknesses” and reaffirms the existence of European steering of the Lisbon Strategy. Mr Verhofstadt is not challenging the creation of national plans, because the direct involvement of the governments, national parliaments and the social partners is vital for the strategy to succeed, but the initiatives must be coherent and in particular, avoid social and tax dumping. Furthermore, certain effort- the completion of the single market without borders, the increase of the research effort- cannot be otherwise than common. One of the current weaknesses with the Lisbon Strategy lies, in Mr Verhofstadt's view, in the “open method of coordination, which is not binding enough. Having spent years making do with drawing tables and writing reports listing and comparing the results of the Member States, the EU has gradually taken on the appearance of an economic think-tank”. I will return to the ideas of the Belgian Prime Minister tomorrow.
(F.R.)