Asymmetric impacts of tax resources and the GNI residual

The tax candidates have been analysed earlier in chapter 7 and do not need to be discussed here.

The introduction of own resources if these are not fully recognised by the Member States as

‘owned’ by the EU could create a conundrum in the calculation of the residuals, particularly in the case of a tax agreed under enhanced cooperation for a subgroup of countries, such as the FTT. Even if the resources were fully accepted as owned by the EU, a problem would arise on the treatment of countries not participating in a tax resource in the case of variable geometry.

Here is a simplified example of the complications that could be faced. Let us imagine a union of five Member States that have identical levels of GDP. The total budget is €100 billion and they originally all contribute €20 billion.

7.10.1 Tax fully accepted as owned by the EU

Now a tax is introduced to finance the budget that has a different impact on the Member States, which is shown in Table 7-4 as covering a percentage of their contribution. Once the tax is paid there is a residual of €66 billion. The option now is that the Member States just distribute the residual according to the GNI share, just as the EU does for the TOR. As long as the Member States accept the tax as owned by the EU and the differences in yields are acceptable, the story finishes there. As we can see in the impact on the total contribution, the countries end up contributing different amounts, but the state treasuries pay the same (case 1).

Table 7-4. Case 1 – New resources full accepted as owned by EU

A B C D E

Amount of original €100 billion;

all countries have the same GNI (€)

20 20 20 20 20

With tax where all participate Tax covering contribution

(by %) 30 50 40 20 30

(in € billion) 6 10 8 4 6

Remaining €66 billion

GNI-based residual payment

(€ billion) 14.4 14.4 14.4 14.4 14.4

Impact on total contribution

(€ billion) 20.4 24.4 22.4 18.4 14.4

Source: Authors’ own calculations

7.10.2 Tax incidence not accepted by Member States

We know that the EU has not accepted even the relatively small discrepancies for the VAT key.

Taxes such as the FTT, environmental or corporate taxes would have considerably different impacts on Member States. If there is no acceptance of the tax as a fully owned by the EU and they integrate it into the calculation of the contribution, the results vary considerably. Now each country contributes the same in terms of GNI with the tax (case 2, Table 7-5). But this is probably a controversial result too, as the costs to the treasury would be different. Countries disadvantaged are most likely going to claim that given the mobile cross-border nature of some taxes (the FTT or corporate taxes), or the EU nature of the item taxed (e.g. emissions), their higher national contribution is not acceptable.

Table 7-5. Case 2 – Resource calculated as share of GNI contribution

A B C D E

Amount of original €100 billion;

all countries have the same GNI (€)

20 20 20 20 20

With tax where all participate

Tax covering contribution

(by %) 30 50 40 20 30

(in € billion) 6 10 8 4 6

Remaining €68 billion

GNI-based residual payment

(€ billion) 14 10 12 16 14

Impact on total contribution

(€ billion) 20 20 20 20 20

Source: Authors’ own calculations

It is nevertheless ironic that taxes that ensure equity among citizens will often have an incidence that is unequal at the Member State level. As already mentioned in Strengths and shortfalls of the GNI resource, and the need to improve it, the share of the GNI contribution can have very a different incidence at the level of individuals or organisations, depending on the tax bases and national resource on which the contribution is levied.

7.10.3 Use of variable geometry in resources

This leads to alternative case 3 (Table 7-6), where we assume that one of the Member States refuses to participate in the tax, so variable geometry is accepted. This could be, for example, the FTT. Only countries A, B, C and D implement the tax, which we assume raises €28 billion leaving a residual of €72 billion.

Table 7-6. Case 3 – FTT fully owned but with variable geometry

A B C D E

Amount of original €100 billion;

all countries have the same GNI (€)

20 20 20 20 20

Tax covering contribution

(by %) 30 50 40 20 –

(in € billion) 6 10 8 4 0

Remaining €72 billion

GNI-based residual payment 14.4 14.4 14.4 14.4 14.4

(€ billion)

Impact on total contribution

(€ billion) 20.4 24.4 22.4 18.4 14.4

Source: Authors’ own calculations

If the tax is considered an own resource and the residual is shared by all Member States, the total contribution of citizens and companies in the non-participating Member State would be clearly inferior to the contribution of those of other countries. Countries would benefit from not participating. It is unlikely that this is going to be accepted by those implementing the tax, but what system could be used?

Case 4 (Table 7-7) addresses this by requiring that country E pays an amount equivalent to the GNI share of the whole budget. In this case, it would pay €20 billion. The issue here is that in terms of national budget contribution, E pays considerably more from the treasury. This could easily develop into a gross and net balance issue. If that happens, there would be a difficulty, because once the tax is added to see the overall contribution, it is not clear why E should pay less or more. Even if A, B, C and D agreed that the tax is owned by the EU, the contribution of E would become a problematic issue, particularly for B and C, which would need to justify their participation to the electorate.

Table 7-7. Case 4 – variable geometry, non participants of FTT have to pay GNI compensation

Case 4 with variable

geometry A B C D E

Amount of original €100 billion;

all countries have the same GNI (€)

20 20 20 20 20

Tax covering contribution

(by %) 30 50 40 20 –

(in € billion) 6 10 8 4 0

Remaining €72 billion

GNI-based residual payment

(€ billion) 13 13 13 13 20

Impact on total contribution

(€ billion) 19 23 21 17 20

Source: Authors’ own calculations

An option would be to levy from the Member State a contribution through the GNI ‘equivalent’ of the amount the tax would have yielded. This, of course, would again be highly controversial.

First, it would require the virtual estimation of the yield, which in some cases could be complex.

It means that non-participating Member States would need to either harmonise the tax base or estimate a yield on that base. It would also drive Member States where the sector taxed is larger as a share of GNI to avoid participating and to use only virtual calculations, and to lobby for ceilings and restrictions, thus resulting in a situation similar to that of the VAT resource today.

Finally, in case 5 (Table 7-8) Member States may decide that the total contribution including the tax has to be in line with the GNI level. This means that all countries would go back to the default contribution level.

Table 7-8.Case 5 with variable geometry – FTT becomes part of GNI contribution

A B C D E

Amount of original €100 billion;

all countries have the same GNI (€)

20 20 20 20 20

Tax covering contribution

(by %) 30 50 40 20 –

(in € billion) 6 10 8 4 0

Remaining €72 billion

Compensatory GNI-based residual and E has to pay a proportional GNI share (€ billion)

14 10 12 16 20

Impact on total contribution

(€ billion) 20 20 20 20 20

Source: Authors’ own calculations

In this case all contributions end at the same level, but tensions may easily arise from the fact that the national budgets end up paying very different amounts. Also, the absence of a tax in the non-participating country may be considered an unfair comparative advantage or even a hidden subsidy to its corporates, banks or other operators that are exempt from the tax. In case 5, the main effect of the presence of the tax in countries A, B, C and D is to deliver a policy steer, for example by dissuading particular types of financial transactions or encouraging more efficient carbon use, whereas there would be no impact on the cross-country distribution of the financial burden compared with the initial situation.

7.10.4 Conclusion on the workability of variable geometry

This assessment leads to the conclusion that the best resource is one that is introduced in all Member States and is universally accepted as a common resource. The second best alternative is a tax that all Member States introduce but treat as a share of their GNI resource. It eliminates the ownership of the resource by the EU, but when the role is one of sending signals to the market (as with the carbon price), this may be an acceptable, even if suboptimal, compromise. The use of a virtual tax resource calculation for non-participating countries is possible, but it is not the second best option, because the incentives for Member States could be wrong. A simple example would be to transform the ETS revenues into a resource. There are also ways to handle the different incidence of some resources and this is addressed in the next section, where we take into account differences in GNI between Member States.