New resources for the EU budget

How to clear new resources for the EU budget? That’s the question Emmanuel Macron asked in his Athens and Sorbonne speeches when he said he wanted « a budget of several hundred billion [euros] » for Europe. A high level group chaired by Mario Monti, the former Italian President of the Council, has worked on this issue. His findings made public at the beginning of 2017 return to honor an idea once defended by Jacques Delors: create a European corporate tax.

For 30 years, in the name of ‘competitiveness’, a number of European countries have reduced business taxation: to attract investment, they decrease corporate tax and force neighboring countries to do the same if they do not wish to be subject to cumbersome relocations…

At the European level, the average tax rate on company profits- which was about 45% in 1985- has fallen to less than 25 percent today, and the European Commission indicates that the average effective rate is less than 20%.

In the United States, the federal income tax rate is 35% in addition to some ‘small’ state taxes, which lead to an average corporate tax rate of 38%.

When F.D.Roosevelt arrived at the White House in 1933, funds were nearly empty because all the states had engaged in relentless tax dumping: Texas dropped its tax to attract business, then Florida and Arkansas followed suit and businesses relocated their production to where the tax was the lowest. And because the federal government didn’t have the means to combat the crisis the economy sunk into a depressive spiral…

Roosevelt decided to break with this logic and, in just a few weeks, passed legislation for the creation of a federal corporate tax: whether in Florida or Texas, companies had to pay a tax of 35% of their profits. Washington collected the tax and then gave a large part to the states who were members of the Union.

All historians insist on the decisive importance of the ‘federal leap’ put into operation in a few months by the United States after the crisis of 1929. Without this federal effort, if they had remained stuck in the logic of competition and dumping, the United States could have collapsed, unable to finance the New Deal policy designed to combat unemployment and equally incapable of financing the war effort.

In an increasingly unstable and dangerous world, is it not urgent that Europe also be able to take a federal leap in selected areas?

Evolution of the corporate tax rate in Europe and the United States from 1993 to 2010

Today the corporate tax is 15 points lower, on average, in Europe than in the United States. No country can, on its own, combat such dumping but nothing is preventing us, at the European level, to create a corporate (at a rate of 5%) which would fuel a real European budget, a significant part of which would be helping to combat global warming in Europe, invest in research, and replace the United States in funding « 100 billion from Copenhagen » for the countries of the South.

The net results of the companies in the Euro area were about 1.5 trillion euros in 2016 for non-financial companies and 410 billion for financial companies.

A climate contribution of 5% of the profits?

A tax whose average rate would be 5% would bring some 100 billion in every year (for the euro area only). This is within the order of magnitude of what is necessary to participate in the co-financing of the project on European territory and to fund the Global Alliance for sustainable development that Jacques Chirac called for in Johannesburg.

Thus in being funded on on the one hand by 0% loans for all that is profitable in 10, 15 or 20 years, and by new resources, for what comes under the purview of a federal budget, the Finance Climate Pact would powerfully accelerate our market towards a decarbonized economy, in Europe and in neighboring countries.

A comprehensive Plan, a funding hybrid

If Europe acquires new resources altogether, we demonstrate that the collectivity (Europe and member states) could fund 50% of the work made necessary by the commitment to Factor 4. The remaining half would come from stakeholders (individuals, businesses, local communities…) but profitable (through savings) through being funded by loans at a rate of 0%.

And if 50% of the bill is paid by the collectivity, the debate on, « Should it be compulsory to upgrade the work in 10 or 15 years? » obviously changes its nature…

Combined with the gradual rise of the price of carbon, this funding should enable Europe to catch up in the fight against climate change. The project is going to be huge and will require an immense amount of training and engineering across all of our regions, but we have no choice.

If Europe creates 5 to 6 million jobs, the entire economy will be revived. The contribution of 5% asked of shareholders may surprise some at first, but will quickly be perceived as a necessary aid to help save the planet and transition towards a stronger, more resilient, new economic model.

And Trump in all this?

Donald Trump has not merely stated that global warming is an invention of the Chinese. He has also set about attacking the Roosevelt legacy and drastically reducing corporate tax. The reform that he wants to put into legislation would lead to a federal corporate tax of 22% (instead of 35%), which would be in addition to state taxes which are, on average, 3%, for a total of 25% (instead of today’s 38%).

So, even after Donald Trump’s reform, which, if passed, will have a catastrophic effect on public services and US deficits, it is still possible to create a European corporate tax. At 25%, the total of the taxes would be the same on both sides of the Atlantic.

Post-Brexit Europe must not be afraid to affirm a radically different social model than the Trumpian ‘model’.