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Europe

European Commission faces uphill battle on VAT proposal

The European Commission has proposed the creation of a Europe-wide value-added tax. But it is facing an uphill battle to win support for the idea, with opposition being spearheaded by Germany, France and Britain.

The euro sign outside of the European Central Bank in Frankfurt

Europe wants more financial autonomy

The European Commission's proposal to introduce a Europe-wide value-added tax is being met with stiff resistance from the 27-member bloc's economic powerhouses, Germany, France and Britain.

The Commission wants to introduce direct taxation from Brussels for the 2014-2020 budget due to fears that cash-strapped governments may want to reduce their contributions to the bloc.

"At times where public spending is under pressure, we suggest ways to achieve a European budget that is up to the challenges we are facing collectively," said European Commission President Jose Manuel Barroso.

Among the EU executive's proposals are the creation of a separate value-added tax, an EU energy tax or an EU corporate income tax.

Under the current system, the EU raises about three quarters of its budget from national government contributions.

"This is not such a bad system because the national governments have a strong incentive to press for fiscal discipline in Brussels," Professor Friedrich Heinemann of the centre for European Economic Research in Mannheim told Deutsche Welle

Fears of EU expansion

Heinemann thinks the move is aimed at expanding the EU's budget.

"Why has the European Commission been pressing so hard for years and even decades for a European tax?" he asked. "It's about preparing a more aggressive expansion of the budget. This is a central interest of the European Commission and the idea is to let the EU budget grow."

Those in favor of the tax believe it will create more transparency and add value to European decisions by giving Europe real power to pool its resources to work on special projects.

"I don't want the EU to deal with the size and shape of bananas. I would like the EU to create value added at the European level, with things like large research projects," Henrik Enderlein, professor of political economy at the Hertie School of Governance in Berlin told Deutsche Welle. "The EU can only do if it has this autonomous spending and taxing capacity," he added

Critics are worried about tax increases. The recent recession and debt crisis has already forced national governments to cut budgets and raise taxes.

A shopping cart in a supermarket aisle

A European wide VAT could hit consumers

But Enderlein doesn't think this will necessarily lead to more taxation. He says that Germany knows exactly which proportion of its tax is sent to Europe and the European Parliament could effectively replace this. He argues that the elected European Parliament would provide adequate democratic controls.

"Look at the United States: In every state there is a different value added tax and that works perfectly well and so there can be taxation at different levels and I don't see why this wouldn't function in the European Union," he told Deutsche Welle.

Observers say it is unlikely that such a form of direct taxation will be passed by the EU anytime soon, but Enderlein thinks that it's inevitable that countries sharing a single currency will eventually want to have taxation at European level.

"The process of EU integration is a process of unlikely events ultimately taking place. Nobody thought the single currency would appear or that borders would be abolished, but we saw all of these happen," Enderlein told Deutsche Welle.

To be adopted, any proposal must be approved by the EU's member states and the European Parliament. The European Commission plans to present proposed legislation by July of next year.

Author: Natalia Dannenberg
Editor: Chuck Penfold

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