Explaining Tax Cooperation: The Selection of Modes of Governance in EU Direct Tax Policy

1. Explaining Tax Cooperation: The Selection of Modes of Governance in EU Direct Tax Policy Claudio M. Radaelli Ulrike Sabrina Kraemer UNIVERSITY OF EXETER DEPARTMENT OF POLITICS LSE, 30-31 March 2006

2. Preliminary remarks • International taxation presents problems to cooperation => free-riding, race to the bottom • In the EU: no Treaty provisions for direct taxation, based on general single market provisions => unanimity • Focus of majority of social scientists and economists: tax competition rather than tax coordination • Tax coordination in the EU: not a single entity => about content and modes of governance

3. Main points of the paper • Modes of governance are not chosen because of efficiency or social legitimacy, but to avoid/ reduce political transaction costs • Simple model, 3 actors: the Member States, the Commission, and the business community (plus the ECJ) to explain the emergence of functionally differentiated governance arenas, mixing formal and informal modes of governance for reasons of political expediency

4. Some characteristics of EU direct taxation • No linear development in terms of content, no “old vs. new governance” • Variability within the same case: different goals over the years: tax neutrality, harmful tax competition, corporate tax reform • EU not an unitary actor: actor constellations • Highly politicised area

5. The framework: actor-based institutionalism • Elements: - constellations of actors - institutional context (provides rules and styles of interactions) - material context (economic and legal pressures: globalisation, the ECJ) - ideational context (definitions of EU tax policy problems and discourses: HTC, corporate tax reform)

6. Main goals of the relevant actors • Business community: elimination of tax obstacles, simplification, clarification => corporate tax reform, outcome goal • Member States: guarding the revenue base (and attract foreign investment and mobile capital via a competitive tax environment) => fight against Harmful tax Competition, outcome goal • Commission: formulation of policy => process goal, outcome goal: balance of power relations  Emergence of functionally differentiated governance arenas

7. These arenas perform the following functions • Provide rules for the selection of participants, modes of interaction and decision-making rules • Follow different political logics • Develop different socialisation processes • Emerge diachronically, not simultaneously • Differ in ‘quality’ of governance • Allow actors to select their own policy problems • Enable actors to choose their own policy instruments

8. Arena 1: Harmful Tax Competition • Main Actors: Member States and Commission • Style of interaction: negotiation (tax package) • material context: deep economic integration • Ideational context: the narrative of harmful tax competition • Impact - socialisation: MS have accepted peer review, but: confidentiality - overall business climate changed but tax competition even more aggressive in some areas? - savings directive: efficiency difficult to evaluate - state aids successfully used  Mix of soft and hard modes of governance

9. Arena 2: Corporate Tax Reform • Main Actors: Business Community, Commission, individual Commissioners, Member States (reluctantly) • Style of interaction: facilitated coordination, more informal, more participation (though limited) • material context: economic integration, obstacles for cross-border business • Ideational context: competitiveness, abolition of barriers to the single market • Impact - not efficient in terms of concrete results so far, but scores higher in terms of participation - highly technical area, developments need ages - declining political attention  More informal modes of governance, but limited results

10. The emerging arena of judicial tax policy • Major pressure for MS: the ECJ • Commission has tried to use the ECJ to put pressure on governments • Companies try to ‘make business’ with the Court Problem: The Court can strike down national tax rules but can’t build up solutions => No coordinated response of Member States so far

11. Conclusions • Obviously, more comprehensive analysis needed to explain when MS cooperate, and under what conditions • Modes of governance are dependent variables in our analysis: result of the political logic that characterises a specific arena • To understand modes of governance we have to look at arenas within policies ( most literature privileges the policy or treaty level)

12. What now? • Political attention to HTC decreasing, momentum for the code gone, savings directive watered down, transparency issues, British red line, F and NL No to constitution • Developments in CTR longsome, technically difficult, MS have different preferences  Question: Will this new arena of judicial tax policy produce enough political will to either revive the arena of HTX or to push forward the arena of CTR? Otherwise MS could be locked in a situation where harmonisation is inevitable but driven by judicial rather than political action