How To Finance A Social Europe?

Brigitte UngerAs shown by Professor Martin Seeleib-Kaiser from Oxford University, Europe is a social model and it is time that the European Union understands this. As historically welfare states have been used for nation building, if the EU wants to become a strong entity it needs a European welfare state including solidarity and certain minimum welfare provisions, such as minimum pensions, he claims. One way to Europeanize the welfare state, he further suggests, would be a transfer union, in which an EU fund has an automatic trigger: if unemployment rates in an EU country exceed a certain limit, money is automatically transferred from the EU Fund to the EU country in need.

There are also several other models which may establish a fairer, more just and more social Europe, yet all face the criticism that these proposals cannot be financed. It seems the problem lies in the public revenue side, or rather this is used as an excuse for not progressing. In the following I want to put forth sources of income that the EU and EU member countries could use to create a Social Europe.

1. Taxes

If one looks at the harm done to European welfare states by financial markets, it seems time for a financial transaction tax (FTT). According to the latest calculations by the EU from May 2013, a FTT  (a tax of 0.1% on bond and equity transactions and of 0.01% on derivative transactions) would yield 20bn Euros till 2020. If one included a tax of 0.1% on transactions in foreign currencies, total tax revenues would rise to 50bn Euros. Including derivatives (= bets on financial assets) in particular would increase public revenues substantially and may be legitimized with political efforts to make speculators, the major actors in the financial crisis, at least partly pay for the damages they caused. An alternative tax, the financial activity tax (FAT, 5% on the sum of profits and wages of financial institutions) would yield 25bn Euros.

2. Tax Avoidance

Starting with the British Parliament that accused large companies such as Starbucks, Google and Amazon UK of immoral behavior, using loopholes in the tax system, a series of reports on misbehavior of companies has been revealed through media and offshore leaks. Contracts, certificates and emails from offshore islands shed light on the thus far secret underworld of company and individual finance. Mostly company taxes are not even illegally evaded but legally avoided using loopholes in the tax system. Starbucks, advertising ‘fair trade coffee’ worldwide buys its coffee in – guess – low tax Switzerland in order to use the high costs for buying coffee there to reduce its profits, which are then taxed at low Swiss tax rates. Fair trade thus does not always equal fair tax payment. Amazon UK holds its book stocks and book sales in the UK, yet pays its taxes in Luxembourg.

James Henry from the Tax Justice Network estimates global offshore financial assets amount to around 32tn US Dollars. More than 122.000 letter boxes and trusts have been discovered through offshore leaks, in offshore centers such as the British Virgin Islands, Singapore and the Cayman Islands.

A sophisticated transnational private infrastructure of service systems has emerged, ‘which now launders, shelters, manages and if necessary re‐domiciles the riches of many of the world’s worst villains, as well as the tangible and intangible assets and liabilities of many of our wealthiest individuals, alongside our most successful mainstream banks, corporations, shipping companies, insurance companies, accounting firms and law firms’ (James Henry).

Closing loopholes in the tax systems – at least within Europe, is important. This would help EU countries increase their tax revenues, in particular the corporate tax income.

3. Tax Evasion

Tax evasion is the illegal way of not paying taxes and has also increased. Estimates range between large parts of the 32tn US Dollars of global offshore financial assets, to 15% of GDP in some countries and to around 3% of GDP in others (estimates by Friedrich Schneider on the shadow economy and tax evasion). Especially after the financial crisis, as EU countries had to cut expenditures due to budget problems, tax revenues in percentage of GDP dropped and therefore counteracted the planned budget consolidation.

‘Taxes are the price we pay for a civilized society’, said Oliver Holmes, Associate Justice of the Supreme Court of the United States, early in the 20th century. Tax evasion increases when the elites do not feel responsible for the public commons anymore. Not paying taxes means not wanting to participate in the provision of public goods. This is the consequence of an income distribution that has become extremely uneven. Evidently, a billionaire does not need public health care but has his private doctors. The rich seem to have lost the link with the society to which they belong and have opted for not paying taxes. Calculations for Germany of the DIW in 2012 show that taxing only 0.2% of the richest Germans by one percent of their wealth would bring an annual tax revenue of 8.9 bn Euros. Investing this into a Social Germany and a Social Europe would already be an important first step.

A study done by Booz and Company in Zurich in 2011 showed that 102 bn Euros of German tax evasion money lays in Switzerland. Recovering this money from the Swiss neighbor would help finance a Social Germany and could be an important second step in financing a Social Europe.

The European Union  has a GDP of over 12.8 tn Euros in 2012 (see Eurostat), making it the largest economy in the world. 502 million inhabitants with a per capita income ranging between 11.400 Euros (Bulgaria and Romania) and above 30.000 Euros (Germany, the Netherlands, Austria, Sweden, Denmark, Ireland) contribute to this wealth. The largest social expenditures in Europe are pensions followed by health care. Total social spending in EU member countries is around 3.6 tn Euros, between 17.8% (Slovak Republic), 26.3% (Germany) and 32% (France) of GDP.

Comparing this sum to the revenue which could be derived from taxing wealth, from closing tax loopholes and reducing tax avoidance, and from recuperating evaded taxes shows a Social Europe can be financed. It can be financed easily once one recognizes a Social Europe, with solidarity and welfare, is the very core of Europe. Political leadership is needed to set the path for a Social Europe. This also requires an elite who is politically and financially willing to support Europe.

This article is part of the EU Social Dimension expert sourcing project jointly organised by SEJ, the ETUCIG Metall, the Hans Böckler Stiftung, the Friedrich-Ebert-Stiftung and Lasaire.