Fiscal Forum: Future of the EU Tax Mix with Dr. Michele Chang

In September 2024, I had the opportunity to interview the Director of the Masters in Transatlantic Affairs and Professor of European Political Governance at the College of Europe, Dr. Michele Chang, about the future of the EU taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities.  mix. A lightly edited transcript from that interview is below and shows that the politics of tax policy matters to citizens.

Sean Bray: Could you briefly describe what EMU is, and what role tax policy plays in its general construction?

Michele Chang: EMU stands for Economic and Monetary Union, and the way that it was constructed was very heavy on the monetary part and not very much on the economic part. The main part concerns the development of the single currency, which is the euro. And that led to the creation of the European Central Bank to do monetary policy.

The economic part was pretty underdeveloped, and it has gradually been developing over time. But the taxes/fiscal side is still quite underdeveloped. When people had done academic studies in the past, such as optimum currency area theory for example, there was a role for fiscal redistribution when envisioning this. Such policies, however, didn’t make their way into the Economic and Monetary Union in 1999.

Similarly, the European Union had thought about some kind of single currency arrangement for many years, well before the development of the single currency itself. And in the various studies, the idea arose that there would need to be some sort of fiscal transfer between the European Member States.

But when it came down to it, it was left largely off the table, at least in terms of fiscal transfers. The extent to which tax policy features in the Economic and Monetary Union really has to do with the Stability and Growth Pact and trying to put some constraints on domestic fiscal policy, rather than the development of a European fiscal policy. This was for the 1999 start of EMU.

We’ve seen some developments over time that have led to increasing cooperation, especially when it comes to financial integration and banking union. With COVID, we have the NextGenerationEU (NGEU) budget with the Recovery and Resilience Facility, which has led to a renewed interest in tax policy on the European level as some would like it to extend beyond the current framework but there needs to be a way to fund it.

Sean Bray: How would you characterize the current tax mix in the EU?

Michele Chang: That tax mix is pretty limited if you think about the size of the European economy. But also, the distribution is quite distinct.

You can think of the evolution of European integration occurring in a very different context than today, and earlier priorities are reflected in the EU budget: the common agricultural policy, for example, and cohesion policy—these are some of the biggest parts of what European funds go towards today. There have been a lot of concerns and questions raised on the direction of EU funding in the future, whether continuing on the current path is appropriate given the world that we live in today versus the world that we lived in even 20 years ago, which was when we had the accession of the Member States in Central and Eastern Europe.

During COVID, we saw the development of the NGEU budget that is much larger than typical EU budgets thanks to EU borrowing. We see the interest on the part of some Member States (although not Germany) to make this a permanent feature. Macron had tried around 2017 to get a large euro area budget, and it got beaten down when going through the European machinery to the BICC, the Budgetary Instrument on Convergence and Competitiveness, which was a fraction of the original proposal. That then was superseded by the events of COVID and the NGEU budget, but it gave us an idea of where the European Member States were on that topic. Did the COVID experience really change their minds? From what I’ve seen, it hasn’t really. Mostly the perspectives for and against a larger budget are stable.

But there’s still the question, how do you pay for things like a larger EU budget or the continuation of the Recovery and Resilience Facility? You have these ideas of raising “own resources” and plastics taxes and that kind of thing. But if you were to go and develop something like this (a large-scale budgetary instrument), you would need a stable funding source.

Sean Bray: Given that tax policy is about more than simple mathematics, what political constraints do policymakers face when designing tax policy, either in the EU or at the Member State level?

Michele Chang: The major constraint is an electoral one. Can one get elected and stay in office? You’re right when you say that it is political and not just economic or mathematics.

For example, I see Tax Foundation reports that argue a wealth taxA wealth tax is imposed on an individual’s net wealth, or the market value of their total owned assets minus liabilities. A wealth tax can be narrowly or widely defined, and depending on the definition of wealth, the base for a wealth tax can vary. doesn’t fix anything and would actually have a very small impact. But that doesn’t really matter for the politics of it. It’s good to go and warn people, “this isn’t the magic bullet that you might think it is.” But from a political perspective, I think that it is pretty important to have this story, this narrative, that everybody shares in growth and prosperity.

We haven’t gotten past the global financial crisis. This is really what fomented a lot of the populism that we see today. Having some sort of perception of a fairer tax distribution would be an important component of addressing it.

So, I think the first part of that story is the narrative that we can tell right now. That narrative is really a domestically oriented one. How do you tell the domestic population that we’re going to be paying more in EU taxes? And this is actually to your benefit in a world of scarce resources. If we give that money to Europe, it means we’re not giving it to domestic actors.

What the voters see is something being taken away from them, money that otherwise might have been theirs going to Europe. Why does this make sense? Why is this a good thing? And so, part of it is this narrative and the communication issue.  

If you were to go and look at some very good studies that were done on why countries like Germany changed their minds about the NGEU and the domestic crisis, the best that I’ve seen is a political explanation of how this was going to impact domestic politics within Germany. This is going to impact domestic exporters. That is far more instructive than talking about principles of solidarity with the rest of Europe in explaining how this was politically possible.  

Sean Bray: What improvements do you think need to be made in the medium term for a stable and democratically legitimate European tax system?

Michele Chang: The legitimacy question is an important one for Europe and has been for a very long time. When you were a student, we talked about the democratic deficit at the College of Europe quite a bit.

The European Union has tried to undertake various measures to alleviate that. But because it’s not something that can be measured very easily, you can have the Eurobarometer and whatnot. But to go and say, look, this is legitimate, to some citizen in any European country, we have this to prove to you as legitimate, we can’t. This is something that is all largely based on perception.

So, convincing people that the European Union is in their interest and that they get more out of it than they put into it is difficult. I think this is getting back to the famous quote of Jean Monnet that Europe is going to be forged in crisis. And that is because this is what convinces people, policymakers and citizens alike, of the value of European cooperation. How can we build on that within the medium term?

A lot of it is going to have to do with the results of what you already have. This is what you constantly hear from the Northern European economies. The Netherlands, for example, says “show me that you can do well with what we’ve already given you before you ask me for more money.” The results of the Recovery and Resilience Facility funding, for example, are important to justify and legitimize Europe and developing a European tax system. If you’re going to build something legitimate, it is going to have to be through convincing the Member States and allowing them to sell to their domestic population that more money going towards Europe through a European tax policy is in their interest and is going to pay off for them in the long run.

Look at the results that we have so far. It is not just this black pit of money that we never see coming back. And this is also a political element, where it is the political instinct that nothing is ever your fault, but anything good that happens is to your credit.

And we also need to get away from that blame shifting that we see and have broader accountability as well as credit sharing.

Sean Bray: What is tax fairness, and what would make the future of the EU tax mix fairer?

Michele Chang: Fairness is a very murky concept, which you probably got from talking to the economists already. But when you think about something that is fair, I think it is something that is justifiable to everyone and is given willingly and not something that is imposed on them, so that they feel like this is a legitimate tax.

There, I think the concepts of legitimacy and fairness are really interlinked. When you hear fair, it might sound initially that it has to be a percentage of something, that there’s a mathematical formula that will lead you to fairness. And it is a more slippery slope; it can depend on circumstances of what constitutes something as fair in a certain period of time versus in the future when circumstances might change.

Moving from the Member State-based payments to a European citizenry-based one, I could only think that this would have to be some sort of political process. That would be akin to what we saw with the EMU, which meant an intergovernmental partnership, a conference that meant a referendum in several Member States, including Member States that were not legally obligated to have one.

When we look at issues of taxation and fairness, you can make all of the economic cases that you want. But there’s a very good chance that a lot of those arguments would have been true for a long time. And we still don’t have a tax policy. So, it’s not going to be happening on the basis of these economic arguments.

It is going to happen because politicians are going to be taking advantage of a certain moment, a window of opportunity, to have some kind of lasting change.

We saw with COVID, there were some people who hoped that was just the beginning. Now we’ve broken the seal, and we are on our way towards a European tax policy. But it was very clearly time-limited, and it’s not something that you can ignore and then will just continue. This will also have to be a conscious decision that’s not going to slip by anyone.

This could be the threat that Russia poses, combined with the evolving relationship with the US. There is also the relationship with China, which Europe doesn’t view in the same way that the US does.

Is this enough? Part of the answer is going to depend on the proclivities of some major politicians in crafting that narrative and gaining support among not only the Southern European states, which tend to be more favorably disposed towards a more supranational solution, but also the northern Member States, which have always been a much harder sell.

Sean Bray: Do you think policymakers risk losing the legitimacy of EU institutions by pushing political narratives that don’t necessarily align with a given policy’s societal or economic outcome?

Michele Chang: Not necessarily. I think that it’s often very difficult to ascribe blame for specific policies.

So, if we go back to that wealth tax, for example, if it doesn’t economically work, it may make things worse. I think one of the questions is, can you really ascribe that to the wealth tax, that it makes things worse? Other things are going to matter too: what kind of technological developments occur, if there is a trade war, and so on. Will people see the end result and blame that on the failure of the wealth tax?

I think that the story of making the wealthy pay is a pretty powerful narrative. It’s not like central bank independence, where you’ve got one job and that job is price stability. And if you don’t meet it, you’ve obviously done something wrong. I don’t know if the negative economic impacts of a wealth tax would be big enough to detract from the political benefits of this cause. I think this is part of what fuels the populism, the idea that integration only works for a certain set of people and they don’t pay for it.

I hear politicians saying we don’t have roaming fees anymore. That’s what the European Union can do. And honestly, I think that sounds lame to a lot of people. And then you get the pushback of why can’t I get my Netflix content when I go to a different country. What can Europe do? What can it not do? What doesn’t it want to do? There is a lot of confusion over the rule of Europe.

Understanding what the limits of the European Union are gets back to what I said about the blame shifting. It is really tempting to say, this is the fault of the European Union, when that is a partial story at best.

Sean Bray: What is the relationship between EU tax policy and strategic autonomy?

Michele Chang: At the end of the day, if you want strategic autonomy, you’re going to have to be willing to pay for it. And whether that means through a direct European tax on citizens, or whether that means some kind of reconfiguration of the existing tax policy that is done through the Member States, you are going to have to think of some way that this is going to be financed.

I’m not particularly optimistic about finding a way to directly tax citizens. I think that would be blocked within the legislative process of trying to go and do that. You would probably have better luck with the imperfect system that we have now of taxation through the Member States.