German Economists Speak In Support Of Tax Competition In Expanded EU

by Ulrika Lomas, Tax-News,com, Brussels

28 April 2004

The six leading economic think tanks in Germany have warned the established members of the European Union that it would be “disadvantageous” to implement protectionist policies to guard against the low-tax and low-wage economies of the acceding member states.

"If one were to take away the advantages the new members have, including partly in their tax system, the process of convergence that all want to see would be slowed and made more difficult," the institutes stated in their semi-annual report.

The economists’ views will not be welcomed by German Chancellor Gerhard Schroeder. Germany is the largest net contributor to the EU’s budget and Schroeder is unhappy that EU funds appear to be subsidizing Eastern European tax cuts that will help lure German firms towards the east.

National media reports last week quoted the Chancellor saying that the new member states cannot "on the one hand destroy their state income with low taxes and on the other hand build up their infrastructure using aid from the EU."

The Swedish Prime Minister Goran Persson, has also been vocal on the issue, remarking recently that "we levy high taxes in Sweden, Finland and Denmark and then send the money to East Europe". He urged the EU’s new entrants to levy higher rates of tax on their wealthier citizens to restore the balance.

On this point, the institutes agreed it is “problematic” that the high levels of subsidies to the new member states will help keep their tax rates low. However, they stated in their report that “this is an argument against subsidies, not against tax competition."

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