|
|
|
|
CIAO DATE: 3/99
Harmful Tax Competition in the EU: Policy Narratives and Advocacy Coalitions *
Department of European Studies
University of Bradford, West Yorkshire, England
International Studies Association
40th Annual Convention
Washington, D.C.
February 16–20, 1999
Abstract
This paper investigates the dynamics of the European Union (EU) direct tax policy process by drawing attention to the political power of policy narratives in the context of the advocacy coalition framework. The narrative of harmful tax competition has been a political instrument for rekindling attention to a previously neglected policy area. Narratives do not operate in a political vacuum, however. Forum politics and the evolution of the policy environment have facilitated the emergence of harmful tax competition as main paradigm in EU direct tax policy. By re-presenting itself not as a component of an advocacy coalition, but as a forum for inter-governmental deliberation, the Commission has curbed adversarial politics and created the pre-conditions for the adoption of tax proposals. The conclusions discuss the theoretical implications for the advocacy coalition framework.
1. Introduction
Since the 1960s, the coordination of direct taxation has been considered by the Commission and tax experts an important issue: the European market cannot function if tax barriers pose obstacles to international trade, investment and business. Yet direct tax policy proposals have dusted (Easson 1992; Radaelli 1997). Up until a few years ago, even the typical reader of the quality press would have hardly noted their presence. Recently, however, the issue of harmful tax competition has hit the front page of the popular press, although shrouded in a cloud of misinterpretations of the real tax issues discussed in Brussels. Not only has tax policy reached agenda status, but also, following a long period of inertia, in December 1997 ECOFIN, the Council of Economic and Finance Ministers, was able to agree on a comprehensive tax policy package. The package includes a code of conduct on corporate taxation, the revision of fiscal aid policy, and a commitment to finalise directives on the taxation of savings and cross-border interest and royalty payments between associated enterprises of different member states.
How can one explain this change in the policy agenda? Legal resources for harmonising corporate taxes are scarce in the Treaties: whilst in indirect taxation articles no.95-99 of the Treaty of Rome provide a relatively sound legal framework, in direct taxation only article 100 1 and article 220 can be employed (Williams 1998). In particular, article 220 has an intergovernmental nature, for it stipulates that “Member states shall, so far as is necessary, enter into negotiations with each other with a view to securing for the benefit of their nationals: ... the abolition of double taxation within the Community”. This article is not a mandate for Community action, but a simple invitation to negotiate among member states. Additionally, unanimity at the Council level is required, 2 and the Treaties of Maastricht and Amsterdam have not modified the voting system. This legal framework illustrates why direct taxation has not followed the progression of VAT harmonisation. To understand the recent acceleration of the initiatives against harmful tax competition, however, one has to look at resources other than the law.
The argument in this paper is that cognitive resources — especially policy narratives — have been instrumental in setting a new tax policy agenda. The narrative of harmful tax competition has been a political instrument for rekindling attention to a previously neglected policy area. Narratives do not operate in a political vacuum, however. First, the evolution of the policy environment should not be overlooked. The liberalisation of capital movement, the critical debate on competitiveness (Krugman 1994; Scharpf 1997), the new tax agenda of the Organisation for Economic Cooperation and Development (OECD 1998), and the presence of centre-left governments in most of the member states should be taken into consideration. Second, narratives should be linked to the dynamics of political power by using an appropriate conceptual framework. The advocacy coalition framework is particularly useful for the empirical analysis of cognitive variables and policy change. The inclusion of policy narratives in this framework raises interesting theoretical points (presented below). The exploration of narratives within the wider context of coalitions is therefore intriguing. Third, narratives should be linked to organisations. An organisational change, that is, a high-level tax policy forum hosted by the Commission, has accompanied the emergence of the narrative. An important consequence of this has been a change in the structure of the direct tax policy process. By re-presenting itself as a forum for inter-governmental deliberation, the Commission has curbed adversarial politics and created the pre-conditions for the adoption of a code of conduct on special tax regimes.
The paper proceeds in three steps. Section two provides the theoretical background on narratives and advocacy coalitions. Section three illustrates the evolution of the EU direct tax policy process and the emergence of the harmful tax competition narrative. 3 Section four investigates the political dynamics of the harmful tax competition narrative. The implications of policy narratives for the advocacy coalition framework are discussed in the final section.
2. Narratives, Coalitions, and the Policy Process
What narratives matter in political life? What is the relationship between narratives and the analysis of the policy process? This section tackles these two questions. Let us start with the essential features of policy narratives. Essentially, narratives represent a form in which knowledge about policy is cast. But what are the characteristics of this special ‘form’?
Narratives relevant to policy-making generally have the shape of causal stories (Stone 1989). In a policy narrative, ‘events are emplotted — they are put together into a plot in which there are causal relations between actions’ (Banerjee 1998: 193). Stories have a beginning, a middle, an ending, and occasionally even a moral conclusion like in Sixteenth century morality plays (Garvin and Eyles 1997: 66-67).
The temporal order or event (or sequentiality) is a fundamental property of narratives. The plot (and by extension the power of a narrative) hinges on sequentiality rather than on the truth or falsity of the elements of the story. Following Roe (1994:36-37):
‘Less hortatory and normative than ideology, policy narratives describe scenarios not so much by telling what should happen as about what will happen — according to their narrators — if the events or positions are carried out as described. Even when their truth-value is in question, these narratives are explicitly more programmatic than myths and have the objective of getting their hearers to assume or do something’.
The function of policy stories is to underwrite, that is, to ‘certify’, and to stabilise ‘the assumptions needed for decision making in the face of what is genuinely uncertain and complex. As such, policy narratives can be ‘representationally inaccurate — and recognisably so — but still persist, indeed thrive’ (Roe 1994:51).
Under conditions of uncertainty, narratives make problems amenable to human action. In particular, they typically suggest one course of action instead of others by dint of dramatic tension, as Banerjee explains:
A narrative frames a situation in a way that makes one action, and not others, sensible. If the present situation is the penultimate episode of a narrative, then it is fraught with the dramatic tension that occurs before the end of a story or a movie. The action to be committed is implicitly constrained in the narrative construction of a situation in the same way that the content of a happy ending of a movie is recognisable near its end’ (Banerjee 1998: 196-197).
Narratives then convey meaning and suggest action. In doing so, they objectify a course of action and make it as independent from a specific actor’s preferences as a text from a speaker (Czarniawska 1997:12-13). As averred, narratives play a role in the policy process when conditions of uncertainty prevent the use of scientific modes of knowing. However, explanation is still crucial to narratives. The main difference is that explanation is demonstrated in the scientific mode of knowing whereas it is exhibited in the narrative mode, as Czarniawska (1997:19), drawing upon Polkinghorne, observes.
The literature on narratives is burgeoning. There are three possible ways to use narratives in policy analysis. First, the policy practitioner can use narratives in order to intervene in the policy process. Emery Roe (1994) has tackled policy controversies (wherein adversarial narratives collide) by proposing meta-narratives that facilitate consensus. Second, authors such as Czarniawska (1997) turn to narrative knowledge in their quest for alternatives to the scientific mode of knowing. They see the job of the analyst as ‘conversation’ — rather than positivistic science. The idea is that human actions are ‘enacted narratives’ and that a blend of literary theory, anthropology and institutional sociology provides better conceptual lenses than the traditional toolbox of the social scientist. Third, narratives can be considered as an object of empirical inquiry. For example, they can be a cognitive resource used by an actor or a coalition. In this paper neither are narratives the subject of a new mode of knowing, nor a resource employed by the analyst. Thus it is sufficient to stick to the third (limited) conceptualisation of policy narratives, without denying that they can be used in other forms as well.
As averred, narratives do no fluctuate in vacuum. They should be examined within wider interpretative approaches. For policy analysts, the advocacy coalition framework represents one of the most sophisticated empirical approaches to the study of knowledge and policy change (Sabatier and Jenkins-Smith 1993). The approach is based on several hypotheses, illustrated by Sabatier (1998). Central to this paper are the following four features of Sabatier’s theoretical framework:
First, in controversial policy areas the line-up of allies and opponents tends to be stable, at least over periods of a decade or so. Adversarial coalitions provide the backbone of the policy process. They can be defined as individuals from a variety of positions ‘who (a) share a particular belief system and (b) show a non-trivial degree of coordinated activity over time’ (Sabatier 1998:115). Typically, one should find that new issues witness a fluid situation first, followed by a structuration of the policy process in which actors gradually coalesce into coalitions, for example when a focusing event clarifies the underlying conflicts (Sabatier 1998:115). Thus the hypothesis of actors grouped in stable coalitions applies to mature policy areas.
EU direct tax proposals are not new: the first committee to explore fiscal issues in the Community was set up in 1962, and proposals for corporate tax directives were formally submitted to the Council in 1969. However, the notion of maturity is relevant because the EU’s political architecture and processes are more fluid than the ones of nation-states (Richardson 1996). EU tax policy has potential for a critical assessment of coalitions’ stability in the context of a fluid policy-making process. The Commission — this is my argument — has deliberately sought to enfeeble the boundaries of two opposing coalitions by exploiting the loose characteristics of EU public policy-making. Indeed, the Commission has tried to steer direct tax policy towards a structure based on a decreasing importance of advocacy coalitions and on more integration amongst actors. It is as if the Commission intended to break down the walls between one coalition and another. The crucial element in this strategy has been the narrative of harmful tax competition.
Second, agreement over policy core beliefs is — according to Sabatier (1998:105) — the ‘glue holding a coalition together’. Policy core beliefs are ‘fundamental policy positions concerning the basic strategies for achieving core values’ (Sabatier 1998:112). They include normative and empirical precepts. Policy core beliefs with an empirical component define, for example, the overall seriousness of a policy problem, the causes of the problem, and the proper distribution of authority among levels of government (Sabatier 1998:112). By contrast, secondary beliefs concern instrumental decisions necessary to implement the policy core, and ‘deep core’ beliefs are at the level of ontological axioms and fundamental norms. According to Sabatier, policy learning across belief systems is limited to secondary beliefs. The policy core can change as well, but not as an effect of learning.
In this connection, recent EU studies have discussed the conditions under which supra-national institutions such as the European Commission enjoy autonomy from member states. This debate on supra-national agency (Moravcsik 1993; Pollack 1997) has introduced the hypothesis that the Commission can shape the preferences of member states by providing conceptual innovation and by engaging in reasoned persuasion (Smyrl 1998). Why should member states change their preferences in light of the Commission’s entrepreneurship? One hypothesis is that the Commission can exploit the short-term horizon of national policy-makers sitting in the Council (Pollack 1997). However, Smyrl argues that member states are not just ‘tricked’ into accepting the policy goals of the Commission. Rather, member states can be ‘persuaded by the Commission’s arguments’ and ‘apply them knowingly and willingly’ (Smyrl 1998:90). Joining together the advocacy coalition approach and the EU theoretical debate, the question arises how far can persuasion and learning go? Can narratives change beliefs and if so whose and which beliefs? Has the narrative examined in this study been instrumental in altering (a) member states’ perceptions of the overall seriousness of tax competition and (b) their view of the institutional venue (for example, national decisions, bilateral agreements, OECD initiatives, or the EU venue) wherein tax problems should be tackled?
Third, Sabatier argues that major policy change requires a perturbation in non-cognitive factors external to the policy area (for example, a shock in the policy environment which alters the balance of resources between adversarial coalitions). External perturbations are a necessary but not sufficient cause of change (Sabatier 1998). Otherwise one should assume that all exogenous shocks produce change (Mintrom and Vergari 1996). External perturbations translate into policy change only when one coalition is capable and willing to exploit them entrepreneurially. When this happens, change can materialise through the replacement of one dominant coalition by another. However, Sabatier (1998:119) introduces an important alternative to this theme. There is in fact the possibility that the competing coalitions find a compromise that is superior to the status quo. In short, coalitions facing an external shock can devise a positive-sum solution rather then engage in a zero-sum fight.
The emphasis on external shocks suggests that one situates narratives within the changing policy environment. In the case of EU tax policy, the environment includes the consequences of capital movement liberalisation, the reaction to undesirable consequences of regulatory competition, and the changing political priorities of governments. Additionally, the two avenues of change (zero-sum games versus win-win solutions) invite a close examination of the type of change (adversarial versus cooperative) induced by policy narratives.
Win-win solutions, however, require learning across coalitions. Research conducted on the advocacy coalition framework surmises that policy-oriented learning across belief systems is most likely when there is a forum where problem-solving (rather than conflict) is the dominant style of discussion. Sabatier has in mind professional fora dominated by scientists where professional norms guide the discussions. In the case of direct taxation forum politics has taken a different shape. In a first stage, as explained in the remainder of this paper, the Commission has sought to provide a forum dominated by experts and the business community (the Ruding Committee, see Commission 1992). But the recent initiatives against harmful tax competition have been accompanied by a deeper organisational change. The Commission has turned itself into a tax policy forum. 4 The question to be investigated is how forum politics (see also Coen 1997) enhances the power of narratives and assists the emergence of a consensual policy style.
To sum up, the main theoretical objectives of this paper refer to the political role of policy narratives and to the debate on advocacy coalitions, with particular emphasis on the stability of coalitions, the impact of narratives on beliefs, the role of the policy environment versus endogenous change, and policy fora.
3. From Tax Neutrality to Harmful Tax Competition: Policy Narratives and Forum Politics
Tax neutrality for the single market: a strategy that did not work
The Commission had grandiose hopes for the coordination of direct taxation and accordingly presented proposals for common fiscal rules since the 1960s. In 1975 the Commission went so far as to propose a common range of rates for corporate taxes in Europe. However, these hopes were invariably frustrated. Up until the 1980s, the results achieved were poor. The success of VAT did not translate into momentum for direct taxation, which remained the exclusive domain of domestic choices. In 1970 the Werner Report on monetary union envisaged steps towards the coordination of corporate taxes, but these steps became politically insurmountable with the general crisis of the Werner plan (see Radaelli 1997 for more details). The only concrete result in the 1970s was a directive on collaboration amongst tax authorities agreed in 1977 (no.99/77/EEC), but the implementation of the directive was far from being satisfactory (Picciotto 1992).
Learning from this disappointing record, when Commissioner Christiane Scrivener took the portfolio for tax policy in 1989 she launched a new strategy, based on tax neutrality (the strategy is detailed in Commission 1990 and Scrivener 1990). The aims of this approach to tax co-ordination were to present direct tax proposals as a ‘natural’ complement to the single market design, and to adhere completely to the cautious, technical, aseptic language of efficiency and tax neutrality. Essentially, the Commission withdrew grandiose proposals for a common corporate tax system and attacked domestic taxes — such as cross-border withholding taxes on the operations of multinationals — hampering free trade and investment in the single market. European tax policy — Scrivener assured — would be limited to the elimination of distortionary domestic taxes, to be assessed on a case-by-case basis, thus providing a level playing tax field to corporations operating in the single market.
The Commission found itself in good company with economists arguing that tax differences between member states are acceptable, as long as they do not create prejudice to neutrality. 5 Tax diversity would be considered generally acceptable because results from different choices about the role of the state in the economy and the welfare state in countries which remain diverse. However, there are domestic taxes (for example, a withholding tax on dividends paid by a subsidiary to a parent company in another state) which are not neutral (i.e., they distort) to the multinational choices of corporations. Investment decisions should not be distorted by international double taxation of profits and cross-border payments of interest and royalties within multinationals. The tax system should remain neutral in this respect and European action should secure this policy goal.
This strategy was appealing to economists (because of the emphasis on efficient tax systems and tax neutrality), to companies (the elimination of international double taxation is a long-standing policy goal of multinationals see Webb 1996) and of course to the Commission (suffice it to mention the implications of the strategy for the single market). As shown in another study (Radaelli 1997), a ‘supra-national’ coalition, composed of the Commission, an international community of policy experts and multinational companies emerged. The key belief was that the single market required the removal of tax obstacles, especially withholding taxes levied on cross-border operations of multinationals.
However, an alternative ‘inter-governmentalist’ coalition, recruiting its members across ministers of finance and revenue authorities, was less than willing to abolish taxes, however distortionary they might be. The Council adopted two directives in 1990, on corporate taxation, together with a convention on arbitration in international tax controversies regarding transfer pricing policies of multinational companies. 6 But progress did not go much further. The ‘inter-governmentalist’ coalition displayed the rhetoric of sovereignty at great length, 7 but had no solid argument to oppose to tax neutrality for the single market. Yet it had ‘non-decision’ making power (Bachrach and Baratz 1962). Tax issues were simply neglected and excluded by the ECOFIN agenda. When discussion took place at the technical level of working parties, it was impossible to overcome stalemate. Taken one by one, each tax proposal of the Commission allocated revenue losses (in terms of abolition of taxes levied on cross-national operations of multinationals) to one or more countries. Revenue authorities represented member states in these technical discussions. For example, Italy was represented by the ‘general director of revenue’ at the Finance Ministry, that is the person who more than anybody else has the mission to preside over revenue. As the corporate tax proposals implied revenue losses, it was not surprising that revenue authorities were less than keen on giving green light to the strategy of tax neutrality. Most tax dossier triggered negotiations on domestic taxes where at least one country (typically more then one) was worse off. As dossiers were discussed one by one, 8 there was no possibility to compensate countries across different tax issues.
Commissioner Scrivener made a last effort to create momentum on corporate taxes with the Ruding Committee (dubbed after its chair, Onno Ruding), a committee dominated by the business community and tax experts. National tax administrations and tax ministers reacted to the report produced by this committee (Commission 1992) by arguing that most of the proposals were unrealistic or unfeasible in the short-medium term. Essentially, Ministers and revenue authorities were unsympathetic towards proposals fleshed out by their natural counterparts, that is, large multinational companies.
One consequence of this articulation of the EU tax policy process was the adversarial nature of policy-making. One coalition dominated the policy sub-system, and the other coalition, in a manner of speaking, remained in opposition. The proposals and the good economic arguments were firmly in the hands of the ‘supranational’ coalition. However, the lack of treaty base for EU direct tax policy made non decision-making an easy route of escape for the Council. To dominate the process, the ‘inter-governmental’ coalition did not have to do anything else that let the corporate tax dossiers dust. Unsurprisingly then, member states conceded only embryonic degrees of Europeanisation. Year after year, direct tax policy turned into an issue with very low political salience. Notwithstanding the technical elaboration of the proposed directives, politically member states were not interested in making tax concessions at the European table. A period of scarce interaction between the Commission and the Council, and a general lack of political attention, ensued.
In his attempt to re-gain momentum for EU taxation, the Commissioner appointed in 1995 — Mario Monti — deliberately placed tax issues within a broader political framework. The starting point was a reflection document presented to the informal ECOFIN meeting of Verona (13 April 1996). The Verona paper 9 argues that ‘in the past too often discussions were confined to taxation proposals seen in isolation, thus limiting proper consideration of wider tax issues and of the framing of taxation policy within the wider context of EU policies’. It is interesting to observe the use of the term ‘frame’ by the Commission (Schÿn and Rein 1994). Indeed, the new approach of Commissioner Monti has been precisely an attempt to re-frame tax policy. Once the subject for technical debates with low political salience, tax policy has been purposefully inserted into a much more politically relevant frame. There are two key elements in this re-framing exercise: the narrative of tax competition based upon a ‘comprehensive approach’ (as opposed to the previous strategy of tax neutrality and punctual proposals); and the re-invention of the European Commission as a tax policy forum. In the remainder of this section we will first turn our attention to this policy narrative, leaving to the next section the discussion of forum politics.
The narrative of harmful tax competition
If tax coordination is the solution, what is the problem? Before the Verona paper, economists, the Commission and the business community had argued that the problem was the presence of distortionary domestic taxes (typically on cross-border operations) hampering the development of a genuine single market. The Verona paper introduces an important innovation in that it surmises that the main problems are the functioning of the single market, the degradation of the fiscal systems and unemployment. Since then, this has been the position of the Commission, reiterated in every official speech of the Commissioner and in various policy documents.
How can direct tax policy — in the past framed in terms of selective measures against specific tax distortions — be re-proposed as the cement of the single market and EU employment policy? The mechanism enabling this shift is the narrative of harmful tax competition, whose causal components are synthesised in figure 1.
Figure One: The narrative of harmful tax competition
| - Progress of negative integration through the Single European Act |
| - Capital flows are liberalised |
| - Taxation is not coordinated, special tax regimes are not controlled by EU policy |
| - Tax base erosion — tax degradation — race to the bottom n capital income taxation |
| - Tax burden placed onto non mobile factors, typically labour |
- Doomsday scenario. What happens if member states do not act together:
|
| - Unemployment and the single market are at the core of EU problems |
| - New and comprehensive view of taxation in the EU is needed |
| - Tax policy becomes a core policy of the EU |
When is tax competition harmful? The narrative proceeds from the acknowledgement that significant progress has been made — via the Single European Act — in negative integration (see Scharpf 1996). Barriers and distortions in the single market have been progressively removed. This has inter alia constrained national policy choices. Following the liberalisation of capital flows, for example, governments can no longer limit cross-border capital flows within the EU. At the same time, the lack of direct tax coordination leaves states free to offer special tax regimes which attract the most mobile factors, typically capital and, to a certain extent, skilled labour (Tanzi 1995; Zee 1996). The existence of non location-specific activities has made central services of companies, head offices, offshore banking and captive insurance companies free to go where the tax regimes are more favourable. A consequence is that countries unwilling or unable 10 to play the game of special tax regimes and tax concessions are penalised in terms of significant erosion of the tax base. More importantly still, countries would have to tax labour more heavily, should capital migrate elsewhere.
The next step in the construction of the narrative is the ‘dramatic tension’ (Banerjee 1998) between the consequences of inaction and ‘what must be done’. The doomsday scenario illustrates the consequences of inaction. If EU countries do not act together a political time bomb will disintegrate the welfare state. Capital income taxes will spiral down to zero, corporations will move profits to special tax regimes, and governments will be left with the sole option of asking for more revenue from low skilled labour. With the passing of time, redistributive policies and the whole mechanism of the welfare state will come to a grinding halt.
After the doomsday scenario, the story turns to the present and stresses what should be done for the single market and employment. The effectiveness of the single market is endangered by special tax regimes and tax concessions camouflaged under legitimate state aid. Capital does not migrate where returns are higher, but where tax incentives are higher. Initiatives against unemployment are nullified by the shift of the tax burden towards labour. The implication is that tax coordination is bulwark of the single market and employment. The salience of tax coordination — this is an explicit impact sought by the narrative — must be raised to maximum levels. In the old strategy of tax neutrality, European direct taxation was a policy in search of a ‘drive’. Left to itself, tax policy suffered from low political salience, and even the thorough analysis of the Ruding Committee would not raise its profile. With the narrative of harmful tax competition, instead, EU tax policy becomes itself an important drive to the rescue of the welfare state and employment.
How much scientific analysis lies behind this narrative? Tax competition is a variant of regulatory competition. Studies on regulatory competition show that the ‘competition of rules’ among countries is open to very different results, depending on the socio-political amalgam of politics, ideas and interests (Vogel 1995; Sun and Pelkmans 1995). Theoretically, there is the possibility that countries will suffer from a disastrous race to the bottom, but under certain political conditions the process can end up with a levelling up of rules and standards. In the jargon popular since David Vogel’s book appeared (1995) the two possible outcomes are the Delaware effect (the race to the bottom) and the California effect (trading up). The theoretical result can go either way, and the tax literature offers examples both of optimistic assessment of tax competition (McLure 1985; Siebert and Koop 1993) and pessimistic predictions of unbridled tax competition eroding the tax base (Genschel and Plumper 1997; Kanbur and Keen 1993; Sinn 1990). Certainly, harmful tax competition has not been discovered by the Commission as economists have analysed it since Tiebout (1956). But it is important to observe that there is not a conclusive theoretical answer provided by economics.
Empirically, the studies conducted so far do not come to strong conclusions (Goodspeed 1998). One thing is to show that capital responds to tax differentials, another is to answer the question ‘does competition lead to too little taxation’? The former question has been tackled by empirical studies; the second is still the object of much uncertainty. Tax systems are extremely opaque and the mobile tax base is influenced also by factors other than taxes. Capital, in addition, may be less mobile than one would think because of asymmetric information (Gordon and Bovenberg 1996). As one economist put it plainly: ‘it is difficult to assess whether tax competition is good or bad’ (Goodspeed 1998: 583).
Even if one assumes that tax competition yields a drastic reduction of capital taxation, the effects of lower taxes on capital are uncertain (Zee 1996:8). True, in the short-term, a tax competition-induced reduction of the rental price of capital affects labour negatively, the magnitude of this effect depending on the elasticity of substitution between capital and labour. However, in the long run investment has a favourable impact on the economy and employment can rise again (Zee 1996). Additionally, skilled labour is not a substitute for capital, but a complementary factor. Therefore, lower taxes on capital can stimulate the demand for skilled labour and, in the long run, encourage the formation of human capital. Ultimately, the impact of tax competition on employment hinges on the trade-off between short-term losses and possible long-term gains.
In synthesis, the Commission does not have much theoretical and empirical evidence at its disposal. 11 But instead of investing in scientific expertise, Commissioner Monti has stressed the political determination to act. What is sufficient for action is the concern among member states that the effects of fiscal erosion could ultimately wreck Community goals such as the single market and employment. If countries are convinced that the risk of the doomsday scenario is realistic — the narrative concludes — action must be taken now.
The literature on policy narratives is useful here because it argues that scientific uncertainty is translated into political certainty by the use of dominant stories in the policy process (Garvin and Eyles 1997). One of the key functions played by the narrative of harmful tax competition is the stabilisation of assumptions needed for action in a policy area dominated by genuine complexity and uncertainty. Further, the narrative portrays increasing control over events and therefore is compelling (Stone 1988). Public policy is all about making problems amenable to human action, not about increasing helplessness (Garvin and Eyles 1997). Harmful tax competition is also convincing in narrative terms. In fact, it plays out a vivid dramatic scene of villains (avid capitalists who deprive their countries of revenue by investing in morally suspect tax havens), potential victims (the ordinary people who need the welfare state) and heroes (the European governments who decide to take action and protect the welfare state). 12
The narrative of harmful tax competition has also an important political property. It ‘talks’ directly to member states by stressing the pressing problems of tax degradation, welfare state funding, and unemployment. Put differently, this narrative magnifies the economic and political gains available to states through European cooperation. By contrast, the approach of tax neutrality adopted by the Commission in the past — based on the selective elimination of domestic taxes hampering the growth of genuine multinational companies in Europe — highlighted gains to be reaped by companies and costs to be borne by states. Another difference between tax neutrality and harmful tax competition concerns the balance between negative and positive integration (see Scharpf 1996 on these two terms). Tax neutrality (pursued in the early 1990s by Commissioner Scrivener) revolves around the idea that specific domestic taxes on cross-border activities of multinationals have to be eliminated in order to gain efficiency. This is an example of ‘negative’ integration, that is, market-making policy achieved by striking down national rules that impede the smooth functioning of the single market. The harmful tax competition narrative is instead an example of ‘positive’ integration or market-shaping policy. Once a single market has been created with capital movement liberalisation, ‘positive’ action must be taken in order to avoid the undesirable consequences of market behaviour. Finally, tax competition rings a political bell in those countries where domestic veto players hinder national tax reforms (Hallerberg and Basinger 1998). The case of Germany, where Chancellor Kohl was unable to respond with effective domestic tax reform to the challenge of tax competition, epitomises the appeal of EU solutions when veto players impede domestic policy change.
Forum politics and ECOFIN agreement
Schön and Rein (1994) observe that cognitive structures are not free floating but are grounded in institutions. A narrative gains political power only when rooted in institutions: for example, by means of appropriate organisational change able to sustain the adoption of a new frame. There is an important relationship between the adoption of a narrative, organisational change, and political dynamics. In the case under examination, the narrative of harmful tax competition has sustained the attempt to attenuate the elements of adversarial policy-making. The idea of re-proposing the Commission as a tax policy forum (Commissioner Monti and his cabinet refer frequently to their idea of ‘using the Commission as a table of discussion’) rather than as the leader of the supra-national coalition has been crucial in this strategy. An appropriate organisational change (that is, the creation of a high level group on EU tax policy) has buttressed this move.
In the aftermath of the Verona informal ECOFIN meeting, the Commission suggested member states give birth to a tax policy group composed of personal representatives of EU ministers of finance (and chaired by the Commission). Since the beginning, this has been a high level group and not just one of the many technical working groups (which, as noted above, in the past ended up in stalemate). Member states bought the idea 13 because the composition of the group was such that there was no apparent risk of giving agenda setting powers to the Commission. The latter, however, was not excluded from this forum because it was up to the Commission to chair the meetings and provide a secretariat. Additionally, the Commission drafted the report of the group. 14 Therefore the Commission was always in a position from which it was not difficult to provide inputs to the group. One political result was indeed achieved by Commissioner Monti, that is, to break the ice of adversarial politics separating the Commission from member states. The policy process became more similar to a cooperative problem-solving forum than to a conflictual arena. And by sitting in the group with their high profile representatives, member states acknowledged that cooperation in direct taxation was a real agenda item.
The mandate of the tax group was to take a comprehensive view of taxation policy in the EU. Hence the past strategy of case-by-case approach was shunned definitively and the policy discourse was re-directed towards ‘comprehensive’ (as opposed to piecemeal) tax policy. In the report of the tax policy group, presented by the Commission in October 1996, the single market, employment and taxation were melded firmly by the narrative of tax competition. At that stage, not all member states were convinced of the need to take one precise form of action instead of another, but political attention was definitively drawn to the existence of ‘unfair’ tax practices, thus placing tax competition at the centre of the tax policy debate. The report recommended further work on the definition of ‘unfair’ tax competition and on possible initiatives, ‘whether legislative or not’. With the report, the Commission secured a result in terms of political commitment to go ahead with proposals. Consensus was not alienated by the presence of ‘hard’ legislative proposals. Quite the opposite, indeed, one of the innovations of the group was the examination of ‘soft’, voluntary policy instruments.
Having achieved rhetorical momentum and political attention, action has to emerge from strong political determination. Accordingly, following the publication of the report, the Commission sought to intensify the politicisation of the process. Meeting in Brussels on 11 November 1996, the ECOFIN ministers decided to pursue their discussion. Finland, France, the Netherlands and Spain appointed new members with higher political status, to denote the determination to seek consensus at the political level, beyond the technical difficulties raised by national revenue authorities.
A deal was clinched on 1 December 1997. The bargaining process leading to the deal revealed the conflicts implicit within the narrative of tax competition. For a deal to be struck, conflicts between different countries have to be settled. Member states do not have the same structure of pay-offs in the EU direct tax policy process. Ireland (Dublin Docks) and Belgium (coordination centres), for example, are very attractive locations for foreign companies. By contrast, Luxembourg has developed a relative specialisation in attracting savings. In other words, Ireland and Belgium are very competitive in corporate taxation, whereas Luxembourg is more competitive in attracting portfolio income.
In the tax policy group these divergent interests were pitched one against the other. Two resources were at hand for solving the conflicts, however. One was the politicisation of the tax policy group. This made it easier to strike political deals when the political advantage of coming to an agreement was greater than the economic cost of renouncing to a certain tax scheme. The examples of Luxembourg and Germany provide interesting insights. For Luxembourg, reputation and prestige were important political objectives. In the past, Luxembourg had not hesitated to veto single proposals for tax coordination against the will of all the other states, but in the context of a high profile political negotiation pressure to coordinate was greater, and so were the reputational costs of rocking the boat. For Germany, tax coordination at the EU level was indispensable giving the lack of tax reform at home and all political energy was put behind the initiatives of the tax policy group.
The second resource was the comprehensive approach implicit in the narrative of tax competition. This transformed a series of deadlocks in individual tax dossiers into a larger positive sum game with compensations across policy issues. By considering tax policy comprehensively, countries losing on one specific tax policy issue were compensated by gains in other issues. To put it differently, the package deal approach facilitated agreement and put pressure on reluctant countries. For example, within the Benelux countries Belgium — under attack for the coordination centres — put pressure on Luxembourg when taxation of savings was on the agenda. In turn, Luxembourg insisted for a deal inclusive of business taxation, and not limited to the taxation of savings.
The agreement reached on 1 December 1997 includes four elements (OJ C 2, 6.1.1998). The first is a voluntary code of conduct in business taxation. Over the period of five years, the code of conduct should provide initially a standstill on special tax regimes, and later a rollback of tax measures. The code defines at a very general level what damaging tax measures are without blacklisting any particular tax regime. Currently, a Council group — chaired by the British MP Dawn Primarolo — is examining a list of potentially harmful tax measures. The group is due to report to the Council in late 1999.
Turning to capital income taxation, the second component of the deal is the commitment to ensure a minimum of effective taxation of savings within the Community. The Council requested the Commission to come up with a proposal for a directive and set a few points around which the proposal should be fleshed out. Following this invitation, the Commission presented a proposal for a 20 per cent withholding tax on interests paid to non-resident EU citizens in May 1998. 15 The third element is the decision to take a closer look at state aid policy. Accordingly, the Commissioner for competition Karel Van Miert was requested to draft clear guidelines on those state aids that employ taxes as the main policy instruments. Special tax regimes have too often been built under the rubric of legitimate state aid policy, thus circumventing the scrutiny of the tax Directorates of the Commission. Finally, the fourth element of the ECOFIN deal is the decision to resume proposals for a corporate tax directive on interest and royalty payments across borders. The Commission had already put forward proposals for a directive on this issue, but the lack of political commitment and technical problems had led Commissioner Scrivener to withdraw the proposed directive in 1994. Therefore the Commission prepared a new proposal, formally submitted to the Council in March 1998. 16
4. From Policy Narratives to the Politics of Narratives
The case under examination shows that narratives are related to broader political dynamics. There are three implications of the tax competition narrative for policy development. To begin with, as the Financial Times put it, ‘fiscal policy has emerged from a long spell in hibernation’ (31 January 1997). Continuity over time is the first, albeit minimal, result achieved by the new strategy pursued by Commissioner Monti. A policy that was hardly noticeable, characterised by a handful of directives, is now on track. Since the Verona paper, political attention has been constant and there are no signs that the momentum will be lost in the near future.
The second implication of the narrative is task expansion. Tax policy negotiations have moved from isolated discussions of single directives to macro-political discourse. Moreover, with its emphasis on tax competition, the EU has now reached an even wider political debate. In fact, both the OECD (1998) and the G7 17 are currently working on this issue.
Related to task expansion is the third implication, that is, the shift of tax policy towards the core of EU public policy. 18 The fight against harmful tax competition has been endorsed in different guises by the Dublin European Council (13 and 14 December 1996), the Amsterdam European Council (16 and 17 June 1997), and the extraordinary meeting of the European Council on employment (Luxembourg, 20 and 21 November 1997). On the 12 and 13 December 1997, the European Council issued a resolution on economic policy coordination in stage three of the Economic and Monetary Union. The resolution calls for enhanced economic policy coordination in the Euro area. This type of cooperation should include ‘the discouragement of harmful tax competition’. Taxation, therefore, has now become an important instrument of non-monetary governance of the single currency.
However, these steps in policy development do not necessarily mean that, for example, the code of conduct will be a success or that the proposal of the Commission for a directive on the taxation of savings will be agreed upon without hesitation. One of the most important challenges implied by a comprehensive discourse on EU tax policy coordination is that ‘squaring the circle’ of consensus becomes more difficult. In 1998 the Austrian Presidency sought to speed up negotiations — especially on the savings proposal — but without results. The financial markets are very sceptical of the proposal on savings and argue that the Eurobond market could simply abandon the EU and migrate elsewhere.
In addition, a comprehensive approach requires coordination of tax policy and state aid policy. The development of a specific set of principles for state aid in the area of taxation is currently one of the preoccupation of DG IV. However, there are many doubts on the effectiveness and coherence of state aid policy as conducted so far by DG IV, and there is no guarantee that the inclusion of tax measures will improve the situation (Wishlade 1998). DG IV has developed its policy within a system of interaction and a political climate that is completely different from the one faced by DG XV, the Directorate responsible for taxation. Typically, DG IV interacts with industry ministers (not finance ministers), takes decisions on a case by case basis, has its own policy instruments, and a peculiar administrative culture (Cini 1996). It remains to be seen whether the solemn commitment of the 1 December 1997 fiscal package to develop principles for ‘tax aids’ will bear consistent fruits or not.
In conclusion, there has been a change in agenda-setting, but so far policy change has not gone further than the adoption of the code of conduct. The preconditions for more profound change are there (including the commitment of member states to reach agreement on the Monti package and the on-going activity of the Council group on the code of conduct chaired by Dawn Primarolo). There is also evidence of an indirect yet very important effect of the narrative. Several countries have put their own tax regimes under scrutiny (for example, the British government has conducted a review of the loose regulatory regime of the Channel Island) or have stopped the introduction of new aggressive tax proposals that were in the pipeline. 19 But so far major policy change has not materialised.
5. Theoretical Implications
It is useful to investigate the political power of policy narratives by taking into account wider conceptual frameworks. The choice in this paper is to relate policy narratives to the advocacy coalition framework. Three points deserve attention, namely the stability of coalitions, the role of the policy environment, and the dynamics of beliefs.
Stability of coalitions. Between 1989 and 1994, when Commissioner Scrivener was in charge of tax policy, two adversarial coalitions characterised the tax policy process. Since 1996, it has become more difficult to interpret events according to the advocacy coalition approach. The policy process has become more fluid and the propensity to collaborate among member states on EU tax issues has increased. Multinationals, economists, the single market Commissioner and his DGs are no longer cemented in a coalition fighting for tax neutrality against reluctant member states. Multinationals have mixed feelings about what the Commission is doing. They agree that certain tax regimes (particularly state aid in the guise of tax concessions) cannot be defended. But they are also worried that the EU tax policy is not addressing the issue of making the EU ‘tax competitive’ in relation to the rest of the world (UNICE 1996; 1998). As for economists, their influence on agenda-setting is lower than in the past. Their arguments about tax competition are less conclusive than their recipes for tax neutrality. More importantly, with the tax policy group reciprocal trust between the Commission and member states has increased: they collaborate more than compete.
At first glance, this result may appear surprising for the advocacy coalition framework. According to the framework, coalitions cannot simply evaporate. Quite the opposite indeed, they provide structure to the policy process. However, the hypothesis of coalitions’ stability over a decade or more refers to mature policy subsystems. In 1989-1994 two alternative coalitions emerged, but the rapid decrease of political attention after the Council agreement on three tax measures in 1990 prevented the consolidation of coalitions. During the first half of the 1990s — notwithstanding the Ruding Committee in 1992 — there was been no real interaction between the Commission and the Council. So much so that when Monti took the single market portfolio in 1995, there were 18 tax proposals at the Council’s table, but a higher number of proposals (30) had been withdrawn. A reason for the changing political relationships is the lack of ‘maturity’ in Sabatier’s terms. Emerging coalitions that do not have time to consolidate can change. A second reason is, arguably, the garbage-can feature of the EU policy process (Richardson 1996): participants, solutions and agenda issues can be reshuffled more easily than in domestic political systems (see also Kassim 1994:20 on the elusive fluidity of the EU policy process). It would be interesting to see whether the re-structuring of direct tax policy has been possible because of the fluid, erratic characteristics of EU public policy-making. If this is true, it should be difficult to find similar cases of coalitional re-structuring in domestic policy-making.
The role of the policy environment. Policy narratives should be situated within the dynamics of the policy environment. The advocacy coalition framework argues that perturbations of the policy environment represent a necessary (albeit not sufficient) cause of change. In this connection, one could argue that the undesirable tax consequences of capital movement liberalisation or the priorities of centre-left governments in the EU have been the major catalysts of action against tax competition. However, the policy risks implied by capital movement liberalisation had already been highlighted by economists (worried that a single market without tax coordination would end up in a catastrophic competition for the mobile tax base, see Sinn 1990) and by Scrivener (Commission 1990; Ruding 1992; Scrivener 1990). Yet direct tax policy was systematically neglected. Neither does the hypothesis of a social-democratic wind blowing the sails of the EU tax ship perform better. Social-democratic Europe was not yet a reality when the narrative of tax competition picked up, in 1996-1997.
The policy environment facilitated the emergence of harmful tax competition through other avenues. One avenue was the critical debate on competitiveness. ECOFIN in 1992 expressed concerns over excessive or ‘unfair’ competition leading to losses of revenue. 20 Two years later, the critical article by Krugman (1994) on competitiveness found a sympathetic echo in a reply by Rudolf Scharping (at that time chairman of the SPD in Germany). Scharping (1994: 193) argued that the obsession with competitiveness has led to ‘a global market for tax evasion’. More generally, policy-makers in Europe have become more concerned with the undesirable consequences of a deregulated single market and an unbridled European Court of Justice, as Scharpf (1999) has shown in his recent work. This new political mood provided a cognitive context wherein the idea of curbing harmful tax competition would appear politically acceptable. During winter 1996-1997 senior German and French officials complained about unfair tax havens and asked why the EU competition watchdogs had failed to investigate special tax regimes. 21 Although at that time there was nothing like a mandate offered to the Commissioner for the single market (German officials asked for a more effective competition policy), Monti was able to pressurise member states on a problem (harmful tax competition) that was perceived as real.
Outside the EU, in May 1996 OECD Ministers asked the organisation to develop measures against unfair competition in the taxation of financial investment. Although not concerned with corporate taxation, the OECD initiative (OECD 1998) has made the Commission’s agenda more credible. EU tax policy, in fact, requires a minimum of tax coordination in the rest of the world (Frenkel et al. 1991). Monti — as the web-site of DG XV informed — met as early as 2 April 1996 with the OECD secretary general to discuss ‘the common concern for tax competition’.
It would be probably exaggerated to contend that perturbations of the policy environment have been a necessary cause of change in EU tax policy. The OECD initiative did not take place before Monti presented the Verona paper. Moreover, the OECD did not agree on the contents of its strategy before 1998. As a cause must precede the effect, it would not be appropriate to look at the OECD policy environment as a cause of the new EU agenda. As for the changing intellectual mood, the preoccupation of EU member states could have been routed towards the OECD, bilateral negotiations (for example, by dint of tighter bilateral tax treaties), unilateral solutions (for example, controlled foreign company legislation, see OECD 1996) or EU’s competition policy. There is no teleological correspondence between threats to the tax base and the code of conduct. The defence of the tax base is compatible with many different policy choices. In order to understand why a certain institutional venue (the EU) and certain instruments were selected one has to account for the endogenous dynamics induced by the policy narrative. However, the OECD initiative and the changing political-intellectual mood on unbridled markets boosted the credibility of Monti’s proposal.
Beliefs and forum politics. Before 1996, ECOFIN was very hesitant to endorse Community action. Since 1996 the Commission has been an entrepreneurial player. It has put pressure and, at the same time, persuaded member states. Ministers of finance —traditionally reluctant to discuss European direct tax policy — have been convinced by new arguments (for example, the idea that harmful competition can aggravate unemployment), new instruments (the code of conduct instead of minimum rates), and new fora. In 1992, economists and the business community dominated the main tax policy forum (the Ruding Committee). In 1996-1997 the main tax policy forum was composed of high-profile national tax policy-makers. In the past, even the possibility of discussing corporate taxation within ECOFIN was considered with scepticism. No government could discuss the domestic tax decisions of another government: invariably, the argument of political sovereignty was raised in order to avoid reciprocal discussion on domestic taxation of international income. Now this reciprocal discussion is possible. Thus the tax preferences of member states have been re-shaped to include initiatives at the EU level. One result achieved by the spirit of the code is the possibility to discuss special tax regimes at the EU level. This implies that the policy core beliefs of member states have changed, with particular reference to (a) the overall seriousness of tax competition as a policy problem and (b) the choice of the institutional venue wherein harmful tax competition should be tackled. ECOFIN has not been ‘tricked’ by the Commission, but persuaded by reasoned argument in the form of a policy narrative. Ministers have agreed to EU tax cooperation knowingly and willingly (to paraphrase Smyrl 1998), and they are collectively engaged in a learning exercise.
Forum politics has enhanced the political power of narratives. By hosting the high level group on taxation, the Commission has offered a table of discussion to senior tax policy-makers. Thinking of the two types of change envisaged by Sabatier, the consensual search for win-win solutions has prevailed over a more controversial style (in which one coalition replaces the hitherto dominant coalition). Forum politics has also been instrumental in enfeebling the boundaries between coalitions. In conclusion, Sabatier’s argument that the policy core is relatively impenetrable to learning could be re-examined. Interestingly, Sabatier argues that policy learning can perhaps make an impact in the policy core only in the presence of ‘solid empirical evidence’. The fact that a narrative developed in the absence of solid empirical evidence has been a catalyst of change makes further investigation of the advocacy coalition approach promising and exciting.
Acknowledgements
This paper arises out of research conducted with the support of the UK Economic and Social Research Council, grant R000222059. An early (and significantly different) draft of the paper was written during my Jean Monnet Fellowship at the European University Institute (Florence, Italy), Robert Schuman Centre. It appeared in 1998 as European University Institute — Robert Schuman Centre working paper (www.iue.it).
References
Bachrach, P.S. and M. Baratz (1962) ‘Two faces of power’, American Political Science Review, 56: 1947-52.
Banerjee, S. (1998) ‘Narratives and interaction: a constitutive theory of interaction and the case of the All-India Muslim League’, European Journal of International Relations, 4(2): 178-203.
Cini, M. (1996) ‘La Commission Europeenne: Lieu d’emergence de cultures administratives L’exemple de la DG IV et de la DG XI’, Revue Francaise de Science Politique, 46(3), June: 457-72.
Coen, D. (1997) ‘The evolution of the large firm as a political actor in the European Union’, Journal of European Public Policy, 4(1), March: 91-108.
Commission (1990) Guidelines on Company Taxation, Commission Communication to Parliament and Council, 20 April.
Commission (1992) Report of the Committee of Independent Experts on Company Taxation (Ruding Committee Report), Luxembourg: Office for Official Publications.
Commission (1996) Taxation in the European Union: report on the development of tax systems, COM (96) 546 Final.
Daveri, F. and G. Tabellini (1997) Unemployment, growth and taxation in industrial countries, Typescript for the World Bank, Milan: IGIER.
Devereux, M. and M. Pearson (1989) Corporate tax harmonisation and economic efficiency, IFS Report Series no.35, London: IFS.
Easson, A.J. (1992) ‘Harmonization of direct taxation in the European Community: from Neumark to Ruding’, Canadian Tax Journal, 40(3): 600-38.
Easson, A.J. (1993) Taxation in the European Community, London: The Athlone Press.
Frenkel, J.A., A. Razin, and E. Sadka (1991) International Taxation in an Integrated World, Cambridge: Cambridge University Press.
Garvin, T. and J. Eyles (1997) ‘The sun safety metanarrative: Translating science into public health discourse’, Policy Sciences, 30: 47-70.
Genschel, P. and T. Plumper (1997) ‘Regulatory competition and international cooperation’, Journal of European Public Policy, 4(4): 626-42.
Goodspeed, T.J. (1998) ‘Tax competition, benefit taxes, and fiscal federalism’, National Tax Journal, LI(3), September: 579-86.
Hallerberg, M. and S. Basinger (1998) ‘Internationalization and changes in tax policy in OECD countries: the importance of domestic veto players’, Comparative Political Studies, 31(3), June: 321-52..
Isaac, J. (1989) ‘Corporate tax harmonization’ in M. Gammie and B. Robinson (eds) Beyond 1992: a European Tax System, London: The Institute for Fiscal Studies, 20-29.
Kanbur, R. and M. Keen (1993) ‘Jeux sans frontières. Tax competition and tax coordination when countries differ in size’, American Economic Review, 83(4), September: 877-92.
Kassim, H. (1994) ‘Policy networks and EU policy-making. A sceptical view’, West European Politics, (4, October): 17-27.
Majone, G.D. (1989) Evidence, Argument and Persuasion in the Policy Process, Yale University Press: New Haven and London.
Mintrom, M. and S. Vergari (1996) ‘Advocacy coalitions, policy entrepreneurs and policy change’, Policy Studies Journal, 24(3), : 420-34.
Moravcsik, A. (1993) ‘Preferences and power in the European Community: a liberal intergovernmentalist approach’, Journal of Common Market Studies, 31(4): 473-524
McLure, C.E. (1986) ‘Tax competition: is what’s good for the private goose also good for the public gander?’, National Tax Journal, 39(3), September: 341-8.
OECD (1996) Controlled foreign company legislation, OECD: Paris.
OECD (1998) Harmful Tax Competition. An Emerging Global Issue, Paris: OECD Publications.
Pollack, M. (1997) ‘Delegation, agency, and agenda setting in the European Community’, International Organization, 51(1), Winter: 99-134.
Radaelli, C.M. (1997) The Politics of Corporate Taxation in the European Union. Knowledge and International Policy Agendas, Routledge: London.
Richardson, J.J. (1996) ‘Actor-based models of national and EU policy-making’ in H. Kassim and A. Menon (eds) The European Union and National Industrial Policy, Routledge: London, 26-51.
Roe, E. (1994) Narrative Policy Analysis, Duke University Press: Durham.
Sabatier, P.A. (1998) ‘The advocacy coalition framework: Revisions and relevance for Europe’, Journal of European Public Policy, 5(1), March: 98-130.
Sabatier, P. and H.C. Jenkins-Smith (1993) Policy Change and Learning. An Advocacy Coalition Approach, Westview Press: Boulder.
Scharpf, F.W. (1996) ‘Negative and positive integration in the political economy of European welfare states’ in G. Marks, P. Schmitter, W. Streeck, and F.W. Scharpf (eds) Governance in the European Union, Sage: London, 15-39.
Scharpf, F.W. (1997) Balancing positive and negative integration: the regulatory options for Europe, RSC Policy Paper, no.4, EUI, Florence.
Scharpf, F.W. (1999) Governing in Europe. Effective and Democratic?, Oxford University Press: Oxford.
Scharping, R. (1994) ‘Rule-based competition’, Foreign Affairs, 73(4), July-August: 192-4.
Schön, D., and M. Rein (1994) Frame Reflection. Toward the Resolution of Intractable Policy Controversies, Basic Books: New York.
Scrivener, C. (1990a) ‘Harmonization of tax law within the Community’, European Taxation, 30, Dec.: 355-358.
Siebert, H. and M.J. Koop (1993) ‘Institutional competition versus centralisation: quo vadis Europe?’, Oxford Review of Economic Policy, 9(1), Spring: 15-30.
Sinn, H.W. (1990) ‘Tax harmonisation and tax competition in Europe’, European Economic Review, 34: 489-504.
Smyrl, M. (1998) ‘When (and how) do the Commission’s preferences matter?’, Journal of Common Market Studies, 36(1), March: 79-99.
Sorensen, P.B. (1997) ‘Public finance solutions to the European unemployment problem?’, Economic Policy, October: 223-64.
Stone, D.A. (1988) Policy Paradox and Political Reason, Scott, Foresman: Glenview (IL).
Stone, D.A. (1989) ‘Casual stories and the formation of policy agendas’, Political Science Quarterly, 104(2): 281-300.
Sun, J.-M. and J. Pelkmans (1995) ‘Regulatory competition in the single market’, Journal of Common Market Studies, 33(1), March: 67-89.
Tiebout, C. (1956) ‘A pure theory of local expenditures’, Journal of Political Economy, 64: 416-424.
Trimingham, J. (1997) The role of rhetoric in EU policy development: The case of the Trans-European Network, MA paper, Department of European Studies, University of Bradford, Bradford.
UNICE (1996) Lack of Community Action in Company Taxation and Its Attendants Costs for European Business and Industry, typescript, UNICE: Brussels, July.
UNICE (1998) Company taxation in the single market: the business perspective, Mimeo, UNICE, Brussels, 4 November.
Verdun, A. (1996) EMU — The Product of Policy Learning and Consensus Among Monetary Experts, Working Paper, The European Policy Process, Occasional Series, University of Essex, Colchester.
Vogel, D. (1995) Trading Up. Consumer and Environmental Regulation in a Global Economy, Harvard University Press: Cambridge and London.
Webb, M.C. (1996) ‘International cooperation and the taxation of transnational business: The OECD and the EU’, Prepared for delivery at the 1996 Annual Meeting of the American Political Science Association, San Francisco, August 29 – September 1.
Williams, D.W. (1998) EC Tax Law, London: Longman.
Wishlade, F. (1998) ‘Taxing times for the regulation of ‘unfair’ competition: Fiscal advantages, tax competition and the state aid rules’, Paper delivered to the Centre for European Policy Studies Tax Task Force, Brussels, CEPS, 9 December.
Zee, H.H. (1996) Taxation and unemployment, IMF working paper no.45-1996, Washington: International Monetary Fund.
Endnotes
*: Prepared delivered at the annual meeting of the International Studies Association, Washington, D.C., February 16–20, 1999. Panel on Regional and Multilateral Responses to International Tax Competition (Sponsored by International Political Economy). Back.
Note 1: Article 100 is a general, catch-all provision. It provides that “the Council shall, acting unanimously on a proposal from the Commission, issue directives for the approximation of such provisions laid down by law, regulation or administrative action in member states as directly affect the establishment or functioning of the common market”. Back.
Note 2: Article 100A provides for adoption by a qualified majority of single market measures, but fiscal measures are excluded explicitly. Back.
Note 3: Methodologically, the narrative has been examined by using official documents, the press and thirty in-depth semi-structured interviews with policy makers operating in Brussels (Commission and European Parliament) and in member states (Belgium, France, Germany, Italy, Luxembourg and the UK). Supplementary interviews at the OECD and the US Treasury have provided the wider context of the politics of tax globalisation. Back.
Note 4: It should be observed that I use Commission as shorthand for the single market Commissioner and the Directorate General (DG) competent for direct tax policy. Up until June 1998 DG XV was in charge of direct taxation whereas now competence has been shifted to DG XXI, also responsible for indirect taxation. Back.
Note 5: The discourse on international tax neutrality is based on the notions of capital export neutrality (CEN) and capital import neutrality (CIN). When CEN is achieved there is no tax incentive to locate investment in one country rather than another; CIN instead assures that in a given country there is no tax-induced competitive advantage of a domestic company over a foreign company (Devereux and Pearson 1989). CEN and CIN can therefore be employed as a yardstick for assessing the efficiency of taxes affecting cross-border company activity in the single market. Back.
Note 6: The European direct tax instruments agreed in 1990 are the following ones: directive 90/435/EEC on parent subsidiaries, directive 90/434/EEC on European mergers and acquisitions. The convention on transfer pricing completes the 1990 directives but because of its nature (a convention among states, not a Council’s directive) is not enforced by the Commission, and neither is it reviewed by the European Court of Justice. On the these tax instruments see Easson (1993). Back.
Note 7: See the statement by Isaac 1989:6, at that time Deputy Chairman of the Board of the UK Inland Revenue. Back.
Note 8: To be true, Commissioner Scrivener sought to bundle the proposals in a ‘French direct tax package’, but after July 1990 (when three issues were indeed bundled in the ECOFIN decision on two directives and one convention) this attempt failed. Back.
Note 9: The title of the paper is Taxation in the European Union, SEC(96) 487 final, 20 March 1996. Back.
Note 10: Domestic veto players can hinder tax policy change and thus decrease the competitiveness of a state in the tax competition game. See Hallerberg and Basinger (1998). Back.
Note 11: So far the Commission has relied on raw Eurostat data. The most recent figures show that in 1995 the EU raised 51.4 per cent of total tax receipts on employed labour, compared with 43.2 per cent for the EU (six members) in 1970 (Eurostat, Labour Taxation in the European Union). A recent paper commissioned by the World Bank has found empirical evidence of tax-induced unemployment in the European Union (Daveri and Tabellini 1997). See also Zee (1996) and Sorensen (1997) for a discussion of taxation, unemployment and possible tax reforms. Sorensen observes that the impact of tax reforms on employment levels hinges on crucial assumptions related to the structure of the labour market. Back.
Note 12: I borrow this language from Garvin and Eyles (1997:65). Back.
Note 13: The ECOFIN ministers appointed personal representatives to the high level group, which met four times, on 24 June, 19 July, 12 September and 7 October 1996. Back.
Note 14: European Commission, Taxation in the European Union: Report on the Development of Tax Systems, COM(96) 546 final, Brussels, 22 October 1997. Back.
Note 15: Proposal for a Council directive to ensure a minimum of effective taxation of savings income in the form of interest payments within the Community, COM (1998) 295, 20 May 1998. Member states can choose between the 20 per cent withholding tax and exchange of information on non-resident savings. Back.
Note 16: Proposal for a Council directive on a common system of taxation applicable to interest and royalty payments made between associated companies of different member states, COM (1998) 67 final, 4 March 1998. Back.
Note 17: In June 1996, the leaders of the G7 expressed their concern for harmful tax competition in terms of tax-induced distortions to trade and investment and erosion of countries’ ability to collect revenue. The negative impact of taxes on employment was discussed by the G7 meeting dedicated to jobs and labour standards (Lille, April 1996). Back.
Note 18: See Majone (1989) for the notion of policy core, as opposed to the periphery of public policy. Back.
Note 19: This point was stressed by Monti in his speech to the ‘tax focus’ conference organised by the Centre for European Policy Studies, Brussels, 28 May 1998. Back.
Note 20: Council conclusions concerning guidelines on company taxation linked to the further development of the internal market, document 10224-92 Annex 1. Back.
Note 21: See for example the last 1996 issue of European Voice (no.346): ‘Germany targets EU tax havens’. Back.
Email this citation