EU Tax Mix Interview: Christoph Spengel
In the summer of 2024, I interviewed Professor of International Taxation, Christoph Spengel at the University of Mannheim Business School about the future of EU taxA Tax is a mandatory payment collected by local, State, and National governments from individuals and businesses to cover the cost of general government goods, services, and activities.
mix. A lightly edited transcript from that interview is below and shows the importance of balancing different types of revenue-raising policies with societal goals.
Sean Bray: How do you perceive the current EU tax mix as it stands today?
Christoph Spengel: I consider the EU tax mix as direct and indirect taxes. Since the creation of the European Economic Union (EEU) in the 1960s, we have had a harmonized VAT system. All Member States who joined the EU afterward had to adopt it. The most important direct taxesA direct tax is imposed on individuals and organizations, and cannot be transferred to another payer. Direct taxes, like the personal income tax rate, are often progressive.
is personal income tax (PIT). The corporate income tax is a tax imposed by the federal and state governments. Many companies are exempt from the CIT, as they are taxed under the individual income taxes.
is not very relevant. I think that having a mix of consumption taxation and income taxation is a good thing. Both the PIT (progressive income tax) and VAT (value added tax) are important in terms of generating tax revenue. In Germany, the two taxes account for 75 percent of all taxes. In the last 25 years we have faced many crises. In 2000, the dot-com crash began. In an economic downturn, there is no increase in employment, but savings are a stabilizing factor for the decrease in personal income tax. During the financial crises of 2006 and 2007 the income tax decreased, but the consumptiontaxA consumption tax is usually levied directly or indirectly on the purchase of goods and services. It is paid by the consumer as retail sales taxes or excise tax, tariffs or value-added tax (VAT).
served as a stabilizer. It was different in the pandemic, because most Member States had special COVID-19 taxes to stabilize. But still, I find this is a real advantage, and this should hold for all the new Member States.
Sean Bray: How should the EU reform its tax mix in the medium term?
Christoph Spengel: It’s a good question. It’s a good question. The answer is difficult to find because unlike the United States, it is not a political Union, and the European parliament has only some power, but no budget. This means that taxation is a matter for the Member States. It is important to clearly identify the harmonization measures. We have VAT and PIT that are outside the scope of European Commission. This is in accordance with the principle of subsidiarity, which is a part of the Treaty of the Functioning of the European Union. It’s a bit of a binding statement.
In recent decades, there have a been many efforts and proposals made to harmonize corporate income tax. It began with the common corporate tax basis. The tax base is the amount of income, assets, consumption and transactions that are subject to taxation. A narrow tax base has a negative impact on the economy and is inefficient. A broad tax base allows for lower tax rates and reduced administration costs.
was the CCCTB. It would have introduced an harmonised tax base for corporate income tax, and a mechanism of allocating the consolidated income among the Member States in which the multinational corporations operate. I was in favor of harmonizing the tax base because if you harmonize or put a proposal on the table, then you should weigh both pros and cons. I was in favour of harmonizing tax bases because you have to weigh the pros and con when you harmonize. It would also make tax administration easier. The con is that you hand back the right to set the tax base with tax incentives.
But actually, that’s not true because what was on the table was a set of tax accounting standards which were a good compromise of existing national standards. If you want to encourage investment, there are other options, such as tax credits, or something similar, that come after the calculation of the tax basis. Allocating a consolidated base of tax was complex and difficult. What does this mean for the tax revenue of the countries involved, since it was not clear?
And I now step forward 20 years to introduce the two-pillar plan. Pillar One is still on the table and wants to distribute a part of the multinational income to market jurisdiction. It’s again about allocating taxing powers to market jurisdictions. This is similar to allocating the consolidated tax base by formula. We also talk about Europe. In the EU we have a global tax that will be effective in 2024. This is a minimal tax rate. However, we forgot to harmonize our tax base. You cannot harmonize with the EU. Taxes are simple. The tax burden is equal to the product of tax base multiplied with tax rate. If you want to harmonize with other countries, you must take these things into consideration. We have two worlds. We have a global minimum tax within Europe and we still have domestic anti-avoidance rules where we must compute tax burdens using a non-harmonised set of tax accounting standards. This minimum tax is collected by jurisdictions with a standard rate of taxation below 15 percent. There would be a domestic tax to top up the standard tax. If there is no domestic tax, then the resident country could tax the difference of up to 15%. This is a clear disadvantage to EU-based multi-nationals, because they have to pay 15 percent in every jurisdiction worldwide. I don’t believe that the US would introduce this. My country, Germany is a very interesting country for the automobile industry. Porsche, Audi, and the headline Hungarian tax rate is 9 percent. If a German multinational invests in Hungary, it must pay at least 15%, right? Hungary can collect the additional tax. Why should Germany accept that? Imagine that a US competitor to Audi opens a production facility in Hungary. They must pay 9 percent. This is a directive of the EU that can only be altered by unanimous consent. Why should others pay 9 percent if they are in a better position than you? I believe that we’re on the wrong track if the US or China don’t join the global minimum tax. We have a public country-bycountry reporting. We reveal secrets that we were not required to disclose in the past, not even in consolidated accounting. We have a global tax once again. The EU is a bit ring-fencing it, and that’s not good.
Sean Bray:
What role should capital taxation play in the tax mix?
Christoph Spengel:
I see some interrelated things when you ask for a stable fiscal position and capital taxation. Personal income tax and value added tax are the two most important taxes, and it is good to have this tax mix. We also see that a part of the income for very rich individuals is either not taxed at all or taxed very lowly. Have you heard about Mr. Zucman’s proposal to tax billionaires and others? It’s on a table. Why only billionaires? Why not people with EUR900 million? The problem with capital taxation is the fact that the corporate income is a backstop to the personal income tax, because the rich have their business investments. Why do they pay so little tax on their economic incomes? You cannot go through a company, and now Mr. Zucman is saying to have a net property TaxA property tax is levied primarily on immovable properties like land and buildings as well as tangible personal property that’s movable like vehicles and equipment. Property taxes are the largest source of revenue for state and local governments in the U.S. They help fund schools, roads and police services, among other things.
. I’d like to talk about inheritance and gift taxes. A gift tax is a tax imposed on a transfer of property made by a living person without payment or exchange. Typically, the tax is owed by the donor and not the recipient.
. How should I collect the property tax? I have very little information. The European Commission has no role in this. The Member States are responsible for the inheritance and gift taxes. If you die, it’s the last time you can transfer income to your children or lastly consume. Here we should consider a stable gift and inheritance tax, and not leave business assets almost untaxed. This is related to capital taxation. If you raise income taxes, this does not increase the burden of taxation on corporations. If the profits are already in a corporation, leave them there. It’s not about increasing corporate tax rates, because they are relevant for investment and location decision-making. But it’s about a fairer and more sustainable capital taxation that is in the hands the owners. And the last point in time is the inheritance.Sean Bray: How should the EU reform the VAT?Christoph Spengel: The VAT is very vulnerable. The tax system is flawed. The studies promoted by European Commission about the EU reveal a
tax-gap. A tax-gap is the difference between the taxes legally owed, and the taxes collected. According to the IRS’s latest estimate (2011-2013), the gross tax gap in the U.S. is responsible for at least $1 billion in lost revenue every year. This suggests a voluntary compliance rate of 83,6%. The net tax gap can be calculated by subtracting the late tax collections from gross tax gaps: from 2011 to 2013 the average net gap was about 1 billion.
The estimates are massive. The lost tax revenue is more than EUR100 billion per year. The system is vulnerable to fraud because it is borne by the consumer but we collect the tax on each chain of the value creation process. If you charge VAT on a business-tobusiness transaction, the buyer of goods and services can deduct it as input VAT. There is a tax collection, but no incident of the tax. This system is vulnerable, because you can deduct input by showing an invoice, but, if that doesn’t match or trigger, the VAT will have been transferred to tax authorities and must be released. You can write whatever you want into a tax law to combat tax fraud, but the system must be waterproof. The buzzword is reverse charge. Reverse charge is the buzzword. Airbnb is a direct competitor of hotels if you offer an apartment. Why should you not pay VAT? The market is growing. We are talking about a stable fiscal situation, but the VAT is very vulnerable and has many legal loopholes. It’s very important. It’s very important.Sean Bray:
Should the EU focus only on PIT and VAT or are there other taxes to consider reforming?Christoph Spengel: I would say there are others. As I said, VAT and PIT contribute the most to tax revenue. I also considered corporate income tax, but the next step should be to reduce compliance cost and have more simplification. I also talk about the tax basis and allocating profits to Member States, or jurisdictions that are active in environmental taxes. We would have carbon credits across the EU. It would be nice. Climate change is an issue that affects the entire world. Everyone benefits if we reduce carbon dioxide emissions by 10%. It’s a very controversial issue, especially in the public. If I were in charge, if the United States, China and India sat down at a table, I’d like them to say that we all live on the same planet. I think about the generation of my daughters and so on. And, we see climate change, but we should put effort on the global side and take the most relevant countries and say, “okay, we pay” then for Africa and for parts of South America because there are some global costs.Sean Bray:
How should we think about the differences in burden between capital and labor taxation?
Christoph Spengel: I think the most important is personal income tax but that can be difficult, so we talk about labor taxation and capital taxation because labor is income from employment. I would say that agriculture is capital. Business is capital. Self-employed is both labor and capital. Rental income is capital. It’s capital and it is labeled. I believe that a uniform taxation on capital income would simplify and harmonize the tax system, and eliminate arbitrage between different types of capital income. The capital gain on the sale of real estate, however, is not taxed when it is long-term. If you still sell more than 10 year after purchase, it is not taxable. If you sell shares in the UK, capital gains are taxed. This would also increase fairness and simplify things, because, after all, why should we be fair? Richer households can afford to invest in real estate. I would like it to be more uniform. We also have other taxes on work that are sometimes direct. Austria has payroll taxes. France has payroll taxes. We have more problems with capital income. That’s why i say it’s crucial to have equal treatment as well as an indirect relationship between capital income and labour income. Capital income is also referred to as corporate profits. And now I come a bit from economics.
Who bears the corporate income tax? Where is the incidence then? You can say that the tax is a cost which reduces profits and the incidence occurs at the shareholder’s level. If you consider the tax a cost you can say that you transfer the costs to the consumer or substitute costs. Recent studies in Germany show that we also have a local trade taxes where we have good statistics. If the corporate tax rises, we see a lower salary increase. This means that a part of the corporate taxes is also paid by labor. It’s a bit interesting. I would leave it simple. We should make it easier for young people to accumulate capital in preparation for retirement. We should have private saving which would be defined as a move towards a consumption tax. You can deduct savings to your taxable IncomeTaxable Income is the amount of income that is subject to tax after deductions and exclusions. Taxable income is different from gross income for both individuals and corporations.
. It would allow individuals to accumulate more capital in preparation for retirement. That’s what I tell my students, that they should plead for more elements of the consumption tax because you can accumulate maybe 15 percent more capital depending on the interest rate.Sean Bray:
What do you think the EU should do going forward with Pillar Two?Christoph Spengel:
I would abolish the minimum tax. We had a global tax forum in the middle of 1990s, about 30 years ago. Tax avoidance is not just the province of multinationals. Some jurisdictions also offer unfair subsidies. We also discussed the Belgian coordination centers and Dutch financing companies regimes. It was decided on a political level that we would remove unfair elements from the tax system, and not introduce any new ones. The IP patent boxes were introduced after 15 years. The same thing but then accusing multinationals of tax avoidance is unfair. A global minimum tax does not end tax competition. We are now observing more tax competition, for example in the personal income tax of expatriates. You can also use cash. You can see what Germany has done by offering Intel EUR4 billion for a factory, or EUR500 millions in Saarland for a chip factory coming from the US. Tax competition is not going to stop. I would eliminate the global minimum tax in Europe because it’s a clear advantage. I would tell the governments that they need to create a level playing ground, but it is difficult. It is especially difficult for me to deal with China. China is the most important to me. I think that the United States has a tax policy that is based on evidence, but it wasn’t Trump who said America first. Tax policy has been a part of American tax policy for over 50 years. I tell you that tax policy is all about domestic efficiency. No one speaks about global efficiency. What is good for the whole world? It’s not Europe. It’s global. It’s the exact same with environmental taxes. It’s about global stable tax revenues that are fair. We could also discuss a variety of tax topics in relation to developing countries. I think it’s necessary to broaden the view on the global context.
Sean Bray:
What does “tax fairness” mean to you?Christoph Spengel: Tax fairness is the principle of equity. You can do this on an individual basis. Personal tax should be fair. The tax system should be based upon a net principle, and a
progressive Tax. A progressive tax is a tax where the average tax burden rises with income. High-income families shoulder a disproportionate amount of the tax burden while low- and mid-income taxpayers bear a relatively small burden.
rate. This is a fair thing. The famous couple Peggy and Richard Musgrave had international equity. That’s fairness between countries. This means that countries are entitled to a fair share in profits that can be attributed them. You could try this with global players in order to achieve fairness among jurisdictions, because business models are changing as a result of digitalization and mobilization. This means that value creation does not have to be linked to your market. You asked about the digital economic model, and I would not tax it differently than traditional business models. You could discuss things if we understand the digital economy. But the rest is a combination. If you create something new, such as a machine learning or patent, then it’s a combination between labor and capital profit. Amount A is the same as Amount B in Pillar One. This is a question of whether to go this way or to traditional profits. Let’s say there is income tax, and consumption tax. The income tax is based on where the value is created and the destination tax is based on where the value is consumed. In countries without Google representation, there are still consumers. Therefore, to have stable and sustainable tax revenue, you shouldn’t forget the VAT on electronic services that goes to the destination country.
Sean Bray: Is there anything we missed that you’d like to cover?
Christoph Spengel:
I have dealt, not actively, but as a commentator, with tax fraud like Cum-Ex, short sales, and other dividend arbitrage systems, which is criminal at least in Germany. There have been court decisions, and I see I also spoke about VAT fraud. But regarding financial income, that is an international scene. I believe that we should do more to improve our cooperation with tax authorities in Europe. We already have directives on administrative co-operation, but I’m referring to tax fraud. Europol is a good organization, but they are only concerned with indirect taxes. We lose a lot because direct taxes are not taken into account. It’s about EUR25 billion and that’s especially important right now in Germany because we have difficulties setting up a federal household next year that is compliant with our constitution.
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