August 29, 2006
Kaye on Tax Discrimination: A Comparative Analysis of U.S. and EU Approaches
Tracy A. Kaye (Seton Hall) has published Tax Discrimination: A Comparative Analysis of U.S. and EU Approaches, 7 Fla. Tax Rev. 47 (2005). Here is the Conclusion:
The judgments of the European Court of Justice have caused some coordination of various individual and corporate tax laws through negative integration. Pure tax harmonization has not resulted, in that a finding of incompatibility of a tax law with a Treaty provision does not guarantee that all Member States will resolve the problem in the same way legislatively. Arguably, this judicial action was necessary during the infancy stage of the Internal Market. However, given the progress made towards the Internal Market, it is time for a more balanced approach that takes into account a Member State's need to finance its government. This could be accomplished through a more judicious use of the rule of reason, on occasion exercising, like the Supreme Court, an extra dose of judicial sympathy for the Member State's taxing power. Alternatively, a European scholar suggests reliance on Article 4 of the EC Treaty. Because this treaty provision obligates the Member States to avoid excessive public deficits, sound tax policies that combat anti-avoidance conduct would need to be accepted as justifications for infringements of the Treaty freedoms.
On the legislative side, the Council is designed to safeguard the economic interests of the Member States. The Finance Minister's acknowledged responsibility is to look after the Member State's interests in tax matters before the Council. The Commission should refocus its energies on formulating Community tax policy, making proposals to the Council, and drafting the detailed measures needed for their implementation. The Commission should continue to push for a move to qualified majority voting for certain tax issues. Hopefully, the Member States will soften their opposition as they experience the frustration that EU enlargement has only exacerbated the inability to have agreement on any new Community tax legislation. At a bare minimum, the Commission can issue recommendations, which although not legally binding, would be persuasive in pushing Member States towards more tax coordination.
In contrast to my EU recommendation, with respect to the United States, I advocate less congressional involvement. The recent U.S. experience with federal intervention in state tax legislation demonstrates that Congress is being too generous with the states' money. Unlike the Council of Ministers, Congress does not represent the states and there is increasing temptation to enact legislation that benefits a select constituency at a revenue cost to the states. At present, the United States is better off with increased judicial oversight, because in the name of reducing complexity, the congressional answer seems to be that no one should pay taxes. I conclude with a recommendation that the Supreme Court should give priority to state tax conflicts and additional restraints should be placed on the ability of Congress to tamper with state tax laws. I recommend the creation of a Committee of Treasurers patterned after the EU's Economic and Social Committee or the Committee of the Regions but in this case comprised of the treasurers of the fifty states. This Committee of Treasurers would have to be consulted with respect to any federal intervention in state tax legislation.
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Congratulations to my colleague Tracy on a compelling proposal! It's great to see comparative law informing our tax policy discussions. From an admin angle, I think these consultative bodies would have much to contribute to the debate.
Posted by: Frank | Aug 29, 2006 1:47:26 PM