Tuesday, February 12, 2013
Lilian Faulhaber (Boston University) presents Charitable Giving, Tax Expenditures and the Fiscal Future of the European Union at NYU today as part of its Colloquium Series on Tax Policy and Public Finance convened by Daniel Shaviro (NYU) and William Gale (Tax Policy Center; visiting at NYU):
In the wake of the recent economic crises in Europe, policymakers, academics, and other commentators spoke repeatedly about the fiscal future of the European Union. Had the fact that the twenty-seven Member States of the European Union lacked a harmonized fiscal policy lessened or worsened the impact of the economic crises? Did these crises and the outcry that surrounded them mean that fiscal harmonization was now more or less likely than before? Would Member States forever shy away from fiscal union, or was it even more necessary after the Greek bailout to tie together the taxing and spending policies of the European Union?
This Article argues that these current debates have ignored a significant development in the European Union, and that this development means that the budgets of the Member States are already more closely linked than has previously been recognized. This development, which this Article identifies as a “cross-subsidization effect,” has emerged out of the tax expenditure jurisprudence of the Court of Justice of the European Union, where the Court struck down revenue-reducing direct tax provisions. By striking down these tax provisions, the Court did more than just require the Member States to amend their tax law. The Court effectively gave Member States a choice: either stop using your tax laws to subsidize your own residents, or extend that subsidy to residents of all the other Member States. Member States that chose the latter option end up subsidizing other Member States, thus linking the budgets of the European Union together.
In order to illustrate the cross-subsidization effect, this Article focuses on four recent cases in which the Court considered charitable giving incentives, such as tax exemptions for charitable organizations and deductions for charitable donations. These charitable giving cases illustrate the cross-subsidization effect, and the Member State responses to these cases illustrate both the benefits and the costs of this development. The cross-subsidization effect may offer hope to policymakers interested in pushing the European Union toward greater fiscal harmony in that it suggests that Member States, including those outside the Eurozone, are closer to this goal than has previously been recognized, in that certain elements of their budgets are now interdependent. The Member State responses, however, hold a warning to policymakers. Although the revenue effects of the charitable giving cases are relatively small compared to recent amounts lost and spent in the economic crises, Member States have still pushed back strongly against the cross-subsidization effect that emerged out of these cases. This Article argues that policymakers must consider the Member State responses to this effect, as well as the possible motivations underlying those responses, as they consider their next steps toward European fiscal union.
Update: Dan Shaviro blogs the workshop here.