Thursday, June 6, 2013
This paper focuses on several cases decided by the Court of Justice of the European Union in recent years. In these cases, the CJEU struck down geographic limitations on tax expenditures for charitable giving, thereby leaving Member States with a choice. Member States that chose not to eliminate their tax expenditures entirely would have to extend them to beneficiaries across the European Union. Those that did not want to extend these benefits to the rest of the European Union, however, would have to eliminate their tax expenditures and perhaps replace them with direct subsidies.
The Court has thus effectively forced Member States into either subsidizing each other’s charitable sectors or no longer using their tax systems to encourage charitable giving. This paper shows that most Member States have chosen the first option, meaning that they are engaged in a web of horizontal subsidization. In the absence of any supranational taxing authority in the European Union, this horizontal subsidization represents a new model of fiscal federalism, where taxing and spending decisions are spread between Member States, rather than assigned vertically to a centralized government. This new model could arguably allow the Member States to retain the benefits of both centralization and decentralization, with Member States now paying for benefit spillovers yet still retaining the competition and representation of political preferences generally associated with decentralized systems.
However, horizontal subsidization should raise significant concerns because of the way that the Court reached its decisions in cases considering tax expenditures. In order to arrive at horizontal subsidization, the Court ignored both the economic equivalence of tax expenditures and direct expenditures and the fundamental regulatory and cultural differences between Member State charitable sectors. By prioritizing formalism over functionalism and overlooking the remaining differences between Member States, the Court distorted Member State policy choices, favored certain types of charitable organizations, and created incentives for Member States to increase barriers to entry to their charitable sectors. This paper suggests that the CJEU’s tax expenditure jurisprudence is thus more likely to be a cautionary tale than a model for future integration.