The politics of taxation in the European Union

While taxation is generally considered a matter of national sovereignty, the power to tax of the Member States of the European Union (EU) is increasingly constrained by the EU. Against this backdrop, the chapter investigates the politics of taxation in the EU. Starting with a historical overview, it shows that the initial legal setting of the EU has enabled certain harmonization of taxes, in particular in the area of value-added tax (VAT), but also hampered meaningful tax coordination on the road to the EU’s internal market. The EU and its Member States appear to be trapped: past decision-making has led to tax distortions, harmful tax competition and increased problems of tax evasion and avoidance. At the same time, institutional, judicial and political obstacles hinder agreement on how to tackle these problems. The chapter then reviews different strands of literature that find explanations for both the lack of tax harmonization and successful instances of coordination. Explanatory factors include the heterogeneity of national preferences, the powers of the ECJ and the Treaties, as well as the role of changing narratives and non-governmental organizations. As the pace of legislative change in the field of corporate taxation has increased dramatically since the financial crisis, the chapter ends by discussing current developments, such as the politicization of tax issues in (and outside) the EU, the influence of the global context and the impact of the COVID-19 pandemic.