Harmonization through Competition? The Evolution of Taxation in Post-War Europe

The period since the end of the Second World War has been marked in Western Europe by a massive expansion of the state and the gradual liberalization and integration of the European economy. This expansion of the state has rested on a greatly enlarged fiscal base. Government receipts as a proportion of gross domestic product (GDP) more than doubled between 1950 and 1990 ‑ a scale of increase associated historically with periods of war rather than peace.1 Yet while all European countries experienced a rise in the proportion of GDP collected by the government as tax revenue, both the proportion of GDP and the rate of increase have varied considerably. There have also been major differences in the composition of each country’s revenue base.2 Whether these differences have declined over time due to the twin pressures arising from liberalization and integration is the central question addressed in this chapter. In the first part of the chapter, we use documentary evidence, based on the records of national governments and of the supranational European institutions, to analyse the impact of trade liberalization since 1950 on ideas of indirect taxation within member states of the ECSC and EEC. For this reason the focus is on the introduction of a single tax, value added tax (VAT). In the second part, we employ statistical evidence (since the documentary evidence remains closed) to assess the impact of the more rapid liberalization of the European economy in the last two decades of the twentieth century on overall tax rates and structures within the EU. The broad sweep of taxes levied by member states thus comes into view. In spite of a wealth of published data, there has, surprisingly, been little attempt in the growing literature on tax competition to describe how taxes have developed over the post-war period.3 The chapter assesses the role of the transfer of ideas in attempts to harmonize European tax systems. It highlights the resilience of national systems of state finance and emphasizes the role of economic processes and the communication about them among policy-makers to explain the continued divergences of national tax systems within the European Union (EU).