Tax Policy and Subsidiarity in the European Union

How much tax coordination is desirable in the European Union — and of what type? This chapter seeks to address these issues by taking as guiding principles the notions of subsidiarity and proportionality that have been central in wider discussions of the appropriate architecture of European Union policy making. We start by considering what the literature on fiscal federalism suggests would be an appropriate division of taxing powers within the Union — and then confront this with the realities of current practice. While there have been many achievements, the comparison brings to light several shortcomings of the European experience. Significant constraints have been posed by a variety of institutional realities — such as unanimity voting, the European Court of Justice and the influence of lobby groups — and efficiency arguments that favour tax competition may have had an influence on the progress in tax coordination. We argue too, that the Union has in recent years come to respond to failures of policy coordination by trying to use administrative measures as a substitute.