Policy Brief: European Union & Uneven Development
Oisín Joyce - Associate, Rights and Partnership
Picture credit: Depositphotos
A Disjointed Union
An increase in wealth inequality across Europe demonstrates that, in many respects, the current institutions & frameworks of the European Union must be (re?)evaluated and then reformed to meet the new needs of the member states. Freedom of movement of workers is one of the core tenets of the European project, which arguably served as the main point of contention in the 2016 UK Brexit referendum. (Payne & Bienkov, 2018) However, freedom of movement can reinforce the pre-existing north-south & east-west wealth disparities on the continent through brain drain. As a case in point, in 2019 the median wealth in the EU ranged from $13,348 in Latvia to $139,739 in Luxembourg. (Suisse, 2019).
While the reasons for these vast differences in median wealth are numerous, freedom of movement can cause a brain drain in more economically peripheral regions of Europe as workers can easily migrate to other parts of the EU where they perceive that they will have more opportunities and a better rate of remuneration for their labour.
While freedom of movement may enable the personal success of individual workers, by creating brain drain freedom of movement erodes the tax base of their home member state which in turn further complicates the process of economic development in that member state. In effect, this means that their country of birth has lost out as the funds invested in the education & development of these citizens so that they can contribute to their member state’s economy has for all intents & purposes gone to waste.
Ultimately, freedom of movement is vital for the continued existence of the European Union as a bloc – but its current implementation has, in some cases, served to further entrench regional inequities. For freedom of movement to continue to be viable, it must be reformed.
European Union 2019 - Source : EP
Encouraging Sustainable Development Within Europe
At present, there are funds such as the European Regional Development Fund (ERDF) and Structural Reform Support Program (SRSP) within the EU budget, which provide less developed EU countries with funding for capital & infrastructure projects to develop their economies. However, allocation for these projects is decided at the Union level – as opposed to by the member states themselves. This creates a potential conflict between the development priorities of the Union as a whole, and the development priorities of individual member states.
Equally, private remittances still play a large role in the development of many eastern and southern European member states. According to the European Statistical Office (Eurostat) (Eurostat, 2019):
• About 55% of personal remittances in 2019 were sent within the EU Member States.
• Croatia, Bulgaria, and Latvia were most dependent on international remittances in the EU in 2019.
However, the capital generated by remittances is held by private individuals, and is not subject to taxation (unless declared to the tax authorities by recipients). This effectively means that the government of the member state in question is unable to use any part of this capital for macroeconomic development. Ultimately, the only economic benefits of remittances are microeconomic in nature, such as the personal enrichment of individuals in receipt of remittances and the increases in disposable income such remittances may create.
A policy-based solution to this problem to further encourage sustainable development & reduce wealth inequality between EU member states would be to have a form of citizenship-based taxation for EU citizens who reside in EU member states other than their EU country of citizenship. The United States of America is currently the only ‘western’ country that taxes its citizens based on citizenship regardless of residence. (Service, 2020) US citizens who are based outside the US often begrudge the fact that they are required to pay US taxes regardless of where they live as they receive very little in exchange, save for consular protection. Equally, the USA does not have freedom of movement agreements with any specific country. Owing to that, the ability to live abroad for a US citizen is decided by one’s access to visas abroad.
However, EU citizens are, as a matter of right, able to reside in other EU member states without visas as a result of their EU citizenship from their own country. In this respect, the new opportunities that they embrace in other EU member states are afforded to them because of their birth citizenship. Thus, there is a fair basis on which a limited form of marginal taxation may be levied on them by their EU country of citizenship when residing in another EU member state. It should be made clear at this juncture that this policy brief is in no way advocating for citizenship-based taxation for EU citizens resident outside the EU.
Picture Credit: ECFR
The current model used in the USA is that US citizens are taxed based on their worldwide income, with exclusions allowed that are adjusted for inflation, which in 2020 was $107,600. (Service, 2020)
By contrast, the European Union is a supranational organization of states that cooperate in policy areas based on mutual interest as opposed to a single sovereign state. Thus, an EU model of citizenship-based taxation based on residence would need to factor in economic disparities between member states by using metrics such as purchasing power parity (PPP) and foreign exchange rates (if applicable).
Equally, it would be important to ensure that this policy would not penalize lower & middle-income earners who may already face a considerable tax liability in their country of residence – thereby necessitating a large foreign income tax exclusion and low marginal tax rates.
Such a model would also need to be coordinated on a Union-wide basis to be viable. Hence, a provisional calculation formula could be devised based on available economic data on a yearly basis in each member state. A model like this could be used:
• [Individuals in top 25% income bracket in EU Member State of Residence]
• Divide [Net Income in EU Member State of Residence] by 100
• Multiplied By 1% of [Net Income in EU Member State of Residence]
• Minus [Exclusion Equal to Sum of Mean Salary in EU Country of Residence]
• = [Tax Liability to EU Country of Citizenship]
The design of this policy is fair as tax liability to the EU Country of Citizenship is calculated based on their income relative to the country of residence as opposed to how high or low their income may be in relative terms in their EU Country of Citizenship - thus factoring in the cost of living and purchasing power parity to the determination of liability.
In the event that it is implemented correctly & equitably, this policy could provide several positive outcomes. Firstly, member states of the European Union with lower median wealth will not be as heavily impacted in economic terms by brain drain as their governments will still be in receipt of tax revenue from their citizens who are resident abroad.
Secondly, under the terms of this policy, the wealth generated in stronger European economies is redistributed to weaker European economies to encourage sustainable development as governments will have direct access to the capital generated by their citizens abroad. This provides an added benefit of EU membership that can serve as a strong counterargument to Euroscepticism.
It goes without saying that member state government access to increased tax revenue as a result of such measures can only be of benefit if it used correctly – but this is subject to the competence of individual governments as opposed to the European Union as a whole. Equally, some variables would need to be considered such as dual EU citizenship, posted workers and social security entitlements – but these issues can be managed and worked on during a pre-implementation consultative process.
Oisín is pursuing a Master of Public Administration (MPA) in Development Practice at University College Dublin. His research interests include economic inequality & conflict resolution. He has worked on several projects at University College Dublin on conflict in the north of Ireland, renewable energy in the Midlands region of Ireland and aid allocation in Bangladesh.