RIGA - Tax harmonization within the European Union dominated financial talk last week, with economists from new member states defending low taxes as dictated by the needs of competition and rapid growth. Germany and France, however, want to put an end to the "tax dumping" and have begun to put pressure on the European Commission.
Last week German Economy Minister Wolfgang Clement threatened to call into question the future of EU subsidies, especially those given to new members states refusing to raise their tax rates. Some in the anti-tax dumping camp have suggested that structural funds to new bloc members were being used to finance budget shortfalls caused by low tax rates.
Budget Commissioner Michaele Schreyer, however, refuted this claim, telling a Portuguese paper that the lower taxes offered by new EU members were not being financed with EU funds.
"In the first place the new member states must cofinance structural assistance received from the EU. In the second place, they must respect new rules and regulations that often call for substantial public spending," she was quoted as telling the Diario Economico daily.
In Riga, participants of the Nordic and Baltic Sea Region Finance Minister Conference agreed on May 28 that an open discussion was needed on the tax harmonization issue but admitted that it should be for the distant future. Latvian Finance Minister Oskars Spurdzins told reporters that Latvia's position remained unchanged and was still against any harmonization, as this would result in a considerable tax rise.
Both Estonia and Lithuania have maintained a similar stance, as has Poland, another new EU member.
"Unfortunately, according to EU data Latvia is the poorest member country by far, and we cannot drop this instrument as this would slow development," said Spurdzins, who explained that the issue covered not only tax rates but also base rates for taxation, such as corporate income tax.
German Finance Ministry's Parliamentary State Secretary Barbara Hendricks, who was also in Riga, stated that Germany first wanted the base rates for corporate income taxes to be equal on the EU level, leaving final tax rates as a secondary issue.
In mid-May German Chancellor Gerhard Schroeder and French President Jacques Chirac announced that they would make a joint effort to harmonize EU tax rates in order to prevent what they saw as fiscal dumping. The European Commission, by contrast, announced that it did not support such a move and believed that fair competition for investments should be supported.
Baltic economists continue to claim that low taxes are important for economic development and that the Baltic countries should resist pressure being applied by EU heavyweights.
"Low taxes are a good contribution to economic growth. Even if benefits from tax revenues are not as high, this will get business people moving and growing," said Rita Karnite, head of the Latvian Academy of Sciences' Institute of Economics.
Well-known economist Uldis Osis said the government should not yield to the pressure.
"Germany, France and other old EU members have very high taxes. They are welfare states where the unemployed are very well taken care of, and this is what slows down their growth. But we are in a completely different situation and cannot afford it at the moment," he told the Baltic News Service.
Osis stated that growth was very important for Latvia right now. "We cannot afford to pay big money to those who do nothing -- we have to grow," he said. If new EU member states did everything like the old members, development would come to a halt, he added.
