The minimum tax as punching bag for authoritarians

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After the Polish government unlocked billions in recovery funds by taking the EU’s minimum corporate tax directive hostage with its veto, the Hungarian government is now trying to do the same.

While the minimum corporate tax directive might be a random casualty of the right-wing governments’ thirst for money, it is a fitting victim of anti-democratic authoritarianism.

The minimum tax directive aims at implementing one pillar of an international agreement to put a backstop to the global race to the bottom in corporate taxation by making sure that all profits of large corporates are taxed at least 15%.

Exchanging one veto for another

However, the directive that should implement this uniformly on an EU level was blocked by the Polish government. Officially, the government said it wanted legally binding assurances that the other pillar of the global tax deal would also be implemented before it agrees to lift its veto against the minimum tax directive.

More realistically, the Polish government wanted to increase pressure to unblock the EU funds, blocked due to the rule of law concerns, that should finance the Polish recovery from the pandemic. Once the EU Commission unblocked the funds, the Polish government lifted its veto even though it did not get the legally binding assurances it had professed to want so badly.

However, the hopes that this would free the way for the adoption of the directive turned out to be premature, as the Hungarian government, whose recovery funds are also blocked due to rule of law concerns, suddenly opposed the directive last week.

“You try it”

“It’s a negotiation tactic,” an EU official said, adding that “if you are Prime Minister Orbán and you see that in the case of Poland it is working, you try it.”

It is likely that the minimum tax directive is the random victim of authoritarian governments who are trying to squeeze money out of the EU while staying unpunished for their violations of the rule of law. But it is nevertheless a fitting victim.

“Establishing a global minimum taxation should be a goal that unites us. We need to ensure fairness and equity both for our economies and our societies,” Economy Commissioner Paolo Gentiloni told the European Parliament during a debate on this topic this morning.

Benefiting from a fight

The rather bland statement masks an existential truth.

Democracies cannot flourish in a fair and equitable way if they are in constant competition for capital. The global corporate tax competition pits democracies against each other, thereby disproportionately favouring capital to the detriment of all spheres of society that would profit from the more ready availability of public funds.

The big guys win as long the little guys fight themselves.

While the global tax competition is not some devious scheme imposed from above, right-wing authoritarians should be rather familiar with this dynamic as they use the same principle for their domestic politics, pitting middle- and working-class voters against other weak parts of society, for example by scapegoating immigrants and other minorities for all kinds of societal ills.

One of the ways to get out of this situation would be to reduce the possibilities for unilaterally destroying cooperation attempts, for example by abolishing unanimity requirements for EU decisions.

As the EU can only decide on tax matters unanimously, it is incapable of reacting effectively to challenges that the authoritarians pose to it.

In this morning’s parliamentary debate, France’s Europe Minister Clément Beaune reminded the members of Parliament that while Paris was in favour of changing the unanimity rule, especially in fiscal matters, there was one problem: “To move away from unanimity, we need unanimity.”

Chart of the Week

On Friday (24 June), EU leaders are likely to give Croatia the final green light to join the eurozone after the EU Commission gave its positive assessment when publishing its convergence report earlier this month.

Thus, if all goes as planned, Croatia will be able to introduce the euro on 1 January 2023.

In some ways, however, Croatia is already more euroised than many euro area economies. Numbers from Eurostat show that Croatian businesses are already using the euro in their trade with partners outside the EU, and more so than the EU average.

Graph by Esther Snippe

In fact, only Slovenia has a higher euro usage rate than Croatia in the entire EU. This might, however, have less to do with the euro enthusiasm of Croatian companies and more with the fact that Croatia is not a global trade powerhouse like Germany, for example, that more often uses the US dollar in its dealings with trading partners outside the EU.

While the most important destination countries for German exports were the US and China in 2021, Croatia’s most important export destination outside the EU was its neighbouring country Bosnia and Herzegovina.

Germany’s main trading partners might be less inclined to do the trade in euros. Meanwhile, the Bosnian currency is pegged to the euro, making trading in euros a more natural choice.

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