Challenges of Europe-the Strength of Soft Power Inclusion and Exclusion in Contemporary European Societies

Soft Power to Make Citizens Fulfill Their Duty to Pay Taxes by Prof. Dr. Brigitte Unger Utrecht University School of Economics, the Director, Economic and Social Institute WSI,

International (post) graduate course, Inter University Center Dubrovnik, Croatia April 16-20 2012

1 Terminology: Soft Law versus Soft Power

Wieger Bakker, Nye‘s concept of Hard Power (military, economic threat) versus Soft Power (voluntary committment)

Frans van Waarden, Hard State Power (military force, jail) versus Soft State Power (naming and shaming, blaming)- EU, ECJ, ECB

Hard Law (laws, EU-Directives…) versus Soft Law..not legally binding norms, e.g. Financial Action Task Force 40 plus 9 Recommendations, UN Resolutions, EU "codes of conduct", "guidelines", "communications” ‘voluntary‘ committment

The Third European Soft Power

• The European Central Bank (ECB) is the institution of the (EU) that administers the monetary policy of the 17 EU Eurozone member states. It is thus one of the world's most important central banks. The bank was established by the Treaty of Amsterdam in 1998, and is headquartered in Frankfurt, Germany.

• The current President of the ECB is Mario Draghi, former governor of the Bank of .

• ECB has stock capital of 5 billion euro which is held by the national central banks of the member states as shareholders.

ESFS and ESM

• ESFS On 9 May 2010, the 27 member states of the European Union agreed to incorporate the European Financial Stability Facility, guarantees 780 bill Euro, lending capacity of 440 bill Euro.

• ESM In July 2012 permanent Rescue Mechanism, the European Stability Mechanism an intergovernmental organisation under public international law will be located in

Another 500 billion Euro….

Critics: Board of ESM is under no parliamentary control ECB Board of Governors plus 17 Central Banker

1. Soft Power to Make Citizens Fulfill Their Duty to Pay Taxes Citizens have Rights and Duties EU Treaties (of Rome, Maastricht, Lissabon) only talk about EU CITIZENS‘ RIGHTS… • general right of non-discrimination • free movement and residence in Member States • right to vote • right to petition in European Parliament

CITIZENS‘ DUTIES • obey the law • defend the nation • pay taxes

The art of taxation consists in so plucking the goose as to obtain the largest amount of feathers with the least amount of hissing.

Jean-Baptiste Colbert French Minister of Finance 1619-1683 1. The Duty to Pay Taxes is unpopular

There is no such thing as a good tax Sir Winston Churchill, UK Prime Minister and Nobel Prize Winner Literature 1953

The income tax has made more liars out of the American people than golf has. Will Rogers, American Actor in the 1930ies

The income tax created more criminals than any other single act of government. Barry Goldwater, US Senator (1909-1998)

Taxes are the price we pay for a civilized society

Oliver Wendell Holmes 1841-1935 Judge of the Supreme Court

2. The Dwarf Revenue of the EU-25 2006 in mio Euro

.

GNI-based own resource: 70,132.1 (approx 65%) At the moment capped at 1.23% of total GNI of the EU VAT-based own resource: 17,206.2 (approx 16%) Traditional own resources: (TOR) 15,028.3 (approx 14%) Mainly import duties Total other: 6,056.5 (approx 6%) under spent funding, interest on late payments… Total EU Revenue = 108 billion Euro (Dutch Tax Revenue =130 billion in 2011)

2. Taxes in Percent of GDP in the EU in 2008

Austria 42.8 Germany 39.3 34.5 44.3 32.6 Netherla 39.1 nds Bulgaria 33.3 40.4 OECD 34.8

Cyprus 39.2 36.7 34.3 Czech 36.1 29.3 36.7 Rep 48.2 Italy 42.8 Romania 28.0 32.2 Latvia 28.9 29.1 43.1 Lithuania 30.3 37.3 42.8 Luxemb 35.6 47.1

UK 37.3 US 24.0 Arab Emi 1.1 3. The Freedom not to Pay Taxes in the Member Countries?

The four freedoms in the EU guarantee free movement of goods, services, labour and capital.

Does this also include the freedom not to pay taxes?

2 ways of not paying taxes:

Tax Avoidance…legal way not to pay taxes Tax Evasion ….illegal way not to pay taxes

3. CORPORATE TAX RATES FALL IN OECD MEMBER STATES

60

50

40

30

20 Corporate Tax Rate TaxCorporate

10

0 1982 1987 1992 1997 2002 2007

13

4. Reasons for the Decline in Tax

Revenues

Since the liberalization of capital movements in the early 1980ies, financial markets took off.

16 4. Extreme inequality of income distribution creates a new elite, a club of billionaires Previously 1: 2000 An emperor had approximately 2.000 times as much as his subordonates.

Today: 1 : 1 000 000 Hedgefunds manager John Paulson. In July 2006 he founded a hedge fund with the sole strategy to bet on the collapse of the real estate market. In 2007 his Fund increased by 590%. John earned in this year 3,7 billion US dollar.

Some other billionaires try to buy an apple

4. Income differential to the 3rd world

GDP per capita, constant 2000 US$, high vs low income countries

3500

3000

2500

2000

1500

GDP per Capita per GDP 1000

500

0 1980 1985 1990 1995 2000 2005 2010 Time Source: World Development Indicators, 2009 Low Income High Income (divided by 10)

19 4. Inequality – falling wage shares in developed countries

20 4. New old problem Rising unemployment rates

4. Unemployment Rates in Europe Rose

Unemployment rate Belgium 25 Finland France 20 Germany Greece 15 Ireland Italy 10 Luxembourg

% labour force labour % Malta Netherlands 5 Portugal Slovak Republic 0 Slovenia 2008 2009 2010

Source: IMF 1. Public debt in percent of GDP till 2014 in Europe - Estimates

160% 140% 120% 100% 2014 80% 2009 60% 40% 20% 0%

Staatsschuldalspercentage van het BBP Italië België Finland Ierland Spanje Frankrijk Portugal Zweden Oostenrijk Duitsland Nederland Griekenland Noorwegen Denenmarken

Verenigd Koninkrijk Public Debt Problems as a Consequence of the Financial Crisis

 Schweiz Österreich 

Quelle: APK Vorsorgekasse Volkswirtschaftliches Referat Interest Rate Spreads on Long Term Public Debt Obligations

II. "Große Rezession" I. Finanzkrise III. Weltweite Erholung aber Phase Ia. Phase Ib. Phase IIa. Phase Ilb. EU-Schuldenkrise & Liquiditäts- Solvenz- Vertrauens- Globale weltweite krise krise krise Wirtschaftskrise Währungsschwankungen Konjunktur Interbankmarkt Aufschläge aufAktienmarkt 10 jährige deutsche Staatsanleihen in Basispunkten 2000 4000

1800 3600

1600 3200

1400 2800

1200 2400

1000 2000

800 1600

600 1200

400 800

200 400

0 0 jan-07 apr-07 jul-07 okt-07 jan-08 apr-08 jul-08 okt-08 jan-09 apr-09 jul-09 okt-09 jan-10 apr-10 jul-10 okt-10 jan-11 apr-11 jul-11 okt-11 jan-12 Österreich Belgien Spanien Frankreich Irland Italien Niederlande Portugal Finnland Griechenland (re Achse) Quelle: OeNB, Thomson Reuters. Krugman, P. (2008) Nach Bush – Das Ende der Neokonservativen und die Stunde der Demokraten, Campus, Frankfurt

Fitoussi, J.-P./Stiglitz, J. E. (2009) The Ways Out of the Crisis and the Building of a More Cohesive World, OFCE Document de travail, 17.

26 Postdemocracy, The Non Death of Neoliberalism

Elite does not pay its taxes anymore.

Non democratic organizations – EU-Commission, ECJ, ECB decide on European politics = Post Democracy (W. Streeck).

EU-Commission – austerity packages /‚sustainability‘ ECJ makes judgements to guarantee the 4 freedoms that interfere with national labour law (F. Scharpf) ECB gives money to Greek banks…no citizens involved (W. Streeck)

Epistemic Communities (F. van Waarden) rule instead of European Parliament, Council of Europe. Explains why Neoliberalism isn‘t dead (Colin Crouch)

Soft Power to Collect Taxes? - Blacklisting OECD List of Tax Havens in 2000

28 G-20 London Summit 2 April 2009 blacklist (New OECD list)

four tiers for complying with international tax standard: 1. Those that have substantially implemented the standard (includes most countries but still excludes Hongkong and Macao). 2. Tax havens that have committed to – but not yet fully implemented – the standard (includes , , , , and ) 3. Financial centres that have committed to – but not yet fully implemented – the standard (includes , and ). 4. Those that have not committed to the standard (an empty category)

Country Blacklists are Made under Pressure of Nations who Pay for International Organizations

When the G-20 commissioned the OECD to make the tax haven list, this was like sending the fox to guard the hen-house

NO EUROPEAN COUNTRY ON THE OECD LIST!!

NO RICH COUNTRY ON THE LIST!!

BUT Pressure from US!

Since 2010 Tax Evasion as Part of in FATF Recommendations (=Soft Law)

UN Office on Drugs and Crime 1 Mei 2006 http://www.unodc.org/unodc/money_laundering _cycle.html 31 The Regulator(s) of Anti Money Laundering Policy

FATF The Financial Action Task Force since 1989 Leading Global Player Soft Law with 40 Recommendations plus 9 on Terrorist Financing

Country Assessments and Blacklisting

Other Regulators: EU 3rd Anti Money Laundering Directive, hard law but passive regulation

32

Tax Evasion becomes part of AML and Combating Combat The 40 plus 9 Recommendations • Ratification of UN Conventions • Implementation of Anti Money Laundering Law • Establishment of a Financial Intelligence Unit • Number of Reports of Suspicious Transactions • Banks, real estate, car dealers, lawyers..have to file a suspicious transaction report STR to the Financial Intelligence Unit • The Financial Intelligence Unit analyzes the report and forwards it to Law Enforcement Agencies

2. Combating Money Laundering – Blacklisting . The FATF lists for Non Cooperative Countries and Territories

Blacklist N European countries

IMF list 1999 69 19; Austria, Hungary, Ireland, Luxemburg, Netherlands, , , , UK, , Luxembourg, and 8 smaller European jurisdictions FATF 2000 15 2; Liechtenstein and Russia

FATF 2001 19 3; Hungary, Russia and Ukraine

FATF 2002 10 1; Russia

FATF 2005 3 0; , and Nauru

FATF 2006 0 0; Myanmar (Burma) removed in October 2006 FATF 06/2011 2-8 0; , Korea – , , , Myanmar, , , ,

34 FATF Blacklist in reality (2000/2001)

35 FATF Blacklist in reality (until Oct. 2006)

36 FATF Grey list (feb 2010)

37 US Blacklists

The U.S. National Bureau of Economic Research has suggested that roughly 15% of countries in the world are tax havens , Bahamas, Cyprus, Liechtenstein, Luxembourg, , , Panama, , , Switzerland

Non-sovereign jurisdictions commonly labeled as tax havens include: (UK), (UK), Campione d’Italia (an Italian exclace, Italy), (UK), The Channel Islands of and (UK), Delaware (US), The (UK), Jebel Ali Free Zone (), Labuan (Malaysian Island off Borne), (NL), Nevada (US), (UK), Virgin Islands (US), Wyoming (US) Collecting Taxes

• Blacklisting of Countries done by international organizations is not successful • Blacklisting of Companies, naming and shaming, done by commercial companies or NGOs more successful

• Increased need of EU countries to collect taxes and protest of the population. Liechtenstein tax evader list, (Germans bought it) Inkeerregel in the Netherlands, Berlusconi tax relief, Swiss-German, Swiss- Austrian Contracts right now…

• Big pressure from the US

• Levy Financial Transaction Tax (Tax Fairness)

• Redistribute Income since Exclusion of a Large Part of Potential Tax Payers is the true cause of the economic crisis and of the crisis of democracy

WELFARE STATE DISMANTLING AND EXCLUSION IN POSTDEMOCRATIC EUROPE - ECB Meeting

Thank you

Prof. Dr. Brigitte Unger Utrecht University School of Economics Janskerkhof 12 3512BL Utrecht Niederlande Tel +31-30-2539809 E-mail [email protected]