The Tax Policies In The European Union Economics Essay Example

financial policies in the EU.

The financial policy of the EU focuses on various aspects related to economic well-being but prohibits credit provision to public organizations from both the ECB and national banks. Each independent state is responsible for maintaining its own economic health. According to Article 269 of the Maastricht Treaty, member states cannot rely on wealthier states for support; they must sustain themselves through successful financial and economic policies.

Another goal of the EU's financial policy is to maintain price stability under control of ECB. The EU prioritizes balance in its financial policy as stated in the treaty that established responsible financial bodies (Ardy, 2000).Each national government is responsible for maintaining this policy through their legislation (Ardy, 2000). The Stability and Growth Pact (SGP), implemented in 1997, regulates all governments to ensure coordination and success. It addresses concerns of financially stable states like Germany by monitoring finances through surveillance and an "excessive deficit procedure." Member states must annually report stability plans to the Council of the EU, assessing current conditions and government actions taken. These reports include demonstrating economic surplus or approaching a balanced surplus/deficit condition.

Additionally, each state submits objectives for achieving economic equilibrium by reporting debts, projecting expected developments based on research and previous years' data, and outlining participation in economic programs aimed at attaining balance within the country. The Council plays a crucial role in overseeing and coordinating the independent provinces of the European Union. It assesses each country's submissions to determine if they align with the EU's economic policies. If a country fails to comply, the Council advises on necessary adjustments for alignment.

The Council closely monitors each country's financial policies, particularly focusing

on their deficit percentage. Any deficit exceeding 3% of GDP is deemed unacceptable. Given the current economic crisis, flexibility with government debt is allowed by the Council, even during recessions.Maintaining balanced or nearly balanced budgets is crucial for each country's financial equilibrium, as stated in Article 268 of the Treaty. This criterion serves as a fundamental requirement within the European Union (EU) to ensure stability among independent member states. The primary objective of EU financial policy is to prevent economic policies of Member States from destabilizing Monetary Union's stability. To strengthen this framework, the Stability and Growth Pact was enacted after ratifying the Maastricht Treaty. Member States must adhere to stringent regulations, such as keeping their GDP percentage below 60%, determined by the Council. Coordination and collective consideration of economic policies among Member States are required under Article 99 of the Maastricht Treaty, overseen by the Council. If any Member State's financial policies do not meet Commission standards, intervention by the Council is authorized. Draft guidelines for economic policies are established based on recommendations from the Commission through a qualified majority vote for both Member States and the Community according to Article 99.If a state fails to demonstrate satisfactory compliance, the Council provides recommendations and suggestions based on its past economic history. Failure to follow these recommendations allows the Council to publicly express concerns about recent shortcomings and offer alternative satisfactory recommendations for that state. Each state in the European Union must prove to the Council that they have a balanced or nearly balanced economic system according to their own plans and structures. An imbalanced economic system, where government debt exceeds the equity of the

economy, presents a significant issue. To prevent member states with high levels of debt from burdening their fellow partners, it is mandated by the Treaty that states should avoid excessive government deficits. High government debt ratios in a state make it impossible for them to demonstrate their value within a larger group.As a result, the EU financial policy implements strict regulations to protect wealthier states and ensure they do not assume the debts of less affluent members.Another important factor in each state's economic well-being is its employment rate.Unemployment is a common characteristic of an unhealthy economic system, so Article 2 of EU Consolidated Treaties outlines a financial policy aimed at promoting economic and societal advancement as well as high employment rates.This policy aims to maintain balanced states during recessions by reinstating the European Unemployment Fund, which provides additional funds from the EU to prevent rising unemployment rates during times of recession. The Council, which has authority over individual states, must always act in accordance with the law and its decisions must be unquestioned. When financial matters are presented to the Council, unanimous decisions are required for implementation. The EU community only assumes financial responsibilities while national governments handle regular state affairs. It is each country's responsibility to uphold EU standards regulated by the Council, and intervention from the Council in financial matters only occurs if a state falls into an unsatisfactory condition.
Each state in the EU has its own budgets and programs overseen based on performance in the larger model. The Stability and Growth Pact has been crucial in shaping successful financial policies for several EU Member States. The primary role of the Central Bank

is to maintain stability within the EU. Due to interdependence among EU states, any financial instability in one country can impact others, highlighting the need for stability across all associated states.The Greek economy's troubles have caused anxiety throughout Europe.There is growing criticism of EU financial policies due to the strict conditions imposed by the Maastricht Treaty and the Stability and Growth Act. These conditions give more power to stronger economies, which has raised concerns among scholars. One concern is that many states do not adjust their financial plans during economic booms or growth phases. Another concern relates to breaches of the 3 percent deficit limit. The main focus here is on the limitations placed on future growth within the EU, which prevent certain states from overcoming cyclical shortages and dampen their desire to join the EU.

According to Michael Deppler, it is believed that issues arising from this situation are not caused by the Pact itself but rather by individual national policies that pose challenges for governing EU members. There is a movement to increase accountability of the Pact through independent national financial councils at a national level. This would allow the Council to primarily focus on managing these councils instead of being responsible for everything.

In Eastern Europe, there has been a shift towards implementing flat tax rate systems for personal income taxes instead of traditional hierarchical systems. However, further research is needed to determine which approach is most effective based on individual economic circumstances.Personal income revenue enhancements are necessary but only represent a small portion of the overall budget. According to Appel (2005), each European Union member state has its own approach to handling income

revenue enhancements. The structures of income tax differ greatly between countries, with some adopting a flat rate system where everyone pays the same rate regardless of their income, while others have progressive systems based on income levels. High-income individuals may face rates as high as 40-50%. Certain Western European countries, like France, have complex tax systems with numerous brackets that citizens need to navigate - for example, there are 560 different tax brackets in France. This results in significant individual payments. Both France and the United Kingdom encounter challenges with their complex tax systems. France aims to limit the number of tax brackets per person annually but faces an approximate cost of $60 billion due to interruptions caused by revenue enhancements. Similarly, the United Kingdom has experienced increasing complexity in their tax codes instead of simplification. To address this issue, the government sponsored a study that implemented a flat rate system. Eastern European countries had to reorganize their tax structures after communism fell and faced difficulties with subsidized tax systems in order to join the EU. Previously, public expenses were funded by internal government funds deposited into federal treasuries; however, privatization transformed these funds into private ones.During the establishment of the EU, many post-communist countries had difficulty meeting its strict tax criteria for private income and belongings. These countries decided to adopt standardized methods used in other EU countries without exceptions made by the Council for their tax criteria, despite economic differences among them. Some Eastern Member States implemented a "flat tax" system on personal income taxes due to circumstances beyond their control. This reform became popular in former communist countries as it allowed individuals

of all income brackets to pay the same rate. Estonia was the first country in Eastern Europe to adopt this tax structure in 1994 with a competitive rate of approximately 26% and no deductions. Other countries quickly followed suit, such as Serbia with an incredibly low flat tax rate of 14%. Lithuania reduced its high revenue enhancement rate from 33% to 27% in 2007 and plans further reduction to just 20%. Georgia has a remarkably low flat rate of only 13%, while Slovakia eliminated multiple personal income revenue enhancements and consolidated into one flat rate of19 % in 2004.Although some tax deductions were reduced under the new system, many businesses found it attractive. Despite unfavorable economic conditions, Latvia struggled to implement lower income taxes plans. However, flat tax systems have been successful in Eastern Europe and are now being embraced by Western European countries. These systems aim to ensure fairness and prevent exploitation of loopholes by exempting only those with the lowest incomes while everyone else pays the same rate regardless of their earnings. While Western European countries are working towards simplifying their tax systems, they may not be as uniform as a flat tax system. Germany and France have already implemented legislation to reduce complexity in personal income tax structures by decreasing top income bracket rates and reducing brackets for highest earning taxpayers. Spain and Greece are also following suit by lowering brackets and top rates. However, adopting a flat tax system poses challenges for many Western countries due to their heavy reliance on welfare systems that support individuals unable to work for various reasons. Any reduction in government spending is seen as potentially

disastrous as it could further impoverish the poor who rely on government assistance. Due to its impact on welfare-dependent individuals, transitioning to a flat tax system is seen as almost impossible.
Many Western citizens are considering adopting a flat tax rate due to the loss of business and potential revenue to Eastern countries. The better tax rates and proximity of neighboring countries make this temptation irresistible for some Europeans. A prime example is Slovakia, which has garnered significant attention since implementing a flat rate tax system with projects like Hyundai's new mill in Zilina (Matlack, 2005). The Slovakian government has reported $13.6 billion in new foreign investments following this change.

While larger Western states do not currently have concrete plans for such a transition, the idea is gaining support among countries that currently employ traditional progressive tax systems. EU member states are examining neighboring countries' income tax policies before making any changes themselves.

Western businesses are increasingly relocating to Eastern countries due to lower income and corporate tax rates available in former Communist states. Therefore, conducting further research tailored to each member state's requirements is necessary in order to determine the more effective tax system – whether it be a tiered structure with deductions or a flat tax system without deductions.

The objective of this research is to analyze the economic environment in each country and its relationship with the most effective tax structure.When comparing the incomes of individuals in different countries under various tax systems, it is possible to determine the most suitable system for each specific country. The ideal system will be influenced by prevailing economic conditions. Researchers should randomly select average income samples for comparison purposes

using either a graded or flat rate system based on competitive rates. For instance, let's consider an individual in Lithuania who earns an average annual income of 40,000 Euros. In Lithuania, this person would pay the same tax rate as others within their income bracket due to a flat tax rate of 27%. As a result, they would spend approximately 10,800 Euros on taxes annually and have a net income of around 31,000 Euros. Now let's examine how someone with the same income would be affected by tiered tax systems found in Western countries like France's complex tax tier structure. The profession and deductions of individuals determine their respective tax brackets. A person with a general occupation and few deductions would fall into the 30% tax bracket, resulting in an annual expenditure of about 12,000 Euros on personal income taxes. Therefore, compared to France's high and complex tiered system, this individual would be financially better off with a flat tax rate.
In the European Union, each Member State is responsible for its own financial policies but is also accountable to a cooperative Council that makes impartial decisions promoting unity. Despite criticisms, the current financial policy has successfully maintained harmony among independent states. Cooperation is crucial for fiscal stability within the EU context. Each state has the responsibility to make its own financial decisions, which are evaluated by a governing Council to ensure sustainability. The Council assesses fiscal policies considering balance and government deficits while tailoring them according to each state's uniqueness. However, there is a lack of serious and significant studies on the effectiveness of each tax system in place for individual countries. Therefore, it is

important to have general principles governed by an unbiased organization that aims at maintaining stability and balance within the European Union as a whole.

Conducting studies on real individuals based on average statistics would provide more solid evidence in favor of one tax system over another. Unfortunately, many states have not made efforts to gain real-life knowledge of which tax system would truly benefit their citizens. This difficulty has created challenges in passing legislation or gaining support for a flat tax rate system. Conducting studies, whether privately or publicly funded, can demonstrate the benefits of different tax systems based on income and country-specific factors.These studies would provide advocates with solid evidence to support future lobbying initiatives and potential legislation. The income tax varies among European Union member states depending on the country, with former communist countries tending to find more success with flat rate systems. On the other hand, Western countries continually add more specifications to their already complex tax grading systems. This situation leads to a flow of Western money to Eastern countries through foreign investments in local businesses that are exempt from high foreign tax rates. Many European Union countries have found the flat tax system highly beneficial.

Several studies, including those conducted by Hillary Appel (2005), Brian Ardy (2000), Michael Deppler (2004), the European Union (1992), Ignas Galinia (2007), Alberto Majocchi (2003), and Carol Matlack (2005), have explored the potential benefits of implementing a single tax rate in Western European countries. The aim is to demonstrate personal income savings while maintaining government stability and social programs. However, there are concerns about the feasibility of this rising trend of equal tax rates in Western Europe.