On 14 February 2006, the Lithuanian Free Market Institute released a petition on the excise tax policy in the European Union signed by sixteen European free-market think tanks. The Petition was submitted to the European Commission, the European Parliament and the Council of Europe as well as national governments of the member states.
The Petition has been prepared in view of adverse effects of high excise taxes on the consumers in the new member states, the ongoing discussions on increases in excise duties and further steps taken towards tax harmonisation. Sixteen European free-market oriented think tanks have undersigned the petition encouraging national governments and EU institutions to consider the implications of the tax policy for the new member states and to commence discussions on changes in the excise policy.
Below is the full text of the Petition.
to the national governments of the European Union member states, the European Council, the European Commission and Members of the European Parliament
February 14, 2006
Excise duties are partially harmonised in the European Union (EU) – minimum excise requirements are set for alcohol, tobacco and energy products, and the new EU member states have committed to reach these minimum levels. However, this task is getting increasingly burdensome for the consumers, businesses and government institutions of the new member states.
We, the undersigned, state that failures of partial excise harmonisation reveal inherent flaws of tax harmonisation: societies are prevented from having lower taxes and smaller and more efficient governments; member states have limited opportunities to adapt to their unique social, economic and geographic conditions; and national governments are shielded from potential competition amongst them. Therefore we encourage launching an EU-wide debate on the reform of the excise tax policy and considering an abolition of the minimum level of the excise duties.
Surging fuel prices and smuggling activities have disclosed the natural shortcomings of the excise tax. There is no agreement whether the excise tax is efficient and necessary to internalise the negative externalities of consumption. The application of excise duties itself causes significant negative externalities: consumers opt for cheaper and low- quality substitutes, administration of excise duties is costly, differences in prices provoke smuggling and high excise duties hit the poorest strata of society the hardest. Furthermore, availability of smuggled alcohol and tobacco substitutes completely undermines the objectives of the public health policy.
Excise duties constitute up to 80 percent of the price paid by consumers, thus heavily distorting market information about the supply and demand as well as long-term prospects and needs to adapt to changes in the market. The abolition of the minimum level of excise duties and the reduction of excise tariffs are long-term measures in order to help the consumer to adapt to the changes in the market.
Harmonization of excise duties fails to attain its objectives: differences in prices across EU member states remain considerable, collision of wine-producing countries and the remaining member states demonstrates the narrowness of the goals set for the excise policy, and different tariffs of excise duties among member states are tolerated by the EU itself as they do not distort the competition and the internal market. Minimum levels of excise duties were revised before the last EU enlargement took place; these levels were designed to meet the living and income standards in the EU-15 and proved to be too burdensome for Central and Eastern European countries.
We believe that it is internal competition and the four freedoms, not uniform taxes, create the common market.
High prices of the excised goods and their decreasing affordability stimulate smuggling into the new EU member states who administer the longest part of EU’s external borders with poorer EU neighbours, which is a considerable incentive for smugglers. Although smuggling serves consumers and buffers an increase in prices, it creates openings for corruption in the customs, the police and other government institutions. According to surveys conducted by Transparency International, border services of Eastern Europe remain exceptionally sensitive to corruption despite substantial funding and training from EU provided to secure the its external border.
Governments of the EU-15, which have excise taxes high above the minimum level, should show due attention to the scale and importance of the problems faced by the new members of the club.
We urge national governments of the European Union member-states, the European Council, the Commission and the European Parliament to take necessary steps to open debates on the excise tax reform and endorse an abolition of the minimum level of excise duties as the first needed step.
Alberto Mingard – Istituto Bruno Leoni, Italy, Director
Barbara Kolm-Lamprechter – F.A. v Hayek Institute, Austria, Secretary General
Cecile Philippe – Molinari Institute, France, Director General
Chresten Anderson, – Copenhagen Institute, Denmark, Director
Hardy Bouillon – Centre for the New Europe, Germany, Chairman, Academic Advisory Board
Jan Oravec – F. A. Hayek Foundation, Slovakia, President
Jiří Schwarz – Liberální Institut, Czech Republic, Academic Advisory Board
Julian Morris, – International Policy Network, United Kingdom, Director
Krassen Stanchev – Institute for Market Economics, Bulgaria, Executive Director
Mattias Bengtsson – Centre for the New Europe, Belgium, President
Peter Gonda – Conservative Institute of M.R. Stefanik, Slovakia, Economic analyst
Pierre Garello – Institute for Economic Studies, France, Director
Sacha Kumaria, – Stockholm Network, United Kingdom, Director of Programmes
Ugnius Trumpa – Lithuanian Free Market Institute, Lithuania, President
Veselin Vukotic – Institute for Strategies Studies and Prognoses, Montenegro, President
Waldemar Ingdahl – The Eudoxa think tank, Sweden, Director