Dear leaders and fellows from European free-market think-tanks,
The recent enlargement of the European Union has not only opened up new opportunities for the old and new member-states to benefit from the advantages offered by the single market and economic liberties. It has revealed anew the shortcomings of EU regulatory policies and tax harmonization.
The second European Resource Bank Meeting (ERBM), which gathered together free market institutes in Vilnius, Lithuania, put forward the idea of closer cooperation. Often as not EU policy opposing free market principles is implemented in an organized and centralized manner, with broad-based support across the European Union. Advocates of the free market in turn act on an individual basis and are not able to adequately respond or raise proper initiatives in all of the EU member states and EU institutions. The ERBM meeting decided that it was time to take action and articulate free market ideas in a coordinated fashion all over the European Union.
We are inviting you to draw on the results of a recent study by LFMI and to call on the national governments to revise the European Union‘s excise policy – to lower the minimum excise tax rate – at the European level. Reform of indirect taxes, including excise duties, can be contemplated only if member states voice adequate concerns. Therefore, the more of us approach national governments and the media, the more likely it is that this vital issue will be discussed at the EU level.
The harmful effects of excise policy – distorted market signals, an increased burden on consumers in poorer countries and the expansion of corruption caused by smuggling and complicated accounting rules – have exposed the flaws of tax harmonization which need a closer attention in today‘s discussions on tax harmonization.
Should you agree to join us in this effort, please contact President of the Lithuanian Free Market Institute Mr. Ugnius Trumpa (Ugnius.Trumpa@freema.org
). The text of the Petition is posted below. The deadline for submitting your votes is 1 January 2006
President of the Lithuanian Free Market Institute Ugnius Trumpa
to the national governments of the European Union member states, the European Council, the European Commission and Members of the European Parliament
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, a number of exceptions for different products are laid down in laws, 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.
LFMI (Lithuanian Free Market Institute) – Ugnius Trumpa, President