European Fiscal Federalism (Part 3): Pigouvian taxation, and redistribution - Externalities, mobile assets, and euro interest rates

So far, I’ve been describing the economic logic for fiscal federalism. However I have not qualified it. It's all nice and easy to argue that we need to tax the richest and subsidise the poorest, but how do you do this? Which pockets should the EU reach into and what should it pay for?

In the next lines I propose the following Euro-level fiscal tools : (1)Taxes on mobile factors that cause negative externalities, (2)an Income tax, and the maintenance of a (3)common education policy as well as a (4)common defence policy, with a tendency for expansionary military R&D expenditure during recessions. Finally I also argue in favour of (5)the establishment of an European Monetary Fund (EMF) to switch from cooperation to coordination of euro-area fiscal policies. This would be the best tool to keep and improve the theoretically good monitoring devices created by the SGP, while replacing its very ineffective legalistic procedures, in order to improve fiscal stability across the board.

I believe these are the necessary tools for the EU to minimise its risks of suffering from asymmetric shocks, while endowing it with the policy tools to deal with them, should they arise, as they inevitably will. They may however not be sufficient...

European Fiscal Federalism (Part 1): Introduction to the “irrefutable”

It seems that weekends are only reserved for Lady Ashton. On Sunday 8 August, Mr Janusz Lewandowski, the (Polish) EU budget commissioner started floating around the idea of a European tax to be levied by the European Commission on banks, financial transactions, carbon emissions (permits) and air traffic. Berlin, Paris and Westminster were not amused, but Poland, Austria, Belgium and Spain seemed to not dislike the idea too much. Anyway, this is part of the ongoing process of preparation for the 2014-2019 budget which will be presented by the afore mentioned Commissioner at the end of September 2010. Most interestingly of all for me was the response that the proposal received from the Financial Times. I believe that unless you've subscribed to the ft, even if only for free, you can't read this article. It's not complicated but I assume not everybody can be bothered to do it. As such I feel compelled to report some of the comments which are rather strong: