Competitive tax cuts ahead

It is quite likely that the European Union is nearing an end to the logic of the famous Treaty of Maastricht which had imposed a strict limit of 3 percent of GDP for public deficits. And the likelihood will grow stronger if France, after its forthcoming general election, persists in its intention to break its promise to balance public finances by 2004. Only a few days ago, the new right-wing government in that country said the issue must be discussed at the highest level, granting that it was not right to break commitments without prior deliberation with one’s partners. Forget that at the Barcelona summit in March, France had promised to institute measures to contain its public deficit directly after the country’s two elections. The basic driving force behind the French government’s change in attitude on this crucial issue is the need for reducing the tax burden. This is necessary for two reasons: One has to do with internal politics and the other with the need to boost national production. Both are explained, in turn, by the pressure exercised by globalization and, in particular, by the progress of the single market after the consolidation of the eurozone. The first reason is related to the heavy pressure exercised by small businesses and highly paid staff in the private sector for some reward for the constraints imposed during France’s drive to enter the eurozone. Already Mr Chirac has promised a reduction in the highest tax rate to 35 percent, which it is estimated will send the deficit to nearly 3 percent, against 1.9 percent this year and 1.5 percent in 2001. Germany and Italy have already announced similar measures. The second factor is related to the increasing global competition between enterprises and the need to attract foreign investment. In fact, tax rate competition among the eurozone countries is one of the most crucial issues in the new era. The smaller and poorer countries will find themselves more compelled than their richer partners to bring tax rates down, chiefly because of their relative lack of comparative advantages for foreign investment. Besides, citizens are pressing for income parity with their richer counterparts. Greece, of course, is in this category and Economy Minister Nikos Christodoulakis is fully aware of this reality. We may expect the prime minister to make the appropriate announcements in September. We should not forget that past tax reductions boosted economic growth and, ultimately, tax revenues.