Challenges for small countries in the European Union

What difficulties and challenges are small - particularly new - EU member states facing with respect to the taxation policy? What should small countries and large ones, and maybe the whole European Union do in the area of taxation reforms to become more competitive?

The author notes that:

• in the real world of high taxes and examples of compulsory harmonisation at high tax level, tax competition can stop government’s intentions of constant tax increases
• in reality governments competing in taxes look for more effective ways of taxation, i.e. ways to collect more income for the budget at the lowest possible costs without impoverishing and de-motivating the taxpayers too much and ensuring welfare growth
• in order to optimise this double- purpose task, spontaneous tax harmonisation takes place, as a result of which the countries start applying similar taxation schemes not because they follow directives, but because such taxation brings the best results
• the essential condition for such spontaneous harmonisation to emerge is the absence of obligatory harmonisation

Referring to the Baltic countries, the author argues that countries with proportional taxes are ahead, not behind the others, and the task to implement tax reform needs to be considered by other European countries which are seeking effective taxation.

The author also suggests that it is possible and logical to abolish profit taxation on the company level by moving to the taxation of distributed profit and gives the example of Estonia arguing that both the people and the government can gain if there is no profit tax.

The author’s major conclusions are:

• for small countries, participation in the EU is as big a challenge as the small countries are a challenge for the EU
• the key challenges for small countries to be accepted in Europe are to retain their uniqueness and to challenge Europe by providing innovative recipes of success
• knowing that small countries are flexible and able to make decisions faster that the old and large ones, these countries are on a mission to prove that the size of the country can be measured in audacious reforms

Finally, the author highlights that the European Union itself will become a big country only when it is able to accept the challenge of small member states.