10
VAT usually follows the country of origin principle so that at the national borders the
exporter is released from the own VAT burden and the importer is paying the Import
VAT in the respective country. If border controls are abolished,
the country of desti-
nation principle can be applied if all VAT rates are totally harmonized. An alternative
is currently implemented in the EU, where since 1993 the Import VAT has been sub-
stituted by the VAT on internal common market turn-over. Here the trick is imple-
mented that the borderlines are shifted into the firms, which has created an enor-
mously complex administration and high transaction costs including a high suscepti-
bility to fraud. The full transition to the land of origin principle is delayed since years.
In spite of numerous trials to harmonize the VAT tax rates in the EU still considerable
differences do exist as it is the case within the other
indirect taxes on gasoline, en-
ergy, alcoholic beverages, tobacco etc. However, the progress of indirect tax har-
monization has been comparatively limited. This holds also true for direct taxation.
Still differences in the direct tax bases do exist (income and corporation tax). Differ-
ences in the allowed depreciations, loss provisions, capital gains definitions etc. exist,
having quite different impacts on the tax bases. Additionally different (partly more or
less progressive) tax schedules together with a different institutional design of enter-
prise taxation produce efficient tax rates, which can only
be determined if clear as-
sumptions are set. The differences of the effective tax rates for the enterprises within
the EU member countries are still remarkable.
8
Naturally such differences do have
consequences for cross border transactions; due to the currency union exchange
rate fluctuations and interest differences within the union have been abolished.
Therefore the tax parameters might gain in influence but are still influenced by the
other location factors.
II.2.3. Institutional Settings
With regard to the institutional settings the depth and the extent of the planned or-
ganizational level is of utmost relevance. If just a unique target or a set of very nar-
rowly limited public tasks have to be executed by
an international organization, an
international treaty
would be appropriate. As more potential member states should be
covered, as smaller the normative base and the entry preconditions should be formu-
lated. As more tasks have to be completed as more important becomes a clearly
formulated normative base, which usually rests on the human rights and the derived
societal values and have to be shared with the people in all member states.
9
There-
fore, such values have to be expressed in the constitutions of the member states. In
case of a further deepening moving into the direction of an economic and currency
union, the question of an own constitutional setting for the union arise, as the discus-
sions in the EU have demonstrated.
Dependent on the scale and scope of the union the institutional
form of governance
has to be designed. For international organizations usually a general secretariat is
sufficient. If more different kinds of public tasks are transferred to the association,
community or union, a more complex commission (with different departments) might
became necessary. As long as the budgets of the general secretariat or the commis-
8
An approach to standardize and compare effective tax rates for different enterprise tax regimes
has been developed by Devereux/Griffith (1998). An empirically based comparison is shown in
Rose/Petersen/Schmidt/Kambeck (2006).
9
Societal values are, e.g., peace (internal and external), freedom, welfare and justice (of needs
and ability); for more details see Petersen (1993) and Petersen/Müller (1999).
11
sion are purely financed by contributions of the member states, a control by the gov-
ernments of the member states seems to be sufficient.
With growing budgets the
need for an independent audit (or control) court comes into being, which should be
headed by a directorate with judicial autonomies. The staff of the general secretariat
or the commission has to follow a standard code of conduct, which has to exclude
any form of corruption.
10
In case that the union level gets the form of a governmental entity then a direct con-
trol becomes necessary, especially if the own budget is financed by taxes raised on
the unions level. In a democratic setting a directly elected
parliament by the member
states electorate is inevitable following Locke’s rule mentioned above. In such a set-
ting but also in case of a solely currency union, an independent central bank is an-
other must. The board of governors also has to have judicial autonomies as well as a
legislative period being independent from the respective parliament. While the gen-
eral secretary, head of the commission or prime minister has the responsibility for
fiscal policy (annual budgeting as well as mid-term fiscal planning), the central bank’s
governor has to steer monetary policy to safeguard monetary stability. Other neces-
sary control institutions are a commission for competition
control regulated by compe-
tition laws and a regulation office for banking and insurance control.
Independent audit chambers, central bank, competition as well as banking and insur-
ance control are necessary institutions to supervise the political system and the pri-
vate sector in their specific behavior. Under the assumption of perfectly informed and
totally altruistic politicians such institution would be unnecessary: but in view of per-
sonal as well as institutional shortcomings, in vigorous democracies a system of
checks and balances is needed to avoid a too far
reaching accumulation of power,
which can easily be turned into a totalitarian regime. Therefore, the independent
monetary and control institutions with judicial autonomies act to secure the democ-
ratic setting and to limit the influence of the executive and legislative bodies. A net-
work of countervailing powers is the best provision against a misuse of political influ-
ence. Usually their legislative period is longer than of the parliament so that these
institutions can act more independently and with a longer termed political perspec-
tive.
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