EU TAXATION POLICY DURING FINANCIAL CRISIS
The paper deals with the problems of tax coordination and perspectives during and after ﬁnancial crisis. As we see the 2008 ﬁnancial crisis is the worst economic crisis. Great Depression of 1929 was ﬁnancial crisis which know all world ﬁnancers and we can compare these days ﬁnancial crisis with 1929 ﬁnancial crisis. Thr 2008 ﬁnancial crisis has been characterised by a rapid credit expansion, high risk-taking and exacerbated ﬁnancial leverage and credit crunch when the bubble burst. In particular, it reviews the existing evidence on the links between taxes and many characteristics of the crisis. Finally, it examines some possible future tax options to prevent such crises.
This ﬁnancial and economic crisis presents major challenges for tax administration. With the economic downturn, tax agencies are encountering growing compliance risks and greater demands for taxpayer support in the face of prospective budget cuts. This paper examines these challenges and sets out a strategy and measures for responding to them. Theoretical and empirical studies suggest that an economic downturn tends to worsen taxpayer compliance in important aspects. While a drop in compliance may have some countercyclical effects on the economy, tolerating noncompliance is not an appropriate response to the crisis because it is distortionary, inequitable, and, perhaps most importantly, hampers the rebuilding of tax bases over the medium-term.
The crisis therefore presents the ﬁnancial authorities – central banks, regulators and ﬁnance ministries – with two challenges:
The ﬁrst and most urgent is to design short-term policies so as to at least limit the adverse impact of deleveraging and deﬂation on the real economy. We cannot make that impact nil, but we do know how to avoid the policy mistakes which turned the initial problems of 1929-30 into the Great Depression. Fiscal and monetary policies need to be carefully designed, and – as we approach a zero interest rate and consider quantitative easing options – need to be increasingly coordinated. And there are a wide range of policies which can be taken to free up ﬁnancial markets, funding guarantees, liquidity provision, tail risk insurance, direct central bank purchases of assets, and regulatory approaches to capital regulation which avoid unnecessary pro cyclicality in capital adequacy requirements. The measures announced by the Chancellor of Exchequer on Monday were designed as an integrated package, which will have a signiﬁcant impact. And if more measures are acquired they can and will be taken.
It is not, however, on this challenge of short-term economic management – where the lead must be with the ﬁscal and monetary authorities. But instead on the second challenge: how to design the future regulation and supervision of ﬁnancial services so that we signiﬁcantly reduce the probability and severity of future ﬁnancial crises.
Financial sector innovation. The fundamental macro economic imbalances have thus stimulated demands which have been met by a wave of ﬁnancial innovation, focused on the origination, packaging, trading and distribution of securitised credit instruments. Simple forms of securitised credit – corporate bonds – have of course existed for almost as long as modern banking. In the US, securitised credit has also played a major role in mortgage lending since the creation of Fannie Mae in the 1930s; and securitisation had been playing a steadily increasing role in the global ﬁnancial system and in particular in the American ﬁnancial system for a decade and a half before the mid-1990s. But it was from the mid-1990s that the system entered explosive growth in both scale and complexity.