David D. Stewart: Welcome to the podcast. I'm David Stewart, editor in chief of Tax Notes Today International. This week: getting started. 

Between tech companies in the United States and Europe, there is what’s called an innovation or scale-up gap. Europe produces top-notch research but struggles translating it into successful companies. 

Today we’re featuring a discussion on the innovation gap and how to boost European competitiveness through tax policy, headed by Tax Analysts CEO and President Cara Griffith. She sat down with four international tax leaders and experts — Scott Levine, Benjamin Angel, Christian Kaeser, and Gerhard Heumer — who you’ll hear more about in just a minute.  

Their discussion is part of the Taxing Issues webinar series. If you’d like to hear the full hour-long conversation, you can find the link to that in our show notes.  

For now, I’ll hand it over to Cara as we go to that interview. 

Cara Griffith: Welcome, everyone. I'm Cara Griffith, the president and CEO of Tax Analysts. Thank you for joining us today. As you'll hear our panelists discuss shortly, Europe produces world-class research, but unlike the United States, Europe struggles to leverage that research to create world-class technology companies. Today, we'll discuss what's behind that problem and what policymakers might do in tax policy to help address it.

So for today's event, the problem we're discussing is often called the innovation gap or the scale-up gap between U.S. and European tech companies. It has been a subject of widespread attention in recent years from Europe's top government officials, leading economic figures, and other influential experts. For example, in September of 2024, Mario Draghi, former Italian prime minister and European Central Bank president, issued a report on the future of European competitiveness for the European Commission in which he highlighted the scale-up gap in advanced technologies. In January of this year, former German finance minister Jörg Kukies and former Bank of France Governor Christian Noyer presented their recommendations on how to address the scale-up problem under a German-French initiative known as Financing Innovative Ventures in Europe, or FIVE. And then in April, Belgian research university KU Leuven issued a study on how the EU's proposed 28th regime would provide a single set of rules for corporate tax and labor law to boost European competitiveness, how that could work alongside the separate regimes of all 27 EU states.

Then last month, Scott Levine, a former U.S. Treasury deputy assistant secretary for international tax affairs and now a partner at Baker McKenzie, drew on this work and published a three-part paper entitled, "Tax Policy as a Catalyst for Innovation: Attracting Talent." We published it in Tax Notes, and we have made it available for all of you to download in our materials. Scott is with us today as part of our distinguished panel, which I will introduce in a few moments.

Since Scott outlines the problem in very clear language in his paper, let me quote a few sentences from the top. "Europe's technology competitiveness problem is not a research problem. European universities produce world-class science. European engineers are among the most sought after in the world. The problem is what happens after the research is done and the company is formed: The companies that European talent builds tend not to stay European. They relocate, relist, and scale on the other side of the Atlantic. This is not primarily a story about tax rates, but tax architecture is a significant part of the story, and it is at least one of the parts most immediately within the reach of legislative action."

Scott goes on to propose five EU tax reforms, which he says the EU should be able to adopt without needing to amend any treaties. I'll attempt to summarize these relatively quickly.

First, harmonized employee stock option taxation. Employees of qualifying companies could elect capital gains treatment from the grant date and defer income recognition until the sale date, and the EU would have to preempt social changes in some high-contribution states that otherwise would effectively override the deferral.

Second, a capital gains deferral for startup investment. Gains realized on the sale of shares in unlisted companies, qualifying companies, would be deferred when founders and investors reinvest the gains in the next generation of innovative ventures. This reform would be more conservative than the current U.S. version, which excludes rather than merely defers any tax liability for such gains and is also available to passive shareholders.

Third, a harmonized EU-wide transferable research and development credit. So a company that earns a credit it can't use because it owes no taxes would be able to sell the credit to a profitable company in any EU state. And the member state of the first company would compensate that of the second company through treasury-to-treasury settlement.

Fourth, harmonized net operating loss carryforwards for innovation companies. To protect early-stage companies from failure, EU member states would be required to let qualifying innovative companies carry their losses forward during a defined pre-commercialization period.

And fifth and finally, coordinated and harmonized full expensing for businesses. Because European businesses now face a much higher after-tax investment cost than their main competitors, the EU should consider at least an 80 percent first-year deductibility for qualifying equipment and machinery and immediate deductibility for qualifying R&D expenses.

Scott suggests that all five of these reforms should be compatible with pillar 2's global minimum tax, accessible to pre-revenue startups, permanent and inflation-indexed, and mandatorily harmonized across member states. As I mentioned earlier, a more competitive Europe could serve not only Europe but also U.S. interests. It's because it could strengthen the West's competitive position against authoritarian models of state-directed innovation.

So with all that said, we have a fantastic panel to discuss the issues today, assess the reform ideas that Scott has presented, and opine on whether such reform — with its inevitable challenges — is worth the effort.

So let me introduce our speakers and we'll get underway. I've already introduced Scott Levine, partner at Baker McKenzie and author of the paper that we're discussing today. We're also pleased to be joined by Benjamin Angel, director of direct taxation at the European Commission's Directorate-General for Taxation and Customs Union, and Christian Kaeser, executive vice president and global head of tax at Siemens AG and also a member of the Tax Analysts board of directors. And we have Gerhard Huemer, director for economic and fiscal policy at SMEUnited. Thank you so much for joining us all today. We are delighted to have you.

So Scott, I did my level best to summarize your paper, but I want to give you a few minutes to go more in depth on why you wrote the paper, what you hope it will accomplish, and sort of to set the stage for our conversation today.

Scott Levine:

I think that the gap that really matters, as you mentioned, the one that Draghi put at the center of his report and the one that the FIVE report went back to, as you mentioned, it has nothing to do really with European science. That's very advanced, and it's not a shortage of good European founders for sure. Now on the raw inputs, Europe is extremely competitive — world-class universities and research institutions that you mentioned and a very vibrant early-stage startup ecosystem where the number of companies actually has quadrupled over the past decade. The problem is what happens after the research is done, after the companies form. And as you mentioned, European companies struggle through the scale-up phase, the transition from proven innovation to large-scale production and global distribution. And they tend to struggle because they can't reach domestic capital, the integrated market, or the IPO infrastructure that such a transition, the scale transition, requires.

So the companies' European talent builds tend to not stay European. As you mentioned, many relocate, they relist, they scale on the other side of the Atlantic. And if I may refer to an analogy I use in the paper, the problem isn't really the seed; it's the inability to water the plant. So how do we fix this watering problem?

I think to put this in perspective, the stakes are extremely high. The productivity gap between the EU and the U.S. is now roughly 20 percent, and it's almost entirely attributable to the tech sector. The strategic dimension is just as stark. There are three non-EU tech companies that account for about 70 percent of the European cloud market, while the largest European provider holds less than 2 percent. So Europe isn't just lagging in producing technology companies, it's becoming structurally dependent on foreign providers in really one of the most critical digital infrastructures that we will have in this century.

And so where does tax fit into all of this? And here I do want to be careful because it would be very easy for a tax policy wonk, like those on today's chat, to walk into a room and tell you that tax is the answer. It's a cure-all. It's a panacea. In my opinion, it isn't. Tax is not the binding constraint here. The binding constraint is the current state of the EU's capital markets. They're fragmented; they're shallow, with 27 national systems where one deep pool is really needed. So when I talk to European-based PE funds and investment bankers, they tell me that if they could wave a magic wand and if it's just one thing, it wouldn't be the tax code. It would be the savings and investments union actually getting built so that Europe's enormous household savings stopped sitting in deposits and really started investing funding growth equity.

So why did I write the paper about tax, aside from the fact that I really wouldn't hold myself out as a capital markets expert? Because I believe that tax is probably the cheapest and fastest-moving complement to the capital markets agenda. And Europe has spent most of the last decade focused on other agenda items. The decade of international tax reform was at its core — and I will admit being part of this — it was defensive. It was about building a floor, stopping profit-shifting, ending the race to the bottom, protecting the base. And I'm not suggesting that those concerns were not important or shouldn't have been addressed, but it was fundamentally about dividing the pie more fairly. And then in my opinion, while Europe perfected its defenses, it let the growth side of the ledger atrophy.

The offensive playbook, how do we use the tax system to pull risk capital and talent toward European innovation, it received very little attention. That's the gap in the policy conversation that the paper's trying to fill. Two ideas I'd ask you and the rest of our panelists to hold onto as we go forward, because they're guardrails that I think are necessary and that discipline everything else we'll talk about.

Very quickly, first is that Europe should adapt, not copy. I do lean in the paper on American templates and this qualified small business stock (QSBS) rules, the transferability architecture of the U.S. green credits, and I want to be upfront about that, but I'm borrowing the mechanism, not the precise tax benefit. In my opinion, the U.S. version of QSBS has some flaws and the green credits transferability mechanism needs to be reworked to address unique issues that would be raised with respect to [research and development] credits. A European version has to learn from those mistakes, not import them.

And the second thing I'd ask us to think about is that the design for constraints we actually have, not for the ones we wish we had. And so two constraints in particular, one is pillar 2, any incentive Europe builds now has to survive the global minimum tax or [global anti-base-erosion rules] will quietly claw it back and you accomplish very little. And the good news is that the OECD side-by-side package in January actually made room for genuine substance-based incentives. So this is now a solvable design problem, not only if you design it the way you've always designed it, but to be more focused on substance-based incentives and that those design restrictions should be implemented on day one.

And the other constraint is simplicity. If an incentive is so complicated that a two- or three-person founding team, for example, can't claim it without hiring a firm like Baker McKenzie, then it isn't really an innovative incentive. It's probably, I dare to say, a subsidy to tax advisors. So I'd rather that those don't get built and simplicity should dominate to the extent possible.

And lastly, I just want to say there's a reason the window is open right now, which I suspect we'll get into a little bit through this conversation. And that is that the disruption to research funding and the talent pipeline on the U.S. side is dislodging exactly the people and capital Europe has spent years trying to attract. That's a multiyear recruiting opportunity, but only if Europe has something concrete to offer when those decisions get made. I've experienced this with friends in the [venture capital] area that are scientists at [the National Institutes of Health] and are rethinking where they might go home.

So that's how I'd like to frame the hour. Tax is not the hero of this story, but it's a lever that's been sitting unused on the table while everyone worked on the harder, slower machinery next to it, and [inaudible] it there is a choice Europe can't really afford to make anywhere. So I'm looking forward to this discussion, and I say let's get going.

Cara Griffith: Fantastic. Thanks so much. I do believe, though, that tax is the hero of every story, and hence we have Tax Notes. In any case, thank you. Very much appreciate the setting of the stage there. Benjamin, I'd like to turn to you. First, thank you so much for joining us today. We genuinely appreciate your time. I wanted to give you an opportunity to give your thoughts on Scott's paper and sort of the topic more generally.

Benjamin Angel: OK. Well, first, Scott deserves to be congratulated. It's a very serious and extensive paper and a very interesting one bringing a lot of material, and he put a lot of thinking into it, also seeking many opinions around. I fully agree with the introduction from Scott that the main problem we have is not of a tax nature. The main problem is clearly the inability of the European Union to have deepened an integrated capital market. This comes primarily from a number of elements where we compare poorly with the United States. Our pension funds are very small. They represent around 25 percent of GDP, while in the U.S., it's around 150. This has an impact on our ability to have patient investors to finance startups, but also an impact on our ability to finance Series Cs, to have big tickets of above €100 million where we have very few investors with this capacity in Europe.

The second big problem we have is the lack of appetite for ordinary people to invest in equity products. That's a big difference with the United States. We have more than €10 trillion slipping literally in deposit accounts in the European Union and therefore not contributing to the financing of the economy. We have, as Scott mentioned, an avalanche of trading venues. Actually, if we have more than 300 different ones, and when you have so many, it means they're all relatively small with a relatively expensive cost when you're using it. And we have too many also blockage put on securitization.

Does it mean that tax has no role? No, otherwise we would not be here today discussing it. Scott does mention on a number of elements, he mentioned loss carryforward, and that is clearly something that is helpful and already existing in a large number of member states. He mentioned full expensing. Full expensing is implemented in some member states, but it's really a minority. We have recently proposed in June to have a full expensing for tangible assets of R&D at the European Union level. He has mentioned capital gain deferral, and that is an interesting idea. We are looking into it, actually, for forthcoming initiative on business angels. We don't have a rich business angel community in the European Union. Unlike the United States, it's not so much part of our culture, but clearly it would make perfect sense.

And then you have the more difficult question that he brings of transferable tax credits. It's a bit foreign to the EU culture, to the EU tax culture at least. And Scott puts the bar even higher because not only does he want a system of transferable tax credit, but he wants a transferable tax credit at the EU level, which at the next layer of ambition doesn't exist today. It would bring plenty of issues that we can discuss also during this panel. But all those ideas are interesting, they're useful. They've been tested in the United States and in some other jurisdictions and can help make progress in the right direction alongside the big picture. Because the big picture is clearly building a true, well-functioning savings investment union with an integrated capital market. Otherwise, companies will keep on crossing the Atlantic when they need to go.

Cara Griffith: Excellent, thank you. Christian, and then Gerhard, I'm going to turn to you as well. I would also like to give you an opportunity to comment on Scott's paper more generally and on what Scott and Benjamin have now said. I'm also interested, Christian, in your thoughts on whether framing this — we've heard both Scott and Benjamin now say that this really isn't a tax problem. So I'm interested in hearing whether you think that framing Europe's innovation challenge as a tax architecture issue overstates what tax policy can do. Are we trying to pigeonhole tax policy to fix a problem that maybe tax policy can't?

Christian Kaeser: Well, you know what? I'm working in a big company, and I'm used to if there's a problem, that people look at tax, and if they can't explain it, then usually it must be a tax issue or a legal topic. I would agree in this case of EU's innovation gap, tax alone can't fix it. But I would also agree with Scott's analysis that there are a couple of low-hanging fruits which you could pick up and work towards closing this innovation gap.

Because the problem for me, if you look at the situation, and the Draghi report was mentioned, is that Europe would have to go all in. If we want to close this gap, we need to go all in. And this includes tax and the necessary steps to really become competitive here, but not only tax. The funding gap was mentioned and the differences in access to capital, but there's much, much more than the funding gap.

I mean talent, yeah, there's an opportunity to tap into talent pools in the U.S. right now apparently. But what I see in reality is this opportunity didn't fully materialize because when we hire people, they don't want to come over. They don't want to come over for whatever reasons. I mean, you will always find individual topics, but so far I haven't seen one of the very expensive tech talents, but they all want to stay where they're used to to do their work so far. Then we have the data regulation. Europe is very, very focused on the protection of certain human rights — don't want to call it human rights, but civil rights. So the Data Act, the [Artificial Intelligence] Act, they're all very much focused on data privacy and security. And there is a value to this.

I'm not denying that there's a value, but if you are a startup, if you are in the tech area, then actually you don't want to be bound by regulations. You want to experiment; you want to have access to data. You don't want to adhere to and live up to all those rules. So the regulatory environment is simply such that you are much, much freer if you operate across the Atlantic. At least that's the perception. If you look at all this in conjunction, then I think this is the combined reason why people are moving over and seeking their better future with their startups in a U.S. environment.

And where I'm actually not extremely optimistic is the fact that in Europe, and I'm mostly speaking for Germany, which is in the center of Europe, we have been relying on three parameters and thought that they're a given forever. And this is U.S. defense. I wouldn't say it's totally gone, but well, we have to spend more on our defense now because it's not any more guaranteed as it used to be. Cheap energy from Russia, don't have to explain where this went to. And then the Chinese market — which especially for the very export-oriented German industry, but also for the car manufacturers not only from Germany, but from France and Italy and Spain — was a key market. And all three have materially changed. So the good weather condition that we were used to is gone. And that is where I believe we need a concerted action, which includes tax, but a concerted action encompassing all policy areas.

Cara Griffith: Excellent. Thank you. I have questions I want to come back to on that. But Gerhard, before we do that, I would love to get your take on what has been said so far. Also, your group works with startups and scale-ups. I'm very interested in your thoughts on what the problem is and how we might solve it, or at least how we might frame it.

Gerhard Huemer: Look, let me talk about the framing, and thanks for inviting me. I think I fully agree that scale-up is the real problem in Europe, not startups and research. But there's one point which was not mentioned that much so far, which is an addition, from my point of view, even the starting point of the problem. When I speak with startup companies, they tell me it's true we have difficulties getting access to financing in Europe. But the real problem in Europe is that scaling up in Europe is so much more expensive and takes so much more time than in the U.S. due to the non-function of the single market. Due to long and complicated permitting procedures, scaling up in Europe is not profitable enough. And if you invest in a non-profitable scale-up project, of course you will also have difficulties getting financing. And the financing is not that big a problem when we hear that €300 billion of savings every year are invested from Europe in the United States.

This money is there, but it is not attracted enough in Europe. And of course, then tax reforms can do something to reduce this gap, to make it more attractive to stay in Europe. But the crucial element from my point of view is this problem with the slow scale-up performance in Europe due to the 27 different regimes we have in many, many areas, not only in taxation, which creates the problem.

And the second element, a more general politics topic I want to mention is that compared to the U.S., what we have seen over the last years, especially during crisis periods, Europe spends a lot of money to protect existing structures, to protect existing companies, to protect existing jobs, while in the U.S. — including the Inflation Reduction Act — the U.S. is focusing much more than Europe on creating new stuff, new projects, new technologies, etc. And this is the second point which holds back our productivity.

And I know that the European Commission works very hard to make progress in the tax area, too, and also in other areas, but now Benjamin is there in the tax area. But the situation that you have to agree between 27 countries unanimously on any change in the tax environment also does not help in this situation. And there's also this discussion about the coalition of the willing and the enhanced corporation, etc. It can be a step in the right direction, but there is also a shortcoming because if you have a core Europe cooperating, you will still have the small countries which benefit a lot from tax engineering and tax avoidance at the moment. There may be even a more profitable situation if you have a huge block with harmonized taxation and then if you have a few small ones who are benefiting from tax engineering. That's a little bit of my take.

The five proposals in the paper from Scott, I like them a lot, especially their harmonization on the credit and the transferability because currently you have to be aware startups are not benefiting from R&D tax credits. They're beneficial to large companies, so the incumbents, but as long as a startup and an innovative SME, you are not making profits, you're not benefiting from tax credits. That's my first take.

Cara Griffith: Yeah, that all makes good sense. And it is very challenging to have a fragmented system. So you've got 27 different tax regimes. In the U.S., it's how we're trying to work with 50 different states and make them all play nicely, and this is on a much larger scale.

Benjamin, I'm interested in your thoughts on the so-called coalition of the willing. I will say, having started my background in state and local taxation in the U.S., uniformity on anything is an extremely challenging exercise. In your opinion, is a coalition of the willing achievable today? Is the legislative background, is it right? Is now the time when we could achieve something like that?

Benjamin Angel: It's a very difficult question actually. The only attempt that we had so far of going for an enhanced cooperation, which is the more correct name of a coalition of the willing, in the treaty in the tax field failed. It was for creating a financial transaction tax (FTT). The conditions set in the treaty for having an enhanced cooperation are quite substantial. You need at least nine member states. Those member states need to make the request to the commission. The commission may make a proposal to the council that will adopt it by a qualified majority, the right somehow for those nine member states to start an enhanced cooperation.

In practice, we have very few successful enhanced cooperations at the EU level. I'm not even talking of taxation here. We have one, for instance, on divorce. We have one on patents, and we have the European Public Prosecutor Office, which is also an enhanced cooperation. But de facto, it's quite difficult to use. It's not impossible. When there is a will, there is a way, but there is scarcely a will to build something in common outside of the standard European Union format, which brings us back to the difficulties that Gerhard was mentioning in the tax field. That is the only policy if we put aside foreign affairs where unanimity is still requested. It doesn't mean that nothing is possible in the field of direct taxation. We have, for instance, 17 directives, but the energy it takes to get anywhere is completely out of proportion. That's very clear.

Cara Griffith: 

Scott, I'm going to turn back to you. You made five proposals in your paper. Would you rank them? Are there ones that are more important than the others? I'm interested in your thoughts as you were writing and what you thought and what you saw.

Scott Levine: Interesting question. So I think it depends on which incentive or which proposal, how we're thinking about them. So for example, I think perhaps the suggestion that there be a consistent treatment of equity compensation across Europe might be easier to get consensus on than, say, a fairly complicated, admittedly complicated, R&D transferable credit, especially if it goes cross-border within Europe as opposed to each country has their own shower pool, if you will.

But I do think, and the reason I spent the most time on it in the article, I do think that the transferable R&D credit is the biggest bang for the buck. The reason I was focused on it being transferable, not just within a jurisdiction within a member state, but throughout the entire European Union, or at least throughout the coalition of the willing, if we go that route, is that no one market's big enough really to absorb the full credit capacity that would need to be there in order to really make it fluid.

So if you think about a country like the Netherlands, for example, which has one of the strongest tech sectors proportionally and maybe empirically vis-a-vis the rest of the EU, the market itself is relatively small. And if, say, the three or four very large tech companies in the Netherlands were the only ones to potentially absorb the credits from the local startups, there might not be enough to go around. Whereas if you include everybody or a majority of the members participating, you end up with a much deeper pool.

And the U.S. dealt with something similar many years ago in the '80s in the bank space when they realized that they were consistently having liquidity issues, and they created this much larger pool where the banks themselves would be contributing and taking depending on their positions.

And so it dawned on me that this could be something that would be feasible. I did run it through the fairly complex EU treaty issues, but it does seem like it could also work. There would need to be a tweak to the administrative guidance with respect to pillar 2, but I don't think that that tweak is really a problem. And I think the proposal is consistent with the spirit of the existing administrative guidance on transferable credits. So I do think that one in and of itself, if you look at just how much money is being spent in the United States on R&D in the tech sector alone, it's exponentially greater than what's taking place in Europe. And the only way to combat that, or not combat it, but the only way to compete with that is to have, in my view, a similar [inaudible].

Cara Griffith:

Christian, you talked very early on about talent, and I wanted to pose a question on that before we got towards the end. Are there proposals that could be implemented in the near term that would have an impact on talent and how to attract talent, how to capitalize on displaced talent in the U.S.? What are your thoughts on that?

Christian Kaeser: All right. So that's also a bundle of topics, and some of them are outside of tax. First of all, work visa immigration law would have to be fast, flexible, agile. So it doesn't help if you — and that's not a European Union topic by the way, that's a member state topic. So you have to be really fast in onboarding those folks. I mean, they're young there; they are used to an agile environment. They don't want to wait six months to a year for the procedures to come to an end, to hopefully a successful end. So that is very important.

The personal income tax brackets are all across Europe pretty bad, particularly in France and in Germany; what you pay over here is quite significant. They're certainly not extremely attractive. And if you look at the salary packages in Europe, people would say, "Cool, they can afford to pay 50 percent of what they earn." But actually, if you have a choice, why would you? Why wouldn't you stay somewhere where you are better off? And I know California is not the best example. It's not the best example, and it's also moving in a European direction in that regard.

So still, I believe what you could offer them is faster immigration procedures. What you will not be able to offer for the time being is the environment because we don't have it yet. That's part of the gap. So if you are convinced that in the valley, that is where the magic is happening, that is where all your peers are, then you want to stay in the valley; you want to be close to this magic. So the real topic is how can you bring that magic over? And that is where you'll need much, much, much, much more than only the talent focus. The talent will follow the business opportunity, the growth opportunities.

Cara Griffith: Thank you. Benjamin, I want to turn to you. We have a limited amount of time left, and we've addressed a lot of issues here, but some of them are very fundamental in that we have to get a conversation started. So if you can't get the public engaged on issues like this, and if we can't have the conversation, we'll be unlikely to move this forward. So I'm curious from your perspective as to how we do that.

We have spent so much time in the last 10 years talking about the so-called race to the bottom and how we are going to avoid that and pushing forward with [base erosion and profit shifting] and pushing forward with the pillars. How do you now have a different conversation and shift things into something like this? Is that feasible? And how would you think that we're going to get started on it?

Benjamin Angel: Well, it's not a 100 percent shift in the sense that member states are still attached to fighting tax evasion and aggressive tax practices. But let's say that for new initiatives, there is a growing awareness that the priority should be ensuring the competitiveness of our businesses. And this is also the top priority that we have followed for the recent legislative package that we have tabled, amending 16 of our 17 directive.

It's a difficult moment to have this conversation, unfortunately. Because member states are, for most of them, not all of them, but most of them, in a tight fiscal situation. So if you talk to the finance ministry, there's very little appetite to do anything that may have an impact on the revenue. So we need the level above the finance ministry, the head of state and government, the one which have repeatedly said that we need to implement the Draghi report, the [inaudible] report, and Noyer-Kukies report, etc, that you mentioned in your introduction, Cara, to stay focused on the big picture and accept that sometimes it's useful to have a small cost on the way if it allows us to reap a bigger benefit because the economy as a whole is growing at a faster pace.

Will we manage? Honestly, I don't know. Clearly we can see resistance to the effort to modernize our tax system and to make it more business-friendly. If we were in a booming economy with all member states thriving, probably we would face less resistance, but that's the current situation. I know that Scott reads it the other way, which is that it's precisely because you are in a difficult situation that now is the right moment to act. I agree, now is the right moment to act. We need member states to walk the talk because we are running short of Italian prime minister or former Italian prime minister to entrust very good reports and to ring the alarm bell.

Cara Griffith: Scott, I want to give you— it was your paper that really kicked off this conversation, so I'd like to give you the last couple of minutes to comment also on what Benjamin just said and to offer any other thoughts you had.

Scott Levine: Thanks, Cara. What I'm hearing, I know there's going to be a lot of naysayers out there. This is too hard, it's too difficult, we can't do it. I really do believe that the EU doesn't have a choice. And I think that if they continue down the path they're going, it's not sustainable. And I think first and foremost important to the EU and its citizens is that they shouldn't have to sacrifice their way of life and their approach to social welfare. And I completely agree with that. And this paper was designed to create a blueprint, potentially in the spirit of the Draghi report and the FIVE report on the tax side, to get moving. A few things I'd mention.

There are really two sovereignties that we're talking about at the same time with respect to each member state that's kind of pulling them in opposite directions. There's the digital sovereignty anxiety that's increasingly strong enough to overcome, I hope overcome, what I call the fiscal sovereignty reflex. Member states have been guarding their fiscal sovereignty very jealously, as does the United States, as Benjamin knows very well. And it's why tax needs unanimity and why Hungary and Slovakia, for example, can block directives. But the dependence has become, I think, fairly acute, as I just mentioned, to change the calculus. And there are three — as I mentioned, from a digital perspective in particular, there's not a real dominant tech champion in Europe to compete with the largest U.S. tech companies. And that's not a lagging issue, really; that's a structural dependency issue.

And so if you think about the paper, the reconciliation isn't to water down harmonization. The paper, I'm pretty clear, I think that mandatory harmonization within a coalition, exhaustively defined at the EU level, would be my preference, is what makes the architecture really durable. So you have enough power given to the European Commission, and it's defined well enough that they don't need to go back consistently to ask for changes to be made and get the same votes to happen year after year when political winds change.

And I think the reconciliation is really the choice between the choice to participate and what you get for participating in the regime, and the regime being this consensus, whether it's all 27 states, whether it's a coalition of the willing, the regime that would be insulated from state aid and national and charter constitutional challenges I think should be a big magnet or a big pull, and they wouldn't be surrendering your fiscal sovereignty. It's really just exercising it once at the door to enter this, and enabling the service of a digital sovereignty objective would just continue to increase. I think the magnet or the pull of the member states that have not yet signed on will become so strong that they'll see that they're better off joining than not joining.

And I think if they don't reconcile these two sovereignties and they let the digital sovereignty motive supply the political energy that fiscal sovereignty instinctively wants to block, it'll get blocked, and the problem will continue. So in sum, I guess I'd say that I don't think they have a choice. Europe doesn't have a choice, and I'm hoping that they go forward and take this seriously and continue the efforts that Benjamin has started, at least with the most recent budget, and go from there.

David D. Stewart: That's it for this week. You can follow me online at @TaxStew, that's S-T-E-W, and be sure to follow @TaxNotes for all things tax. If you have any comments, questions, or suggestions for a future episode, you can email us at podcast@taxanalysts.org. And as always, if you like what we're doing here, please leave a rating or review wherever you download this podcast. We'll be back next week with another episode of Tax Notes Talk.

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