<p>STUDY ON THE POTENTIAL AND LIMITATIONS OF REFORMING THE FINANCING OF THE EU BUDGET Jorge Núñez Ferrer, Jacques Le Cacheux, Giacomo Benedetto &nbsp;and Mathieu Saunier with Fabien Candau, Claude Emonnot, Florence Lachet-Touya, &nbsp;Jorgen Mortensen, Aymeric Potteau and Igor Taranic Expertise commissioned by the European Commission &nbsp;on behalf of the High Level Group on Own Resources under service contract No 14/PO/04 FINAL VERSION 3 June 2016 The views expressed are attributable only to the authors in a personal capacity and not to any institution with which they are associated &nbsp; 2 Authors: Jorge Núñez Ferrer, Associate Research Fellow, CEPS Jacques Le Cacheux, Professor of Economics, CATT/UPPA (Université de Pau et des Pays de l&#39;Adour), and Scientific Adviser , OFCE/Sciences Po. Giacomo Benedetto, Senior Lecturer in Politics and Policy at Royal Holloway, University of London Mathieu Saunier, Manager, Deloitte Eu Finance Transformation Centre of Excellence With contributions from: Fabien Candau, Assistant Professor in Economics, CATT/UPPA Claude Emonnot, Assistant Professor in Economics, CATT/UPPA Florence Lachet-Touya, Assistant Professor in Economics, CATT/UPPA Jorgen Mortensen, Senior Research Fellow, CEPS Aymeric Potteau, Professeur des universite s en droit public, Lille, Nord-Pas-de-Calais, France Igor Taranic, Research Assistant, CEPS &nbsp;Acknowledgements: We would like to acknowledge the European Commission for its support, as well as for showing great patience and understanding. This acknowledgment is also extended to the High Level Group on Own Resources, who not only asked complex questions, but also showed understanding and the patience to let us work through the material. We hold particular gratitude to the EIB for long meetings and discussions. We also thank Professor Schelkle from LSE for her comments on macroeconomic stability issues, Kathleen King and Monica Alessi from CEPS for editorial support, and Tanguy Sene from LSE for helping coordinate all aspects. Many others have also directly and indirectly contributed to the thoughts in this report. &nbsp; 3 TABLE OF CONTENTS Executive Summary . 12 1 Introduction . 19 PART I. Time to break with the past are we ready? . 22 2 Overview of the present state of own resources and the net balance logic . 22 2.1 Todays status Just three resources but highly complex . 22 2.2 Origins and rationale of the net balance approach and corrections . 23 2.2.1 Assessing the rationale for net balances and corrections . 25 2.2.2 Are the own resources mechanism and corrections in line with current budget needs? 27 2.3 Increasing calls for new own resources . 27 2.3.1 Development of proposals for new own resources . 28 2.3.2 The Lisbon Treaty, budget review and European Commissions 2011 proposals . 28 3 Why the net balance approach is (even more) illogical today . 30 3.1 Economic and cross-border impacts of the EU budget are ignored . 31 3.2 An important shift from local to EU objectives . 32 3.2.1 Brief overview of the increasing EU added value . 33 3.2.2 Reinforcing EU added value . 34 3.3 Reviewing the facts related to financial flows . 35 3.3.1 Net balance vs financial flow analysis . 35 3.4 Centrally managed financial instruments . 36 3.4.1 Other centrally managed financial instruments for infrastructure . 39 3.5 Centrally managed financial instruments for research and innovation . 42 3.6 Distribution and impact of the research and innovation budget . 43 3.7 Financial instruments under shared management . 46 3.8 Concluding remarks on net balances, added value and financial instruments . 47 4 Reasons for the failure or success of previous reforms to own resources . 48 4.1 Fiscal heterogeneity among Member States . 48 4.2 Power and voting rules . 50 4.3 Necessary contextual changes . 52 4.3.1 Points directly pertaining to the budgetary decision-making process . 52 4.4 Issues deriving from the budgetary decision-making process . 53 4.5 Interactions with other EU policy areas and processes . 54 PART II. Political and legal basis for new own resources . 55 5 Role of the legal framework and institutional balances: Sparks of hope for own resources reforms? . 55 5.1 Implications of the reforms of 1970 and 1988 for the current institutional process . 55 5.2 Possible reforms under the present Treaty framework . 56 5.2.1 A new own resources decision . 57 &nbsp;4 5.2.2 Could approval of the annual budget (Arts. 314 and 315) or MFF (Art. 312) be linked to own resources reform? . 58 5.2.3 Unexpected threats or opportunities: Potential of Member States to influence reform 58 5.2.4 Reforms that require a treaty change. 59 5.3 Asymmetrical competences of the Council and Parliament and their impact . 59 5.3.1 Does blockage occur because of the institutions differing powers or solely because of the Council? . 60 5.4 Could the chances of reform increase if national parliaments were drawn into the negotiations earlier, and if so how? . 60 5.4.1 Fulfilling national constitutional requirements under Art. 311(3): A case study of the UK. 61 5.4.2 National legitimacy: Could this help national governments to agree on changes? . 61 6 Potential use of variable geometry for own resources: Is it an option? . 63 6.1 Forms of variable geometry since the 1980s . 64 6.2 Variable geometry through enhanced cooperation . 64 6.2.1 Assessment of the conditions for enhanced cooperation . 66 6.2.2 Compliance with the rules and conditions of Arts. 32634 TFEU. 68 6.2.3 Impact on the budgetary principles of universality and unity . 71 6.2.4 Art. 113 TFEU as the legal basis for the FTT under enhanced cooperation . 72 6.2.5 Alternatives to Art. 113 TFEU in relation to variable geometry in general . 73 6.3 FTT implementation and coordination . 73 6.4 Key lessons on mechanisms of variable geometry and their extension to other candidates for new own resources . 74 6.5 Concluding remarks . 75 PART III Developing an own resources mechanism for the 21st century Building blocks for a package deal . 76 7 Options for new own resources . 76 7.1 What selection criteria? . 78 7.1.1 Market efficiency aspects . 79 7.1.2 Distributional consequences and the equity dimension . 82 7.1.3 Democratic legitimacy and efficient decision-making on the EU budget with a sound financing scheme . 83 7.2 EU VAT. 85 7.3 Corporate taxes . 88 7.4 Carbon levies . 90 7.5 Taxes on fossil fuels . 92 7.5.1 Carbon tax . 93 7.5.2 Inclusion of the ETS . 95 7.6 Financial transaction tax . 96 7.7 Estimating revenue and distribution of the main tax candidates . 96 7.7.1 VAT . 96 7.7.2 Corporate income tax . 97 7.7.3 Carbon levies . 98 &nbsp;5 7.7.4 Financial transaction tax . 103 7.8 Assessing and ranking new own resources . 103 7.8.1 Assessment of the proposed FTT in relation to budgetary criteria . 105 7.9 Accounting and fiscal rules . 107 7.10 Asymmetric impacts of tax resources and the GNI residual . 108 7.10.1 Tax fully accepted as owned by the EU . 108 7.10.2 Tax incidence not accepted by Member States . 109 7.10.3 Use of variable geometry in resources . 109 7.10.4 Conclusion on the workability of variable geometry . 111 7.11 A progressive GNI-based resource? . 111 7.12 Strengths and shortfalls of the GNI resource, and the need to improve it . 112 7.13 Increasing transparency and aligning the GNI resource with the concept of own resources. 115 8 Enhancing flexibility to address unexpected events . 117 8.1 Present flexibility instruments . 118 8.2 Analysis of the use of flexibility instruments in the present MFF . 120 8.3 Enhancing flexibility Some possible solutions . 122 9 Dissociating expenditures from resources By confronting them . 124 9.1 Why generalised correction mechanisms are not a satisfactory answer . 125 9.2 How to dissociate resources from expenditures? . 126 9.2.1 Removing headings from rebates and net balance calculations . 126 9.3 Removing headings Impacts on corrections . 129 9.3.1 Reforming the financial model of the CAP . 130 9.3.2 What is the impact of the CAP on net balances? Does it justify corrections? . 130 9.4 Financing the CAP differently may lead to a better budget and policy . 132 9.4.1 A cohesion-based system of direct payments . 133 9.4.2 An alternative co-financing system . 134 9.4.3 Additional arguments in favour of such an alternative co-financing system . 135 PART IV. Reaching an agreement The building of a package deal . 136 10 Building a package deal . 136 10.1 Reaching an agreement Lessons from the past . 138 10.1.1 Link to external developments . 138 10.1.2 The op</p>