Kiel Working Papers, Kiel Institute for World Economics
No 916:
Do We Need Tax Harmonization in the EU?
Alfred Boss
Abstract: For many years there have been political intentions to
harmonize tax rates in Europe. As to capital income taxation, competition
is often seen to be especially harmful. Facing a high degree of
international capital mobility, every country is expected to reduce its tax
rate in order to attract new capital or not to lose capital allocated in
the country (race to the bottom").
It is shown that the development of
capital income tax rates in the European Union (EU) and in other
industrialized countries as well as the development of corporate income tax
revenues do not indicate that a race to the bottom has taken place. If tax
competition should become as fierce as some observers seem to fear, the
arguments in favor of tax competition instead of harmonization should be
kept in mind. If tax rates are cut in a process of competition, government
expenditures have to be reduced; this helps to avoid waste and
inefficiencies in the public sector. In addition, tax competition might
help to find better tax systems, and every country could learn from the
experiences of other countries. In contrast, tax harmonization would
probably lead to higher taxes in the EU.
Keywords: Tax competition, Tax Rate Harmonization, Value-added Taxation in the EU, Capital Income Taxation in the EU; (follow links to similar papers)
JEL-Codes: H20; H87; (follow links to similar papers)
30 pages, March 1999
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