Corporate Income Tax Harmonization and Capital Allocation in the European Community

Abstract

This paper examines the potential distortionary effects of differences in company income taxation on the allocation of non-financial capital in an integrated European market. Effective company tax rates are constructed for EC member countries and the allocative effects are simulated through the use of a simple general-equilibrium model. The main conclusions are that: there is presently considerable dispersion of effective tax rates; meaningful convergence requires harmonization of both rates and tax base; and while the direct efficiency gain from harmonization is relatively small, the adjustment implied for some countries can be significant.