Tax Competition and Tax Coordination in the European Union

Abstract

This paper examines the tax competition literature and attempts to draw out its implications for the debate on corporate tax coordination within the EU. It begins with the early basic tax competition model, which derives conditions under which underprovision of public services occurs and tax harmonization unambiguously improves welfare for all states in the union. The paper then turns to a wide variety of extensions of this model, some of which reinforce its results and others that yield rather different conclusions. The analysis concludes by considering the implications of the tax competition literature for the debate on EU corporate tax coordination, drawing on some recent efforts to synthesize this vast literature by estimating the efficiency costs of tax competition and simulating the efficiency gains from various tax coordination palns.