Tax Harmonization Research Articles

Between Tax Competition and Harmonisation: A Survey on Tax Coordination

This paper gives an overview on the research done in the fields of tax competition, coordination and harmonisation. The survey is divided in two main parts, in the first section we compare the standard tax competition literature that sees tax competition as a bad, to public choice contributions that advocate tax reductions. In the second part we consider theories of endogenous growth, which focus on analysing the taxation question. After introducing the fundamental contributions, we discuss extensions in the line of an open economy, an OLG setting and the transitional dynamics in greater detail. (author's abstract)

Harmonization of Domestic Consumption Taxes in Central and Western African Countries

This paper examines the reform of the main domestic consumption taxes initiated by the CEMAC and the WAEMU aimed at reinforcing their economic integration. On the whole, compliance with the VAT is relatively weaker in the CEMAC than in the WAEMU. The opposite applies for excises. Major reforms would need to be undertaken by WAMZ countries, except Ghana and, to a lesser extent, Nigeria in order to align their tax structure with that of the WAEMU as planned for 2007.

Harmonization of Domestic Consumption Taxes in Central and Western African Countries

This paper examines the reform of the main domestic consumption taxes initiated by the CEMAC and the WAEMU aimed at reinforcing their economic integration. On the whole, compliance with the VAT is relatively weaker in the CEMAC than in the WAEMU. The opposite applies for excises. Major reforms would need to be undertaken by WAMZ countries, except Ghana and, to a lesser extent, Nigeria in order to align their tax structure with that of the WAEMU as planned for 2007.

Trade, Tax and Takeovers – Can the European Court De-Regulate Europe Despite Resistance from the Council and Parliament?

Proposals by the Commission to remove barriers to cross-frontier business activity seem deadlocked by disagreement in the Council or Parliament (e.g. Tax Harmonisation and the Services Directive) or doomed to produce European packaging for business as usual (e.g., the Takeover Directive). It is the Luxembourg Court which maintains the process of de-regulation, and upholds challenges to national rules on banking, tax, and capital structures, which operate as barriers to market entry and reduce the competitiveness of the European market. For those who believe in free markets, these contributions to a competitive Europe are timely and positive.

Fiscal Competition, Revenue Sharing, and Policy-Induced Agglomeration

Revenue sharing can be used to discourage low tax regions from competing for capital and firms with high tax regions. However, with heterogeneous regions, revenue sharing involves net transfers across regions and creates a moral-hazard problem - that is, regions may want to invest less in market fostering public good when the benefits are shared across nations. This paper analyzes these costs and benefits of revenue sharing. When asymmetric regions compete in capital income taxes only, we show that revenue sharing can be desirable for the high tax region if it is pushed far enough (i.e., J-curve effect), while tax harmonization is always harmful for the low tax region. When regions also compete through public investments, we find that tax competition distorts (downwards) public investments. While revenue sharing discourages public investments due to moral-hazard effect, it remains beneficial in most cases. Moreover, there are new agglomeration forces resulting from public investments, because the inflow of capital raises the incentive for public investments which in turn attract more capital. This leads to the possibility of policy-induced agglomeration (which is different from the classical agglomeration forces in the New Economic geography).

Competing for Capital When Labor is Heterogeneous

This paper investigates the impacts of capital mobility and tax competition in a setting with imperfect matching between firms and workers. The country always gains and the large country always loses from tax competition, thus implying tax competition leads to redistribution from the large to the country. However, the large country always attains a higher utility than does the country. These results imply that our model encapsulates both the importance of being small as well as the importance of being large. We also show that tax harmonization leads to redistribution from the large to the country.

Why Tax Energy? Towards a More Rational Policy

The same fuels are taxed at widely different rates in different countries while different fuels are taxed at widely different rates within and across countries. This paper considers what tax theory has to say about efficient energy tax design. The main factors for energy taxes are the optimal tariff argument, the need to correct externalities such as global warming, and second-best considerations for taxing transport fuels as road charges, but these are inadequate to explain current energy taxes. EU energy tax harmonisation and Kyoto suggest that the time is ripe to reform energy taxation.

Corporate income taxation in Lithuania in the context of the EU

This paper explores Lithuania's competitiveness in the area of corporate income taxation. In order to assess how much freedom of action the country has in designing its own corporate income tax policy, the process of EU tax harmonization is analyzed by evaluating justification for tax harmonization, the major developments and the main outcomes of this process. Lithuania's corporate income tax system is compared with the systems in the other EU countries. Following a macro backward-looking approach, the paper calculates the measures of effective profit tax burden. Effective tax burden measures are computed for the whole enlarged EU. Such calculations are still rare in the economic literature.

The origin principle, tax harmonization and public goods

Abstract This paper takes up two tasks. Firstly, it shows that the conclusion drawn in Lucas (2001) [Lucas, V., 2001, Tax harmonisation and the origin principle, Economic Letters, 71, 111–115.] regarding potential Pareto improvement in small open economies needs to be amended. Secondly, in large open economies, it verifies that some reasonable conjectures, concerning the welfare effects of a particular tax-harmonizing reform, hold under the origin-based tax system when public goods are present.

Tax Competition and Asymmetric Countries

This paper explores the consequences of a difference in the levels of public inputs accumulated over time in a small open economy model where capital tax revenues are used exclusively for the provision of public inputs, while the government sets the capital tax rate in way to maximise its country’s national income. It is shown that in this case the optimal capital tax rate in a country is a decreasing function of its stock of accumulated public inputs. The model thus implies that capital tax harmonisation could actually be detrimental to the so-called core EU member states as it could fix their capital tax rates at an in-optimally high levels and thus hinder their ability to dampen undesirable capital out- flows.

International Tax Competition: A Case for International Cooperation in Globalization

The liberalization of international financial flows and foreign direct investment has induced countries to use diverse measures to attract inflow of foreign capital and foreign direct investment, which is expected to have a positive effect on the growth of GDP and thus a positive effect on social welfare. Tax exemption, reduction of tax rate, tax holiday, or diverse subsidies are some of the most important measures used. In this paper we study international tax cooperation, i.e., countries change and especially reduce tax rate for corporate income or for asset revenues to attract inflow of foreign direct investment. Both theoretical and empirical studies have shown the sensibility of foreign direct investment decision with respect to tax rate differences between home countries and host countries. In general, more inflow of foreign direct investment can be expected if the tax rate of the home country is lower than that of foreign countries. This is the main reason for international tax cooperation. In this paper we propose a simple model to prove the sub-optimal Nash non cooperative solution in a two-country tax-competition game. The model shows that international tax cooperation can improve welfare of the participating countries. How to reach a cooperative solution for an international tax competition game (ITCG) is therefore an important issue for further discussions and studies. International institutions can play a crucial role to reach international tax cooperation or international tax harmonization.

Europ�ische Steuerkoordination und die Schweiz (European Tax Coordination and the Role of Switzerland)

Even though the introduction of the Euro did not necessitate tax harmonization per se, it is expected to lead to increasingly harmonized taxation in practice. This harmonization process will mainly take the form of negotiations on the level of EMU, where political recommendations will be formulated. In addition, individual nations will be under increasing pressure to harmonize taxes in order to curb capital outflow and tax evasion. Judging from the current state of EU negotiations, corporate taxes are likely to decline in the wake of the harmonization process, while withholding taxes may be adjusted upwards. VAT rates harmonization will likely be upwards as well. Further implementation of the source principle in Swiss taxation will likely lead to changes in the portfolio choices of foreign investors in Switzerland; the share of Swiss bonds held by EU-investors will increase.

More Revenues, Less Distortion? Responding to Cross-Border Tax Arbitrage

Transactions commonly known as cross-border tax arbitrages take advantage of inconsistencies between countries' tax rules to achieve more favorable tax results than could have been achieved by investing just in one country. Examples include dual resident companies and double dip leases, in which clever structuring may enable a multinational enterprise to claim the same deduction in two countries. This article analyzes the national and worldwide welfare considerations that may be relevant to a country's deciding whether to allow tax benefits that will be thus duplicated, taking into account strategic interactions with other countries. It also briefly discusses cross-border tax arbitrage in relation to tax harmonization and the proposed creation of multilateral tax institutions akin to the GATT and WTO.

Tax Harmonization and Expenditure Competition among Self-interested Governments

In this paper the effect of tax harmonization on intergovernmental expenditure competition is analysed. To this end, it is assumed that self-interested governments cannot influence tax rates, since taxes are harmonized, but that they can freely choose expenditure policies and, by this, attract additional capital and broaden the assessment base of a capital tax. Hence, self-interested governments might have a financial incentive to provide for public input besides re-election oriented motivations. Since additional tax income from public input provision depends on the harmonized capital tax rate, the choice of the tax rate indirectly determines the amount of public input supplied by governments in expenditure competition.

The organisation for economic cooperation and development

The organisation for economic cooperation and development

Corporate Tax Harmonization in Europe: It's All About Compliance

Although the hope may be to reduce economic distortions in captial markets, the primary focus of corporate tax consolidation among member states of a federation is to reduce compliance and administrative burdens. For example, the Canadian provinces have sufficient flexibility to determine their corporate tax policies, and effective tax rates on captial vary considerably by province, but they still have achieved a considerable degree of harmonization of tax bases. The European Union should also try to implement a consolidated tax base for companies. A compulsory base would be best, but it is likely that the optional consolidated tax base is most practical at this time.

Jeux Sans Frontières Revisited: A New Study of Tax Competition When Transportation Cost Is Composite

The purpose of this paper is to investigate the effects of variable population densities, composite transportation costs, and consumer preferences on tax competition. A simple formula for the number of cross border shoppers is derived which yields explicit expressions for composite reaction functions. The NASH equilibrium problem may have zero or several solutions. The major contribution of this paper is that by considering more realistic forms of the three variables, population densities, composite transportation costs, and consumer preferences, one can obtain major structural changes in the NASH Equilibrium (NE) outcome. 1) The existence of a unique NE is no longer guaranteed, 2) the size of the region is no longer significant in revenue maximization schemes, 3) the amount of cross border shopping is dependent on all three variables, 4) evolution in any or all three variables, can be PARETo-improving if, the evolution of either of these variables is correlated with the evolution of the others, 5) tax coordination is advantageous irrespective of the size of each region. The implication of these findings is that the best strategy is tax harmonization.

Is Fiscal Cooperation Always Sustainable When Regions Differ in Size? Lessons for the EMU

This paper investigates the sustainability of fiscal co-ordination between two regions according to three criteria of co-ordination: tax harmonization, fiscal cooperation and bargaining. We show that in a two-region model in which regions differ in size, bargaining is the only sustainable co-ordination policy when trigger types strategies are implemented. The sustainability of cooperative fiscal policy or tax harmonization depends on the degree of difference in regions' size. When this difference is large, such co-ordinated policies are not sustainable.

Company Tax Reform in the European Union

The European Commission recently proposed to move towards a consolidated tax base for European multinational companies, to be allocated across EU member states through a system of formula apportionment. This paper argues that while the Commission's four al- ternative blueprints for company tax reform may reduce existing problems of transfer pricing, they will also create new distortions as long as existing tax rate differentials are maintained. The paper also analyzes the changes in international tax spillovers which will occur as a result of a switch from the current system of separate accounting to formula apportionment. The final part of the paper discusses whether more conventional corporate tax harmonization should still be a long term policy goal for the EU and presents quantitative estimates of the efficiency gains from harmonization.

Environmental taxation, tax competition, and harmonization

This paper studies the tax competition problem in the presence of transboundary pollution. It shows that economic integration causes the firms to adopt the same or less polluting technologies, but it nevertheless increases aggregate emissions and lowers welfare. Second, the paper examines the ramifications of partial tax harmonization policies. It shows that harmonizing commodity taxes above their unrestricted Nash equilibrium value may either increase or lower the equilibrium emission tax. Under the former, firms opt for less polluting technologies, aggregate emissions decrease and welfare improves. On the other hand, if emission tax goes down, firms will choose more polluting technologies, aggregate emissions will increase and welfare deteriorates. Finally, harmonizing the emission tax above its unrestricted Nash equilibrium value, which leads the firms to adopt a less polluting technology, also causes aggregate emissions to decline and overall welfare to increase.