Tax competition vs. tax harmonization: Where do we stand? CEPII-CERGE Conference on Tax competition in the EU25 Prague, December 16-17, 2004

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Tax competition vs. tax harmonization Where do
we stand?CEPII-CERGE Conference on Tax
competition in the EU25Prague, December 16-17,
2004
Jean Pisani-Ferry
Agnès Bénassy-Quéré
Université Paris-Dauphine
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Outline

• The issues
• Costs and benefits of tax competition
• Ways forward

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Desirable features of taxation in EU25

• Respect for national preferences
• Size and role of the public sector
• Degree of inter-personal redistribution
• Tax incentives (eg. human vs. physical capital
  accumulation)
• Incentive to growth and jobs
• Foster overall efficiency of the public sector
• Ensure appropriate distribution of the tax burden
• Coordination
• Correct locational/size disadvantage and foster
  convergence
• Avoid futile beggar-thy-neighbour policies

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Benefits of tax competition

• 4 arguments
• Diversity of preferences (but not that large
  diversity..)
• Correction of locational disadvantage
• Pressure on public sectors
• But competition should be on value for money, not
  on specific revenues
• Response to domestic political distorsions
  (Tabellini)
• Little evidence of excess capital taxation
• Should political distorsions be corrected in this
  way?
• Should they be corrected at all (Franco)?
• Correction of vertical distorsions (Brülhart)
• Little evidence for Europe

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National preferences Overall tax burdens
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Corporate tax differential with EU15 average and
distance to Luxembourg
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Costs of tax competition

• 3 arguments
• Distorsions in investment location (Sarkozy)
  weak
• With low elasticities (CPB, CEPII), lower tax
  rates may not go much beyond correcting
  locational disadvantage
• Inappropriate distribution of the tax burden
  (excess taxation of immobile labour) medium
• Aggregate evidence seems to confirm shifting of
  burden
• Some cross-country evidence also, but not very
  strong
• Opportunities for profit-shifting for tax
  avoidance strong
• Micro (Gérard) and macro (CPB) evidence of high
  elasticity
• Depsite little evidence of tranfer pricing
  (Swenson)

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Tax rates across EU25
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Some disturbing trade-offs

• Measures that reduce opportunities for profit
  shifting may increase locational competition
  (Gérard)
• Tax coordination does not necessarily lead to
  higher taxes (Häufler)
• Thus do not attempt at hitting three birds with
  one stone
• Priority should be to limit tax avoidance

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Options

• Overall harmonisation is a non-starter
• Even harmonisation of tax bases consolidation
  is unlikely
• Thus, choice between
• Watered-down solutions (mutual recognition,
  options, targeted solutions) Maggiulli, or
• Coalition of the willing (enhanced cooperation)
• Beware of second best some progress towards
  harmonisation may be harmful

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Ways forward

• Enhanced cooperation
• Interesting intellectual support for partial
  harmonisation Bucovetsky
• May lead to stable, large coalitions
• Benefits to the participants less distorsions,
  less shifting
• Compatible with treaty
• Differentiate lower floor for NMS?
• European corporate income tax (Büttner)
• Additional benefit less demand for juste retour