Tax Harmonization and Tax Competition in Europe

19 Pages Posted: 5 Jul 2004

See all articles by Hans-Werner Sinn

Hans-Werner Sinn

CESifo (Center for Economic Studies and Ifo Institute); National Bureau of Economic Research (NBER); Ludwig Maximilian University of Munich

Date Written: January 1990

Abstract

Opening Europe's borders in 1993 makes the allocation of resources more vulnerable to differences in the national tax rates. The first part of the paper demonstrates that direct consumer purchases will imply distortions resulting from diverging VAT rates and it clarifies why the frequently cited exchange rate argument is of no help. The second part shows that, in the case of direct taxation, a harmonization of tax bases is more important than a harmonization of tax rates. Either the combination of true economic depreciation and residence taxation or the combination of immediate write-off and source taxation will result in an efficient international allocation of capital, independent of the national tax rates. The paper concludes with a verdict on tax competition arguing that free migration renders a policy of income redistribution, which is interpreted as insurance against the risk of lifetime careers, impossible.

Suggested Citation

Sinn, Hans-Werner, Tax Harmonization and Tax Competition in Europe (January 1990). NBER Working Paper No. w3248. Available at SSRN: https://ssrn.com/abstract=271181

Hans-Werner Sinn (Contact Author)

CESifo (Center for Economic Studies and Ifo Institute) ( email )

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National Bureau of Economic Research (NBER)

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Ludwig Maximilian University of Munich

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Germany

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