International Tax Competition: A New Framework for Analysis

Abstract

Spurred by the liberalisation of capital flows and the launching of the EU single market and monetary union, the last two decades have witnessed an intense European and international debate on the need for supranational tax co-ordination. In recent years there has been a clear shift in the dominant opinion in this long-standing debate. Only a few years ago the European Commission expressed concern that international tax competition seems to shift the tax burden from mobile capital onto unemploymentridden labour. The Commission therefore argued for improved co-ordination of capital taxation within the EU to prevent further shifts in the tax burden to the disadvantage of labour. However, more recently the Commission has expressed the view that “... a reasonable degree of tax competition within the EU is healthy and should be allowed to operate. Tax competition may strengthen fiscal discipline to the extent that it encourages member states to streamline their public expenditure, thus allowing a reduction in the overall tax burden.” (European Commission, 2001, p. 4).

am grateful to Jens Brechner from the Danish Ministry of Economic Affairs who programmed the simulation model presented in this paper and served as a stimulating discussion partner. All remaining shortcomings are my own responsibility. The activities of the Economic Policy Research Unit are supported by a grant from the Danish National Research Foundation. This paper is part of a research network on “The Analysis of International Capital Markets: Understanding Europe’s Role in the Global Economy”, funded by the European Commission under the Research Training Network Programme (Contract No. HPRN-CT-1999–0067).