Tax Harmonization vs Tax Competition în The European Union

We have chosen the subject of taxes in the European Union as we found it a very interesting and “full-of-debateful-spirit” one. In our attempt to find as many and as complete and reliable sources we have gathered various articles and pieces of information. We have decided to focus mainly upon the article “Tax Harmonization versus Tax Competition: A Review of the Literature”, written by Tom Stults.

As the European Union heads down path toward a more complete integration, several economic policy questions have arisen and now remain without a definitive response. Among these, perhaps none are as contentious as the future of taxation within the Union. But before even addressing the diverse arguments surrounding the topic, it is important to note just why the issue is so salient. First, following the introduction of EMU and the "Europeanization" of monetary policy, fiscal policy including taxation remains one of the few tools left at the disposal of national governments in their effort to influence their own economies. Furthermore, even fiscal policy has been constrained by the introduction of the Stability and Growth Pact, making taxation perhaps the final component with which individual countries can deal with asymmetric shocks. This being said, it is no surprise that the debate over taxation within the EU is a heated one. This being said, the literature on the subject is fueled by one central question: Is regulated tax harmonization or is market driven tax competition the best solution to the awkward state of asymmetric tax rates that currently exists in the EU? Not surprisingly, the existing viewpoints run the gamut from entirely pro-harmonization to pure pro-competition stances. As a whole however, the literature simply reveals the ambiguity of the issue, as reflected by its increasingly complex attempts to convey the reality of the European situation.

As we have already mentioned, the question of taxation within the EU (and EMU) has become a crucial one. Of course, the concern over the subject springs from a general acknowledgement that increased integration within the Union will pressure asymmetrical tax rates among member countries to converge to some point. The simple knee-jerk logic is this: As factor mobility increases within the EU, pressure will be placed on member states to lower their tax rates on mobile factors in order to attract business. This unchecked competition will lead to a 'race to the bottom' in which tax rates will dip so low as to threaten countries' abilities to supply public goods. In response, one might argue for the necessity of strict supranational rules that set a harmonized tax rate at a level that guarantees the adequate supply of these public goods. In fact, the EU requires "a value-added tax of at least 15 percent, and the Brussels-based bureaucracy is seeking to harmonize taxes on corporate income, tobacco, energy, and digital products," which clearly illustrates a rule-led effort toward harmonization. (Mitchell, 1) Yet, as was hinted in the introduction, this simple reasoning and the policies that have resulted from it are far-removed from the reality facing members of the EU (and are certainly not unanimously accepted by member countries). The broad array of suggestions presented by scholarly arguments lends credence to this fact. As we shall show, there exists substantial support for four main options: rule-led tax harmonization, the imposition of a minimum tax floor, or unregulated tax competition, either with or without informal coordination.

There are many different viewpoints of the economists that struggle somewhere between tax competition and tax harmonization in the european union. Both forms of taxation have their advantages and disadvantages and we, the romanian people that have just faced integration have to know what will be the future of taxation in the eu.

But before presenting the different viewpoints surrounding this complex topic we will try to define the concepts of tax competition and tax harmoniztion, take a look into the history of taxation and try to grasp the advantages or disadvantages of both forms of taxation.

In order to obtain a relevant point of view, we have also considered other models of taxation existing throughout the world. In the paragraphs that follow we try to depict some of their features and to draw several conclusions.

ASEAN

What are the implications of different tax systems in ASEAN on the integration of 11 priority sectors? Will increased market liberalization and competition provide opportunities for tax avoidance or lead to harmful tax competition? Are there tax-related impediments to the movement of income and capital that may frustrate the progressive market opening envisaged in goods, services, labor and investment envisaged across the region?