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Tax Harmonization in the EU – Competition or Political Collusion?

Tax Harmonization in the EU – Competition or Political Collusion?. Wilfried Prewo EUSC-CUNY – May 14, 2008.  IHK Hannover. Corporate Taxes in Europe 2007 Top Rates (Local Corporate Tax included). Sweden 28.0 Finland 26.0 Estonia 22.0 Latvia 15.0 Lithuania 18.0 Poland 19.0

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Tax Harmonization in the EU – Competition or Political Collusion?

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  1. Tax Harmonization in the EU – Competition or Political Collusion? Wilfried Prewo EUSC-CUNY – May 14, 2008  IHK Hannover

  2. Corporate Taxes in Europe 2007Top Rates (Local Corporate Tax included) Sweden 28.0 Finland 26.0 Estonia 22.0 Latvia 15.0 Lithuania 18.0 Poland 19.0 Czech Republic 24.0 Slovakia 19.0 Austria 25.0 Hungary 21.2 Slovenia 23.0 Greece 25.0 Cyprus 10.0 Denmark 25.0 Great Britain 30.0 Netherlands 25.5 Germany (2008)* 29.9 Ireland 12.5 Belgium 34.0 Luxembourg 29.6 France 34.4 Italy 37.3 Spain 32.5 Portugal 26.5 Malta 35.0 below 20 25-29.9 20-24.9 above 30 *Germany (2007): 38.7 Source: BMF

  3. What we had feared: EU governments form a cartel in raising taxes under the euphemistic label of "tax harmonization".

  4. % Personal Income Tax Top Rates 1987 2007 1997 • Downward trend; definitely no "harmonization" at a higher level; spread about the same as 20 years ago. • Some countries have actively pushed for tax decreases,others have – unwillingly, maybe – followed. Source: IW Köln/BMF

  5. % Corporate Income TaxTop or Flat Rates(Local Corporate Tax not included) 1987 1997 2007 • Bigger cuts than personal income tax and across the board. Capital is a shy deer and more mobile than people. Source: IW Köln/BMF

  6. % Value Added Tax 1987 1997 2007 • No reduction – minimal tax competition • Moderate increase of rates, mostly to compensate income tax reductions. • But – most important – no harmonization as evidenced by nearly the same spread. Source: IW Köln/BMF

  7. What we feared: What has happened: EU governments form a cartel in raising taxes under the euphemistic label of "tax harmonization". EU attempts at harmonization have been thwarted by competition which even led to (income) tax decreases. Competitive forces: • Globalization • Competition within the EU, enlargement of the EU • Euro

  8. International Competitiveness has many facets;taxes are only one aspect Selected Countries Source: IMD World Competitiveness Yearbook 2007/ www.welt-in-zahlen.de

  9. IMD World Competitiveness Yearbook 2007 Factor Breakdown Altogether > 300 criteria Altogether 321 criteria

  10. Unit Labor Cost(nominal, 1999=100) 1997 2007 Source: European Commission

  11. What should we do in preserving tax competition? Anything that reduces barriers to competition: • open markets for goods and services • deregulation • above all: preserve the principle of mutual recognition

  12. Exception: Taxation of interest With exchange risk gone in the Euro area, the tax treatment of interest and banking regulations are important factors driving the competition for financial assets. It is the only area where tax harmonization is vigorously pursued by EU governments: • information exchange on cross-border interest payments • withholding tax as a condition for continued banking secrecy (Belgium, Luxembourg, Austria) • agreement with third countries (Switzerland)

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