Date: 9 November 2004

Speakers: Friedrich Rödler, Chairman, C.F.E. Fiscal Committee

                Sixten Korkman, Director General for Economic and Social Affairs, Council of the European Union
                Erki Uustalu, Adviser to the Estonian Minister of Finance
                Marc Dassesse, Université Libre de Bruxelles
                Jan van der Bijl, Head of group Taxation, Unilever
 
Classic fears about tax competition centre on the impact such a policy would have on government tax receipts and social equity. In a world where taxable resources are either mobile or inert, mobile resources can "shop" for the lowest tax rates, thereby contributing less to government receivables in their home country. For a given government budget, then, the burden of financing public expenditures shifts to immobile taxable resources, usually comprised of individuals with lower human capital endowments. Such a dynamic can reinforce existing income inequalities.
 
The speakers at a seminar co-organised by CEPS and the CFE on November 9th pointed out that fears about tax competition spurring a race to the bottom in terms of social welfare policies are exaggerated. Revenue from corporate income taxation only represents a small fraction of total government receivables, as personal income taxation and social security contributions account for the bulk of government revenue. Second, as long as cross-border spill-overs are minor, the subsidiarity principle dictates that member states should be able to fully exercise their sovereignty in the domain of taxation. Third, the wave of outsourcing to Central and Eastern Europe has not been driven so much by tax considerations - although lower tax rates are indeed a factor in attracting foreign investments as it has been by the substantially lower costs of labour: firms not only exploit the savings associated with paying less for a unit of labour per hour, but also the lower effective cost of labour in the new member states. Fourth, one must make the distinction between nominal and effective tax rates. For example, even though Germany has high statutory corporate tax rates, the effective tax rates are considerably lower due to the network of loopholes that exists. Finally, the debate cannot be broadly characterised as a power struggle between powerful multinationals and governments: the assumption that firms always favour tax competition must be conditioned by the realisation that companies operating on a pan-European basis do in fact favour a limited degree of tax harmonisation in order to reduce the costs of complying with 25 different tax codes. Anyhow, ECJ case law as well as the introduction of the IFRS will help contribute to the convergence of taxation structures in the EU in the long run. Thus, harmonisation may paradoxically arise precisely through a combination of tax competition and political choices such as the IFRS aimed at improving the functioning of the internal market, coupled with ECJ case law.
 
See the slides of Mr. Rödler’s presentation.