Working Paper: NBER ID: w3248
Authors: Hanswerner Sinn
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.
Keywords: Tax Harmonization; Tax Competition; Europe; VAT Rates; Economic Integration
JEL Codes: H2; H3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| removal of trade barriers (F13) | exacerbate existing distortions (H31) |
| exacerbate existing distortions (H31) | capital flight into low-tax countries (F21) |
| tax harmonization (H26) | resource allocation efficiency (D61) |
| removal of border controls in 1993 (F55) | increased resource allocation efficiency (D61) |
| removal of border controls in 1993 (F55) | distortions due to diverging VAT rates (H31) |
| tax bases harmonization (H26) | efficient international allocation of capital (D61) |
| tax competition (H26) | undermine income redistribution policies (H31) |