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Tax competition and foreign direct investment - Cepii

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					       Tax competition vs. tax
  harmonization: Where do we stand?

      CEPII-CERGE Conference on Tax competition in the EU25
                 Prague, December 16-17, 2004

Agnès Bénassy-Quéré                           Jean Pisani-Ferry

                                                   Université
                                                   Paris-
                                                   Dauphine
                     Outline

1.   The issues
2.   Costs and benefits of tax competition
3.   Ways forward




                                             2
    Desirable features of taxation in EU25
   Respect for national preferences
       Size and role of the public sector
       Degree of inter-personal redistribution
       Tax incentives (eg. human vs. physical capital accumulation)
   Incentive to growth and jobs
       Foster overall efficiency of the public sector
       Ensure appropriate distribution of the tax burden
   Coordination
       Correct locational/size disadvantage and foster convergence
       Avoid futile beggar-thy-neighbour policies
                                                                   3
      Benefits of tax competition
4 arguments
     Diversity of preferences (but not that large diversity..)
     Correction of locational disadvantage
     Pressure on public sectors
          But competition should be on value for money, not on specific
           revenues
     Response to domestic political distorsions (Tabellini):
          Little evidence of excess capital taxation
          Should political distorsions be corrected in this way?
          Should they be corrected at all (Franco)?
     Correction of vertical distorsions (Brülhart):
          Little evidence for Europe

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    http://www.mof.gov.cy & Slovenia : http://www.stat.si).
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                                                                                                                            15
                                                                                                                                                                              burdens




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    Sources : Eurostat ; OeNB, Focus on transition, 2003-2 (Hungary & Poland) ; national sources (Cyprus :




                                                                                                               Da ande
                                                                                                                   nem
                                                                                                                           ark
                                                                                                                                                                  National preferences: Overall tax




                                                                                                                      Suè
                                                                                                                            de
5
Corporate tax differential with EU15 average
       and distance to Luxembourg
 10

                                          Italie   Espagne        Malte
  5                Pays-Bas    Autriche                                       Grèce
       Belgique France
                       République tchèque                         Portugal
  0                              Danemark
           Royaume-Uni                       Suède
                                     Pologne                        Finlande

  -5                                                               Estonie
                Allemagne                Slovaquie
                              Slovénie
 -10
                                      Hongrie
                                                       Lettonie
 -15
                                         Irlande       Lituanie

 -20
           y = -4,2505Ln(x) + 25,82                                                            Chypre
                  R2 = 0,1252
 -25
       0               500                10 000         10 500              20 000   20 500            30 000



                                                                                                                 6
           Costs of tax competition

3 arguments
 Distorsions in investment location (Sarkozy): weak
       With low elasticities (CPB, CEPII), lower tax rates may not
        go much beyond correcting locational disadvantage
   Inappropriate distribution of the tax burden (excess
    taxation of immobile labour): medium
       Aggregate evidence seems to confirm shifting of burden
       Some cross-country evidence also, but not very strong
   Opportunities for profit-shifting for tax avoidance:
    strong
       Micro (Gérard) and macro (CPB) evidence of high elasticity
       Depsite little evidence of tranfer pricing (Swenson)
                                                                      7
                                           Tax rates across EU25
                            50                                                                             50

                            45                                                                             45




                                                                           Tax wedge on unskilled labour
                            40                                                                             40
Corporate income tax rate




                            35                                                                             35

                            30                                                                             30

                            25                                                                             25

                            20                                                                             20

                            15                                                                             15

                            10                                                                             10

                            5                                                                              5

                            0                                                                              0
                                 30   35   40       45      50   55   60                                        30   35   40     45       50   55   60

                                            Overall tax burden                                                            Overall tax burden




                                                                                                                                                    8
       Some disturbing trade-offs
   Measures that reduce opportunities for profit
    shifting may increase locational competition
    (Gérard)
   Tax coordination does not necessarily lead to
    higher taxes (Häufler)
   Thus: do not attempt at hitting three birds with
    one stone
   Priority should be to limit tax avoidance

                                                       9
                      Options
   Overall harmonisation is a non-starter
   Even harmonisation of tax bases +
    consolidation is unlikely
   Thus, choice between
     Watered-down solutions (mutual recognition,
      options, targeted solutions) – Maggiulli, or
     Coalition of the willing (enhanced cooperation)

   Beware of second best: some progress towards
    harmonisation may be harmful
                                                        10
                          Ways forward
   Enhanced cooperation
       Interesting intellectual support for partial harmonisation –
        Bucovetsky
            May lead to stable, large coalitions
       Benefits to the participants: less distorsions, less shifting
       Compatible with treaty
       Differentiate – lower floor for NMS?
   European corporate income tax (Büttner)
       Additional benefit – less demand for juste retour


                                                                        11

				
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posted:11/23/2012
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