Coordinating Corporation Taxes in the European Union: Subsidiarity in Action!

The future of capital income taxation in the European Union (EU) hinges importantly on the future of the corporation tax (CT). Under the EU treaty, the Member States do not have to harmonize their CT rates or bases. Harmonization is to be “approximated” only if required for the functioning of the internal market. But greater approximation of capital income tax systems could promote investment, improve the tax burden distribution and, last but not least, reduce compliance and administrative costs. While the normal return on mobile capital cannot be taxed at the same high rates as labour income, tax coordination should enable the Member States to capture some of that return. After all, capital is less mobile in the EU as a whole than between individual states. Tax coordination should also make it possible to tax firm-specific rents more effectively (although not at the same high rates as location-specific rents, if separately identifiable). Furthermore, there is no reason why foreign share- and bondholders should be completely exempt from tax. Beyond that, the CT is needed as a backstop to the individual income tax (PT). Without a CT, the labour income of the self-employed would be retained in corporate form and largely escape the PT. In short, effective if moderate taxation of capital income seems desirable.1