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Tax Harmonization and Tax Competition in Europe

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  • Hans-Werner 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.

Suggested Citation

  • Hans-Werner Sinn, 1990. "Tax Harmonization and Tax Competition in Europe," NBER Working Papers 3248, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:3248
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    1. Charles M. Tiebout, 1956. "A Pure Theory of Local Expenditures," Journal of Political Economy, University of Chicago Press, vol. 64(5), pages 416-416.
    2. Boss, Alfred, 1989. "Steuerharmonisierung und Realisierung des EG-Binnenmarktes," Open Access Publications from Kiel Institute for the World Economy 1395, Kiel Institute for the World Economy.
    3. Boss, Alfred, 1989. "Steuerharmonisierung und Realisierung des EG-Binnenmarktes," Wirtschaftsdienst – Zeitschrift für Wirtschaftspolitik (1949 - 2007), ZBW - Leibniz Information Centre for Economics, vol. 69(5), pages 249-251.
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