50 years of corporate tax harmonization initiatives in the

EU: Is Enhanced Cooperation the solution?

Hendrik Vrijburg Erasmus University Rotterdam

Tax harmonization

• History on corp. tax harmonization is long– Neumark (1962) – Bolkestein (2001)– but unsuccessful in general– today: Common Consolidated Corporate Tax Base (CCCTB)

• … welfare effects are ambiguous theoretically– Internalized tax spillovers (+)– Improved allocation of resources (+)– Reduced compliance costs (+)– Lack of government disciplining (-)– Uniform policy imposed on heterogeneous preferences (-)

• … and asymmetric across countries

Tax HarmonizationECA: ArgumentsECA:Conclusion

Tax harmonization

• Welfare gain in detailed simulation studies:– Max 0.20% of GDP for full harmonization– Max 0.12% of GDP for only base harmonization with CCCTB– Only improved allocation of economic resources!

• Proposition 1:“The gains from corporate tax harmonization are small and asymmetrically distributed across countries. Therefore, a grand coalition of all countries might not be in the interest of all potential members and smaller coalitions will arise.”

Tax HarmonizationECA: ArgumentsECA:Conclusion

ECA: Arguments

• Enhanced Cooperation Agreement (ECA)• Amsterdam (1997) and Nice (2003)• Details:

– Subset of countries harmonize policies– Mechanism of last resort– Minimum of 8 countries– Always open to participation of outsiders– Only ECA members decide on policies– Policies should not oppose the interests of the EU

Tax HarmonizationECA: ArgumentsECA:Conclusion

ECA: Arguments• General Arguments

– same as under full harmonization• Theoretically welfare improving:

– if interests of the insiders are aligned with the interests of the outsiders

– as a pilot group from which outsiders can learn• But..

– Welfare gains ECA even smaller: Max 0.05% of GDP– Gains from cooperation are “exported”– And highly uncertain given missing arguments

Tax HarmonizationECA: ArgumentsECA:Conclusion

ECA: Conclusion• But we must be careful

– Self selection into coalitions– Strategic choice of common policy– New vested interests are created!

• Proposition 2:

“Allowing enhanced cooperation between a subset of countries in the EU is a dangerous policy direction which yields only a modest welfare gain compared to a grand coalition.”

Tax HarmonizationECA: ArgumentsECA:Conclusion

Propositions

– Proposition 1:“The gains from corporate tax harmonization are small and asymmetrically distributed across countries. Therefore, a grand coalition of all countries might not be in the interest of all potential members and smaller coalitions will arise.”

– Proposition 2:“Allowing enhanced cooperation between a subset of countries of countries in the EU is a dangerous policy direction which yields only a modest welfare gain compared to a grand coalition.”