Tax competition V Tax Harmonization in an enlarged European Union - Research Proposal Example

Some people believe tax harmonization creates unity and a level playing field, some believe its stifles competition and creates a socialist economic bloc. In this thesis I will examine both sides of the argument by looking at how the debate and policy has evolved over the years with a specific focus on how tax harmonization affects multinational corporations—whether it encourages them to invest in the EU or to pull out. Part of the basis of the European arrangement was the centralization of monetary policy.

This was a huge amount of sovereignty for individual countries to give up. The assumption underlying this ceding of power by national governments really is that all economies within the European Union are created equally and the same measures for each economy are the appropriate way forward. This itself was controversial enough, but at the time left the national governments to at least set their own tax rates and compete for business by having differing corporate tax rates. This idea too soon bit the dust.

Countries like France and Italy with high corporate tax rates were jealous that a country such as Ireland with a low tax rate was able to drum up so much business. They began to push for a single minimum rate across the whole of the EU. For high tax countries this levelled the playing field, but forcing more competitive countries to become less so—for low tax countries—often with much smaller economies to begin with—they had to punish companies that had come to them in the first place seeking a safe haven for investment.

The simple knee-jerk logic is this: As factor mobility increases within the EU, pressure will be placed on member states to lower their tax rates on mobile factors in order to attract business. This unchecked competition will lead to a race to the bottom in which tax rates will dip so low as to threaten countries abilities to supply public goods. In response, one might argue for the necessity of strict