Comment on Sørensen: Tax coordination in the EU: what are the issues?

In his paper, Sorensen gives a clear and thorough survey of some important theoretical and practical issues regarding tax coordination in the EU with respect to indirect and direct taxes. Its most original contribution to the discussion on tax policy lies in the quantitative estimation of the welfare gain of the harmonisation of corporate taxes, however. In this comment, we will therefore focus only on that part. Sorensen argues that there is a good case for a fully harmonised corporate tax with a formula-based apportionment of the revenues across member states as the long-run goal of EU tax policy. This eliminates tax distortions in the location of economic activity within the single market and almost completely removes the incentive for tax competition between countries. He estimates that this would yield a welfare benefit of 0.4 per cent of GDP. However, tax harmonisation has important implications that go beyond the efficiency of the capital market. As the author notes, tax competition may serve as a healthy constraint on the ability of governments to overtax citizens (and companies). But tax competition also forces countries to offer high-quality public goods. Furthermore, under tax harmonisation, countries lose the opportunity to tax location-specific rents, thus making the tax system less efficient. Before concluding that tax harmonisation should be the long-run goal of EU tax policy, all benefits and costs should be balanced against each other. Given the magnitude of the benefits—which, in Sorensen’s own words, are disappointingly small—it is not obvious that the benefits of tax harmonisation will outweigh the costs of abandoning tax competition. The case for tax harmonisation would be stronger, however, if the growing mobility of capital forces countries to undercut each other’s tax rates in order to retain or expand their tax bases. But is there such a “race to the bottom”? Sorensen notes that labour taxes have risen * Hans Vijlbrief is director and Jan Koeman is a senior policy advisor of the economic policy directorate of the Dutch Ministry of Economic Affairs, The Hague. The first author is also professor at the Department of General and Development Economics of the Vrije Universiteit in Amsterdam.