The Dilemmas of Tax Coordination in the Enlarged European Union

This study evaluates the economic effects of corporate tax coordination in the enlarged European Union (EU) using a computable general equilibrium model. Our main findings are as follows: (i) Corporate tax coordination can yield modest aggregate welfare gains. The 2004 enlargement of the EU has increased the potential gains from tax harmonization, provided corporate tax rates and tax bases are harmonized at their unweighted averages. (ii) All scenarios for coordination leave some EU Member States as winners and others as losers. An agreement on tax coordination is therefore likely to require elaborate compensation mechanisms. (iii) The large and diverse country effects suggest that Enhanced Cooperation for a subset of the Member States may be the most likely route towards tax coordination. (iv) Identifying winners and losers from coordination for the purpose of a compensation mechanism may be problematic, since countries experiencing gains in GDP and welfare tend to lose tax revenues, and vice versa