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Double income taxation as a response to tax competition in the EU

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Abstract

The following article discusses the undesired consequences of tax competition and presents a proposal for tax reform derived from a very general normative basis: the idea of exchange between governments and taxpayers and the principle of equality. The aim is to tie tax competition to jurisdictional competition in general and thereby maintain tax competition as a productive procedure instead of abolishing it by harmonising tax systems. Surprisingly, systematic double taxation of income, as factor income following the source principle and as citizens' income following the residence principle, is one element of the solution. The other is unitary taxation of business income.

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References

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    cf. M. Günkel: Standortauswahl unter europäischen Staaten, op. cit. p. 41). In Ireland, foreign companies are clearly privileged as well. Cf. C. Pinto: EU and OECD to fight Harmful Tax Competition: Has the Right Path Been Undertaken?, in: Intertax, Vol. 26, 1998, pp. 386–410, here pp. 397f.; M. Walsh: Ireland, EU Agree to Major Changes in Irish Tax Regime, in: Tax Notes International, 3.8.1998, pp. 282–284. This behaviour by states is sometimes called “tax dumping” because tax rates for international investors are below those for domestic firms (H.-H. Härtel: Steuerdumping oder Steuerwettbewerb?, in: Wirtschaftsdienst, Vol. 77, 1997, p. 492; H.-G. Grigat: Verlagerung von Unternehmensgewinnen in das Ausland und Steuerdumping, in: WSI Mitteilungen, Vol. 50, 1997, pp. 404–414).

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    L. Gerken: op. cit.,, pp. 35–43.

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    E.g. H.-W. Sinn: Tax Harmonization and Tax Competition in Europe, in: European Economic Review, Vol. 34, 1990, pp. 489–504; H.-W. Sinn: How Much Europe? Subsidiarity, Centralization and Fiscal Competition, in: Scottish Journal of Political Economy, Vol. 41, 1994, pp. 85–107; H.-W. Sinn: Das Prinzip des Diapositivs. Einige Bemerkungen zu Charles B. Blankart, in: Wirtschaftsdienst, Vol. 76, 1996, pp. 92–94; H.-W. Sinn: Das Selektionsprinzip und der Systemwettbewerb, in: A. Oberhauser (ed.): Fiskalföderalismus in Europa, Berlin 1997, Duncker & Humblot, pp. 9–60. For an overview and critique of neoclassical tax competition theory see M. Streit, D. Kiwit: Zur Theorie des Systemwettbewerbs, in: M. Streit and M. Wohlgemuth (eds.): Systemwettbewerb als Herausforderung an Politik und Theorie, Baden-Baden 1999, Nomos, pp. 13–48.

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    Cf. the report of the Ruding Committee, op. cit. Commission of the European Communities: Report of the Committee of Independent Experts on Company Taxation, Luxembourg 1992.

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    E.g. H.-W. Sinn: Tax Harmonization…, op. cit. and Tax Competition in Europe, in: European Economic Review, Vol. 34, 1990, pp. 489–504; H.-W. Sinn: How Much Europe?…, op. cit. Subsidiarity, Centralization and Fiscal Competition, in: Scottish Journal of Political Economy, Vol. 41, 1994, pp. 85–107. For an opposing argument, again from a neoclassical point of view, cf. C. Fuest: Interjurisdictional Competition and Public Expenditure: Is Tax Co-ordination Counterproductive?, in: FinanzArchiv, Vol. 52, 1995, pp. 478–496.

  20. 22

    For example, a north-south gradient in tax auditing can be observed among the German Länder (H. J. Kröger: Betriebsprüfung und Steuerfahndung 1997 im Ländervergleich, Bremen 1999, Arbeiterkammer Bremen).

  21. 23

    The European Union has been named a “tax cartel” (C. E. McLure: Tax Competition: Is What's Good for the Private Goose Also Good for the Public Gander?, in: National Tax Journal, Vol. 39, 1986, pp. 341–348, here p. 346; G. Larbig: Perspektiven des europäischen Steuerwettbewerbs, in: Wirtschaftsdienst, Vol. 78, 1998, pp. 743–749, here p. 745), a “harmonisation cartel” (B. S. Frey, R. Eichenberger: To Harmonize or to Compete? That's Not the Question, in: Journal of Public Economics, Vol. 60, 1996, pp. 335–349, here p. 341), and a “fortress” in tax competition (B. Huber: Der Steuerwettbewerb: Gefahr oder Chance?, in: List Forum für Wirtschafts- und Finanzpolitik, Vol. 23, 1997, pp. 242–256, here p. 254).

  22. 24

    Commission of the European Communities: Towards Tax Co-Ordination…, op. cit. in the European Union: A Package to Tackle Harmful Tax Competition, COM(97), 495final, 1997.

  23. 25

    For the criticism of the EU policies towards tax competition see G. Larbig, op. cit. Perspektiven des europäischen Steuerwettbewerbs, in: Wirtschaftsdienst, Vol. 78, 1998, pp. 743–749, here p. 745; and C. Pinto, op. cit. EU and OECD to fight Harmful Tax Competition: Has the Right Path Been Undertaken?, in: Intertax, Vol. 26, 1998, pp. 386–410, here pp. 397f.

  24. 26

    Therefore, the critical assessment of Switzerland and Luxembourg is not surprising (OECD: Harmful Tax Competition: An Emerging Global Issue, Paris 1998, Annex II, pp. 73–78). Severe criticism also by Pinto and A. W. Wright: Review: OECD Harmful Tax Competition Report Falls Short, Harmful Tax Competition: An Emerging Global Issue, in: Tax Notes International, 17.8.1998, pp. 461–463. Approvingly, however, J. Francke: The 1998 OECD Report on Harmful Tax Competition; Just Right, in: Tax Notes International, 28.9.1998, pp. 979–981; and E. Osterweil: In Defense of the OECD Report on Harmful Tax Competition, in: Tax Notes International, 21.9.1998, pp. 895–896.

  25. 27

    E.g. R. A. Musgrave: The Theory of Public Finance, New York 1959, McGraw-Hill.

  26. 28

    Cf. the discussion about the necessity of introducing the most favoured nation status in order to align bilateral treaty law to the EC Treaty, e.g. A. J. Rädler: Most-Favoured-Nation Concept in Tax Treaties, in: M. Lang (ed.): New Developments in International Tax Law, Vienna 1997, Linde, pp. 1–14; M. Lang: Kein Verstoß von Doppelbesteuerungsabkommen gegen die Grundfreiheiten des EGV?, in: Internationale Wirtschaftsbriefe, Vol. 14, 1996, pp. 667–670; M. Lang (ed.): Multilateral Tax Treaties: New Developments in International Tax Law, Vienna 1997, Linde.

  27. 29

    See L. Gerken, J. Märkt, G. Schick: Internationaler Steuerwettbewerb, Untersuchungen zur Ordnungstheorie und Ordnungspolitik, 40, Tübingen 2000, Mohr Siebeck, pp. 14f., 215–223, for a detailed discussion of this aspect.

  28. 30

    Cf. L. Gerken: Von Freiheit und Freihandel. Grundzüge einer ordoliberalen Außenwirtschaftstheorie, Untersuchungen zur Ordnungstheorie und Ordnungspolitik, 39, Tübingen 1999, Mohr Siebeck, p. 152.

  29. 33

    Scientific Council at the German Federal Ministry of Finance, op. cit. (Feforming International Capital Income Taxation, Bonn 1999, p. 50) proposed aligning the German tax system consistently to either the residence principle or the source principle. Cf. also the report of the Ruding Committee (Commission of the European Communities: Report of the Committee of Independent Experts on Company Taxation, Luxembourg 1992).

  30. 36

    Others argue that progressive taxation can be defended on the grounds of benefit taxation (e.g. K. Wicksell: Finanztheoretische Untersuchungen nebst Darstellungen und Kritik des Steuerwesens Schwedens, Jena 1896, Gustav Fischer, p. 113.

  31. 37

    On negative income tax see OECD: Negative income tax: an approach to the co-ordination of taxation and social welfare policies, Paris 1974.

  32. 39

    J. Märkt: Verändert der Steuerwettbewerb systematisch das Steuersystem?, Diskussionsbeiträge des Walter Eucken Instituts, Freiburg 2000.

  33. 40

    E. Wenger: Gleichmäßigkeit der Besteuerung von Arbeits- und Vermögenseinkünften?, in: Finanzarchiv, Vol. 41, 1983, pp. 207–252; E. Wenger: Warum die Finanzwissenschaft bei der Suche nach einer theoretischen Basis für die Einkommensteuer erfolglos bleiben mußte?, in: C. Smekal, R. Sendlhofer, H. Winner (eds.): Einkommen versus Konsum, Ansatzpunkte zur Steuerreform-diskussion, Heidelberg 1999, Physica, pp. 37–63.

  34. 42

    For a discussion on different apportionment formulas cf. U. Johannemann: Entwicklung und Stand der Unitary Taxation Method, Münster 1997, Lit, pp. 58–104.

  35. 43

    Cf. L. Gerken, J. Märkt, G. Schick, op. cit., pp. 186–195.

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Correspondence to Lüder Gerken or Jörg Märkt or Gerhard Schick.

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Gerken, L., Märkt, J. & Schick, G. Double income taxation as a response to tax competition in the EU. Intereconomics 36, 244–254 (2001). https://doi.org/10.1007/BF02928978

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Keywords

  • Transfer Price
  • Multinational Firm
  • Factor Income
  • Unitary Taxation
  • Double Taxation