- George Kopits
- Published Date:
- March 1992
© 1992 International Monetary Fund
Library of Congress Cataloging-in-Publication Data
Tax harmonization in the European community : policy issues and analysis / edited by George Kopits.
p. cm. — (Occasional paper, ISSN 0251-6365 ; 94)
Includes bibliographical references.
ISBN 9781557752253 : $15.00 ($12.00 students)
1. Taxation — European Economic Community countries. 2. Fiscal policy — European Economic Community countries. I. Kopits, George. II. International Monetary Fund. III. Series: Occasional paper (International Monetary Fund) ; no. 94.
336.2’0124—dc20 91-44899 CIP
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The following symbols have been used throughout this paper:
… to indicate that data are not available;
— to indicate that the figure is zero or less than half the final digit shown, or that the item does not exist;
– between years or months (e.g., 1991–92 or January–June) to indicate the years or months covered, including the beginning and ending years or months;
/ between years (e.g., 1991/92) to indicate a crop or fiscal (financial) year.
“Billion” means a thousand million.
Minor discrepancies between constituent figures and totals are due to rounding.
The term “country,” as used in this paper, does not in all cases refer to a territorial entity that is a state as understood by international law and practice; the term also covers some territorial entities that are not states, but for which statistical data are maintained and provided internationally on a separate and independent basis.
As an integral part of completing the single European market, tax harmonization commands attention not only within the European Community (EC) but also beyond its frontiers. Indeed, expansion of the single market to the European Economic Area (EEA)—agreed among member countries of the EC and of the European Free Trade Association (EFTA)—and eventually to a number of Central and East European countries in transition from central planning, suggests that the Community’s approach to tax harmonization will apply in a far wider context than envisaged at the outset. Furthermore, transformation of the U.S.S.R. into the Commonwealth of Independent States has generated considerable interest in EC tax harmonization on the part of former Soviet republics as well. In general, many IMF member countries—in their capacity as EC trade partners or as suppliers of capital or services—are understandably interested in the repercussions of the single market and tax harmonization on their economies.
The essays in this Occasional Paper were prepared in the Fund’s Fiscal Affairs Department by members of the former Industrial Countries Unit, under the direction of George Kopits. An earlier version of the first three chapters was submitted to the IMF’s Executive Board for discussion. The authors are indebted for useful comments to Antonio Cabral, Michael Emerson, Morten Jung-Olsen, Marc Van Heukelen, and other members of the EC Commission staff; to Julian Alworth and Bernard Snoy; and to several Fund colleagues. Chris Wu provided computational assistance, and Ahwerah Vichailak and Luzmaria Monasi word-processed drafts of the manuscript. Within the External Relations Department, James McEuen edited the final manuscript and coordinated production, and Alicia Etchebarne-Bourdin provided typesetting assistance. The opinions expressed are those of the authors and do not necessarily reflect the views of the EC Commission or the Fund.
Chapter I discusses the case for harmonizing the taxation of commodities and capital income in the context of the single market, in particular upon removal of border controls and restrictions on factor movements, respectively. It outlines the relevant principles of international taxation, from the points of view of allocative efficiency and equity, and discusses certain key administrative issues. Against this background, the chapter presents an overview of tax harmonization proposals and related measures and of their likely microeconomic and macroeconomic effects, including effects on non-EC economies, as well as major systemic implications.
Chapters II and III contain extensive surveys of the theoretical literature, of alternative tax harmonization proposals, and of preliminary estimates of the effects of these proposals (mainly on resource allocation, income distribution, and the government budget). Whereas the focus of Chapter II is the harmonization of the value-added tax (VAT) and excises (on tobacco products, alcoholic beverages, and mineral oils), Chapter III concentrates on the harmonization of taxes on corporate income and interest income. Both chapters discuss administrative measures needed to maintain the level and intercountry allocation of revenue from these taxes.
Chapter IV provides estimates of effective rates of corporate income taxation for each EC member country (by source of financing and asset type) under various scenarios for harmonization of statutory tax rates, tax bases, or both. The corresponding tax wedges are used to calculate the effect of tax harmonization under each scenario on the long-run allocation of capital among EC member countries. These simulations are performed on the basis of a computable general-equilibrium model, both in a closed form and open to the rest of the world.
Chapter V is devoted to an analysis of the EC Structural Funds, which are to play an increasingly significant compensatory role in certain regions that experience adverse revenue consequences of tax harmonization in particular, and welfare losses associated with the completion of the single market in general. Partly on the basis of past empirical evidence, an attempt is made to assess the adequacy of the Funds as a social safety net and as a supplement to, rather than a substitute for, national assistance to depressed regions.