Nova workboard

a blog from young economists at Nova SBE

Tax competition

This blog is about tax competition between European Union member states. Many countries try to attract foreign firms by charging  low tax rates. In this blog, I try to give arguments why the tax competition between European member states to attract multinational firms should be prevented.

For a lot of countries such as The Netherlands a favourable tax regime is an easy way to compete with bigger countries in Europe. Countries that are attractive to especially American multinationals are Luxemburg, Switzerland and Ireland. Countries like Germany and France are not that dependent on favourable tax circumstances. These countries have a larger market they don’t only have more potential customers, but also more high educated personnel. By competing only on taxes governments do not compete on more complex areas like infrastructure. This has negative consequences for the economy.

At the moment, there is a division between the big countries and the smaller countries. The bigger countries want to stop the smaller fellow member states. The other countries are missing out on a large amount of taxes. There is a mismatch between the place where income is taxed and where the companies earn their revenue. Technology companies like Google are not required to pay taxes in all European countries since the European law only requires a corporation to pay taxes if these firms have physical activities in a country. For example, Google taxed their whole European income in Ireland.

Another argument against these tax wars is that the normal inhabitants of these countries are designated to pay the bill. The citizens have to bear the costs of the tax competition between the governments. Although, the governments have mutual agreements to don’t compete with fellow member states. Nobody really seems to respect these agreements. The European Commission has to do more to prevent the mutual tax war.

The national governments miss out on a lot of revenues. If they charged higher corporate taxes the government revenues would be a lot higher. The European agencies estimate the loss of taxes by the mutual tax competition on 50-215 million euro a year. The question is whether these firms compensate these lower taxes by contributing to the economy in another way. Governments have to examine how many jobs these firms generate.  An important function of taxes is to redistribute income between people in society. However, if firms earn a large part of the income in the complete economy the fundamental values of the taxing system are in danger. Citizens will lose their willingness to pay taxes if there are no measures.

By attracting businesses with very low taxes a very important argument the governments do not consider is that multinationals are dependent of the things that are done with taxes. Businesses need a good infrastructure, an educated work force and a good functioning government. Large multinationals are a one of the heaviest users of the benefits from the tax spending. Therefore, it is not logically they are not taxed proportionally to the benefits of the taxes.

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Author: studentnovasbe

Master student in Nova Sbe

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