Tax Harmonization versus Tax Competition: A Review of the Literature

This leaves us with but one remaining perspective on the taxation question: That of support for the effects of entirely unhindered tax competition. This final viewpoint obviously stands in direct opposition to the supporters of strict tax harmonization, whereas the rest of the literature nicely occupies the gray area in between. The logic championing tax competition is simple: tax competition will reduce government revenues, and by being forced to maintain sound public finances, governments will reduce their superfluous and inefficient spending. Not surprisingly, this body of literature derives its support from conservative policymakers and Public Choice theorists, who assert that, "competition in general, and competition among governments in particular, is beneficial because it reduces government waste and disciplines politicians." (Janeba, 2) This reasoning is adopted almost word-for-word by scholars such as Alfred Boss: "If tax rates are cut in the process of competition, government expenditures have to be reduced; this helps to avoid waste and inefficiencies in the public sector." (Boss, 1) While this argument is not nearly as complex as its counterparts, it raises the interesting possibility that reducing government revenues is not necessarily welfare-decreasing. Echkard Janeba and Guttorm Schjeldrup share this viewpoint in their essay on "Why Europe Should Love Tax Competition..." In examining the effect of increasing capital mobility, the authors come to the contentious conclusion that, "increasing competition is likely to improve voter utility…" (Janeba, 3) In addition to this, the EU members' (mostly) parliamentary systems are compared to the US presidential-congressional system, and it is claimed that, "parliamentary democracies have higher taxes, higher public goods provision, and higher government waste." (Janeba, 3) This provides further support for the argument that reductions in EU member government revenues may indeed be welfare-increasing.

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