Opening Europe's borders in 1993 makes the allocation of resources more vulnerable to
differences in the national tax rates. The first part of the paper demonstrates that direct
consumer purchases will imply distortions resulting from diverging VAT rates and it
clarifies why the frequently cited exchange rate argument is of no help. The second part
shows that, in the case of direct taxation, a harmonization of tax bases is more important
than a harmonization of tax rates. Either the combination of true economic depreciation
and residence taxation or the combination of immediate write-off and source taxation will
result in an efficient international allocation of capital, independent of the national tax
rates. The paper concludes with a verdict on tax competition arguing that free migration
renders a policy of income redistribution, which is interpreted as insurance against the risk
of lifetime careers, impossible.
*Published:
European Economic Review, Vol. 34, pp. 489-504, (1990).
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