The right way to harmonise taxes, if you must do it

With the news earlier this week of business support for a common corporate tax base in the EU, it seems little will stop Brussels from getting its way. So if we're going to have tax harmonisation forced upon us, let's at least make sure it's done in the right way. It's time, then, to re-visit a Wall Street Journal article, written in 2004, which still provides the answers:


"There are three ways of providing a common tax base. Two of those systems facilitate jurisdictional competition, while the other would create a cartel for politicians:

Option No. 1: The optional European company charter would give a firm the choice to register -- at least for tax purposes -- as a pan-European company. The rules for this new entity, including the definition of taxable income, would be determined in Brussels. Such a system might even allow a company to file just one tax return, with the money then allocated to individual nations based on a neutral criterion such as the company's sales. This would reduce compliance costs compared to the current system while also containing a built-in safety mechanism to protect against higher tax burdens. Simply stated, if European politicians and bureaucrats got too greedy and adopted a flawed measure of taxable income, companies could stick with -- or return to -- the status quo. This freedom of choice would ensure that a common tax base could not be used as a tool to raise business taxes.

Option No. 2: Optional home-state taxation would give a firm the ability to choose the tax base of its home country (presumably where it is headquartered) and to use that definition of taxable income for all 25 EU nations. This would eliminate the complexities of using 25 different methods of calculating income, and it also would facilitate competition between nations since companies presumably would gravitate to the nations that had the most pro-business tax base.

Even if companies did not want to move their headquarters (assuming this is how "home-state" would be defined), they would have a strong incentive to make sure that their government did not utilize a disadvantageous definition of income. This approach, by giving companies the ability to choose their tax base, ensures that a common tax base could not be used as a tool to raise business taxes.

Option No. 3: A mandatory European tax base would require all companies in all nations to calculate their taxes based on a single definition of income. This monopoly approach would make it easier to file 25 tax returns, but governments would be tempted to increase the aggregate tax burden by selecting the wrong common tax base in the absence of jurisdictional competition. Why exercise fiscal discipline, after all, if they think corporate taxpayers are a captive audience?"


To read the full article, click here.


How much chance Brussels will get it right? Don't bet on it.

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