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Globalization with the free movement of capital has increased tax competition among countries. Enterprises relocate their headquarters to neighboring countries that offer incentives for business relocation such as tax breaks. This phenomenon is called “race to the bottom”.

As a result, public revenue decreases and governments are forced to cut public spending since tax revenues become less, and at the same time, they increase individuals’ income revenue tax, property taxes, and consumption taxes.

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Some do not object to this and support public spending cuts, but few check whether public spending cuts are really unnecessary because, as we know, many public expenditures such as, for example, on defense equipment, enjoy a “protection” policy. Supporters of public spending cuts (and the corresponding tax burden on individuals through privatization of social institutions, etc.) argue that public expenditure that supports social services, hospitals and schools reduces EU’s export competitiveness, but they do not take into account the 30% increase in exports in Western Europe in the 1950s and the steady 40% export growth since the 1960s. Consequently, reducing public spending on social care to rationalize the state budget and increase competitiveness is a myth.

Tax competition among countries, as mentioned above, transfers the burden of taxation into salaried labor, and therefore, tax evasion and corruption will increase. Moreover, the decline in purchasing power caused by the tax burden on individuals’ income persons is a disincentive for the so much-discussed growth.

One could argue that immigration could reduce the impact on social spending. This would be the case if migrants can find work and get taxed for their income, and thus their taxation would help to maintain social benefits. However, this would happen in an economy that could create jobs and migrants would have a high educational background. However, when immigrants have a low educational background and the host country is plagued by unemployment and economic crisis (as is the case with Greece), their budgetary costs (ie benefits and allowances received by immigrants burden state budget) are high, and so the taxes on the natives’ income will further increase.

A solution to tax competition, as proposed by some researchers, would be tax coordination among EU countries by introducing a single tax rate, but this is not possible due to the lack of political coordination among these countries. On the contrary, where there was some form of political coordination in the EU countries, it was usually at the expense of employees and in particular employees from peripheral countries i.e. the countries of Southern Europe.

Tax co-ordination, along with the fight against the huge tax evasion of multinationals, could be a means of fairer fiscal burden-sharing, and not by further burdening the permanently tax suffering employees and pensioners.

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Fotini Mastroianni

Written by

Economist, MBA Lecturer,Writer,Blogger mastroyanni.blogspot.gr

Data Driven Investor

empower you with data, knowledge, and expertise

Fotini Mastroianni

Written by

Economist, MBA Lecturer,Writer,Blogger mastroyanni.blogspot.gr

Data Driven Investor

empower you with data, knowledge, and expertise

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