The remedy may be worse than the disease: A critical account of The Code of Conduct

Joeri Gorter and Khaled Moussa Diaw

CPB Discussion Papers from CPB Netherlands Bureau for Economic Policy Analysis

Abstract: The Code of Conduct for business taxation may, diametrically opposed to its intention, aggravate tax competition between EU Member States. The reason is that it induces, by restricting harmful tax practices, cuts in generic tax rates that may reduce tax revenue even further. If one presupposes a benevolent utility maximising government, then this worsens the underprovision of public goods. We show within a standard tax competition framework that this scenario is more likely to unfold with a higher upper bound for nondistortionary taxes, a higher responsiveness of mobile capital to tax rate differentials, and a smaller endowment of internationally mobile capital.

Keywords: tax; taxes; business tax; tax competition; tax discrimination; capital mobility; EU; european union; code of conduct (search for similar items in EconPapers)
JEL-codes: H21 D60 L51 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-pbe
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