CONCLUSIONS

Tax Harmonization With this in mind, it seems that the lack of progress in European tax harmonization is something which should not be regretted too much. The experience of the EC has shown that every movement in the direction of tax harmonization which does not respect the diversity of tax systems, is doomed to fail. The need for tax harmonization does, to a large extent, depend on the objectives of integration and harmonization must normally be justified on a case-by-case basis while applying the subsidiarity principie. More specific rules on the extent to which harmonization should be achie ved cannot be given by economic theory and will probably vary per country or federation. Many tax harmonization developments in existing federations stem from histórica!

evolution and the institutional peculiarities of every country have produced different degrees of harmonization.

countries, it is usually impossible to achieve a full-fledged unification of tax systems and rates.

Our analy sis has shown furthermore that in order to have tax harmonization it is crucial that one has a concrete idea as to the objective to be achieved. Even if the objective is to have a free flow of goods, services, capital and labour among several regions, than it is still not necessary to completely harmonize taxes. The literature on tax harmonization that we have discussed above suggests that there are two fundamental tax coordination criteria (see Cnossen13, who calis this Musgrave's fundamental tax coordination criteria). The first criterion is that of fiscal neutrality, which requires that taxes do not distort the relative prices of domestically produced and foreign produced goods and factors of production, and henee that ensure that the free flow of trade and factors is not distorted. In other words, taxes that reverse the flow of trade and factors are considered distortionary and constitute examples of taxes that should be harmonized. The second criterion is that of tax base entitlement, which requires that property rights in the tax bases are clearly established.

These property rights should be based either on the residence or the source principie. Bothtax coordination criteria do notrequire acomplete harmonization of the tax systems and rates. That is also true of the faimess criterion, which would require a fair distribution of the tax revenues. Faimess coulb probably not be achieved in case of identical tax systems and rates, as it usually demands that stronger shoulders carry heavier tax burdens. Finally, we have argued that different tax rates usually reflect local differences in preferences for public goods between regions. An efficient tax system would allow for these differences in tax rates.

On the other hand, there are also some arguments which require a certain degree of tax harmonization between regions and countries. These arguments, among others, include administrative aspeets of taxation, such as differences the enforcement regimes. Tax authorities usually ñnd it difficult to enforce their taxes on activities that are undertaken in other jurisdictions. Henee, a general movement in the direction of source-based taxes would considerably ease the enforcement of tax policies and reduce the cost of such enforcement.

Other arguments that were encountered in favour of a certain degree of tax harmonization included the phenomenon of spill-overs, i.e. the situation in which taxes cause extemalities in neighbouring states. This is, for instance, the case in the example of cross-border shopping, but also companies decide to alter their location decisions as a result of differences in taxation (i.e. when CEN/CIN does not obtain). There can also be substantial economies of scale in the collection of taxes, which is another argument for centralization.

Tax Harmonization NOTES

1. T. Westaway, "The fiscal dimensión of 1992", in: Dermis Swann (ed.), The European Single Market and Beyond, Routledge, London, 1992, p. 82.

2. See, T. Hitiris, European Community Economics, 3rd edition, Harvester Wheatsheaf, London, 1994.

3. See for a comparison of the (in-)efficiency of origin and destination taxes P.

Robson, The Economics of International Integration, Alien and Unwin, London, 1987, and R.A. Musgrave and P.B. Musgrave, The Theory of Public Finance, McGraw-Hill, London, 1976, and A.L. Bovenberg and J.P. Home, "Taxes on Commodities: A Survey", in: G. Kopits (ed.), Tax Hormonization in the European Community, IMF, Occasional Paper no. 94, 1992.

4. Musgrave and Musgrave, ibid..

5. Bovenberg and Home, ibid., p.23.

6. P.A. Diamond and J.A. Mirrlees, 'Optimal taxation and Public Production I:

Production efficiency, American Economic Review, 61, pp. 8-27.

7. T. Georgakopoulos and T, Hitiris, 'On the Superiority of the Destination over the Origin Principie of Taxation for Intra-Union Trade', Economic Journal,

107, 1992, pp. 117-126.

8. OECD, Taxing Consumption, OECD, París, 1988.

9. Commission of the EEC, Report of the Fiscal and Financial Committee on Tax Harmonization in the Common Market (Neumark Report), Brussels, 1963.

10. This does not apply to commercial transactions of minor importance, for which a tax-free allowance is in forcé.

11. See e.g. Donato Rapponi, 'A programme for a new common system of VAT', EC Tax Review, 3, 1996.

12. See M. Pearson, 'Corporate Tax Harmonization in the EC, CEPS Working Party Report No 4, CEPS, Brussels, 1992, and M. Keen, 'The Welfare Economics of Tax Harmonization in the EC', in M.P. Devereux (ed.), The Economics of Tax Policy, Oxford University Press, Oxford, 1996, and E.H.

Gardner, 'Taxes on Capital Income', in G. Kopits (ed.), Tax Hormonization in the European Community, IMF, Occasional Paper no. 94, 1992.

13. See Pearson, ibid.

14. Commission of the European Communities, Report of the Committee of Independent Experts on Company Taxation (Ruding Report), Brussels, 1992.

15. W.E. Oates, Fiscal Federalism, Harcourt Brace and Jovanovich, New York, 1972.

16. C. Tiebout, 'A Puré Theory of Local Expenditure', Journal of Political Economy, 64, pp. 416-42.

17. See C. Walsh, 'Fiscal Federalism: An Overview of Issues and a discussion of Their Relé vanee to the EC' ,in European Economy, The Economics of Community Public Finance, no. 5, 1993, and P.B. Spahn, 'The Design of Federal Fiscal Constitutions in Theory and Practice', in, in European Economy, The Economics of Community Public Finance, no. 5, 1993,

18. R.A. Musgrave, 'Who should tax, where, and what', in CE. McLure jr. (ed.j.

Tax assignment in Federal Countries, Australian National University Press, Canberra, 1983.

19. S.Cnossen, 'How MuchTax Harmonization in the European Community?', in M. Gammie andB. Robinson (eús.),Beyond 1992: A European Tax System, IFS, London, 1989. See also: S. Cnossen, 'The Case for Tax Diversity in the EC, European Economic Review, 34, pp. 471-479.

20. S. Cnossen, Tax Coordination in the EC, Kluwer, Deventer, 1987, p. 6.