Part 1 - AL-Tax

International Taxation HandbookNotes1. There may also be the feeling within Member States that, having lost monetary policy instruments,fiscal policy – although constrained by the 3% deficit rule of the Stability and GrowthPact – is one of the few macroeconomic policy tools, along with supply-side policies, left at theirdisposal.2. Note that different levels of tax-to-GDP ratios are due to the different proportions of each economicfunction in GDP and hence do not necessarily reflect a higher taxation of labor. When reported asa share of their own tax base (instead of GDP), the same trends emerge, although in less pronouncedform (the ratio for labor, for example, does not diminish as fast). In addition, the implicit rates onlabor and on capital appear much closer. These rates are called the backward-looking macro-effectivetax rates (or sometimes implicit tax rates).3. Including large and homogeneous jurisdictions, perfectly competitive markets, jurisdictions thattake as fixed the after-tax rate of return on capital and the tax rates in the other jurisdictions, fixedpopulations and land, identical preferences and incomes for all residents in each jurisdiction,fixed aggregate level of capital stock which is mobile, a single good produced by the capital andland factors, publicly provided private goods with no spillover effects, two local tax instruments,and maximization of welfare of identical residents (see Zodrow, 2003).4. Note that the assessment becomes even more complicated if one takes into account the results ofthe tax literature on vertical tax competition (when, for example, the EU level would compete withMember States on the same tax base) and/or on partial tax coordination (as countries may alsocompete on other noncoordinated tax bases, for example mobile labor).5. The annual EU 2006 budget amounts to €112 billion (1.01% of the Gross National Income (GNI)of the enlarged EU). About 40% of the budget goes to the Common Agricultural Policy and aboutanother 40% goes to the poorer regions of the Union, to fishing communities, and to regions facingparticular problems of high unemployment and industrial decline (European Commission,2006b).6. In addition, validating previous theoretical findings (in particular, Wildasin, 2003), their resultsindicate that this positive relationship between tax burden and foreign ownership is strongest formore mature economies and for sectors with less mobile companies.7. Instead, the criteria for identifying potentially harmful measures include a significantly lower levelof effective taxation than the general level in the country concerned, tax advantages reserved fornonresidents only, tax incentives for activities isolated from the domestic economy, nontraditionalrules of taxation for multinational companies, and/or a lack of transparency.8. This methodology uses the King–Fullerton methodology of taxation of a hypothetical investmentusing a mix of sources of finance. The method was further developed by Devereux and Griffith(1998a) and is different from backward-looking effective tax rates that use real-life data to computeratios of tax paid on the tax base. For the respective merits and demerits of both methods,see Nicodème (2001).9. Other studies point to the effects of tax exporting (Huizinga and Nicodème, 2006) and larger incorporation(Gordon and MacKie-Mason, 1997; Goolsbee, 1998, 2004; Fuest and Weichenrieder, 2002;de Mooij and Nicodème, 2006). It could also be possible that the tax yield is insensitive to the taxrates, possibly because profit-shifting strategies are so efficient and widespread that profit isalready reported in low-tax jurisdictions.200