Macroeconomic Dimensions of Public Finance: Essays in Honour of Vito Tanzi

By Mario I. Blejer; Teresa Ter-Minassian | Go to book overview

NOTES
1
Helpful comments by Richard Goode, Ken Messere, Karl Scholz, Emil Sunley, and George Zodrow are gratefully acknowledged.
2
For an account of the proceedings of the Committee, see Vanistendael (1992) and Messere (1993). For economic reviews, see McLure (1992) and Devereux (1992), as well as Gammie (1992). For a prior analysis, see Tanzi and Bovenberg (1990). For a general analysis of tax harmonization in the European Community, see Kopits(1992).
3
In Article 3B of the Maastricht Treaty, the European Commission can take action ‘only if and in so far as the objectives of the proposed action cannot be sufficiently achieved by the member states and can therefore, by reason of the scale or effects of the proposed action, be better achieved by the Community. ’ For a brief analysis, see IPS Update (1992). For more comprehensive treatments, see Cass (1992) and Toth (1992).
4
The value-added tax (VAT) is a good example. By agreeing on a tax-credit, destination-based type of consumption tax, member states accomplished nearly full neutrality with respect to intra-Community trade (border tax adjustments can ‘be made unambiguously and expeditiously). At the same time, the administration and proceeds of the tax are left in the hands of member states, as well as the power to set the rates (subject to a minimum).
5
For this purpose, the Report employs tax wedges computed by the OECD (1991) for different kinds of investments under alternative financing arrangements. The principal objection to these kinds of calculations, which were first made by King and Fullerton (1984), is that the underlying model cannot explain why investors do not exploit opportunities for arbitrage (see, e.g., Fullerton (1986)). The Ruding Report does not address this objection.
6
To an important extent, this situation reflects the directives already adopted by the European Council at the time of the Ruding Report and since implemented, namely the parent-subsidiary directive (no source dividend tax on intercompany profit distributions), the merger directive (no tax on capital gains with respect to assets transferred to other member states), and, subject to further consultation, the Arbitration Convention (for solving disputes between member states regarding transfer prices), as well as the directives still to be approved, namely the interest/ royalty directive (no source tax on interest and royalties), and the directive on cross-border loss compensation.
7
For an analysis of the classical system, the imputation system, and other systems for dividend relief, see Bird (1987) and US Department of the Treasury (1992). For an overview of CTs in the EU, see Cnossen (1993).
8
The Ruding Report states that a source-based CT is consistent with the benefit principle. However, if the CT were indeed a proxy for the cost of government-supplied services, the tax would not be distortionary. Hence, the Ruding Report would be redundant.
9
Horst (1980) has shown that if the elasticities of supply and demand for capital are positive but finite, the optimal tax lies somewhere between the point that ensures capital export neutrality and the point that conforms to capital import neutrality.
10
However, implementation of the proposed maximum statutory CT rate of 40 per cent would mitigate the bias in favor of debt finance in member states (e.g. Germany and Italy) where the statutory rates, inclusive of local taxes, currently exceed 40 per cent.
11
This implies a preference for capital import neutrality over capital export neutrality. In a single internal market, however, in which capital and persons can

-175-

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