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uni'wissen 01-2012_ENG

Within the context of his most recent study – on framework conditions for negotiating tax ­reforms – Eggert was invited to the Brussels Tax Forum, at which the world’s leading experts in public finance meet each year to discuss topics of public interest in taxation. The yearly con­ ference serves to clarify issues and provide ­advice for policy makers. It also provides decision-­ making bodies of the European Union (EU), for example the European Commission, with valu­ able background information from current ­research. The EU currently has 27 member states, making tax harmonization a slow and diffi­ cult process. A common tax policy, let alone uni­ form tax rates, is but a distant goal. A Thought Model Shows Why Cooperation Is Difficult Eggert illustrates why cooperation between countries is so difficult with the help of a simple thought model: Two sovereign states are connect­ ed by a single capital market. The citizens of each state are free to consume private and public goods. The latter are goods which it is in the public interest to provide but which are normally not produced in sufficient quantity by private markets – for instance social justice, equal ­opportunity, information, or fundamental research. In order to provide public goods, both countries impose a capital tax. However, this leads to a conflict in interests: If taxes are raised, investors will be less willing to invest in the country. How­ ever, the state can finance more public goods with the additional tax revenue, and this benefits everyone. A tax cut, on the other hand, benefits the investors; their income increases. Since they will invest the additional capital now at their disposal, domestic production will increase as a consequence, and in the end so will private ­income. In return, however, the state receives less tax revenue. Funding for public goods must thus be cut, and public welfare sinks. In situations like this, economists typically call for more competition. Competition, they ­argue, forces the state to be more economical. If the two states were to compete for investors, the optimal tax rate would set itself at the right level without any external help. In the model ­described above, however, tax competition would give rise to a ruinous race to attract inves­ tors, says Eggert: “It’s a dilemma situation in which there can be no winners.” If the countries Where do decisions lead? Game theory describes situations in which the success of the individual is not only dependent on his or her own action but rather also on the behavior of others. Photo: Mellimage/Fotalia A simple thought model from game theory illustrates why sovereign states have difficulties harmonizing their tax rates. The colored numbers stand for the benefits the respective behavioral strategy has for the individual state. The numbers in parenthesis represent the sum of these benefits and thus the ­social value for the state. This number is largest when the two states cooperate by agreeing to har- monize their tax rates (A). However, the individual benefit for a country is greater when it signalizes a willingness to cooperate but then deviates from this course – assuming that the other country coop- erates and thus incurs the most damage (B). No ­cooperation is thus also the predominant strategy when a country assumes that the other will not ­cooperate. But when no one cooperates, the social value is minimized (C). The result: Although all countries lose by competition in sum, they strive for it – a social dilemma. Das Dilemma des Steuerwettbewerbs COUNTRY 1 cooperation no cooperation COUNTRY 2 A B cooperation 3 / 3 (6) 1 / 4 (5) B C no cooperation 4 / 1 (5) 2 / 2 (4) 14