Thursday, April 30, 2009

Financial sector bubble and tax competition

John Kay's article in Financial Times (April 24, 2009) talks about how virtual profits of the banking sector in the UK in the last decade generated substantial revenues from corporation tax and income tax on bonuses.

It reminded me of what I have been arguing in the recent presentation (April 24) at the Polish Economics Association. In essence, I said that the collapse of the financial sector's profits bubble will help dispel the myth that international corporate tax competition resulting in ever lower CIT rates is nothing to worry about because corporate tax revenues have not been declining. Now we know that revenues have so far been artificilly inflated by taxing financial sector's profits. CIT revenues will finally feel the pull of gravity. The benefits of tax competition and supply-side response ("lowering CIT rates will always pay for itself") will deservedly lose some of its credibility. This in turn will help start in earnest the debate on the need to coordinate taxes.

I believe that tax coordination would make a lot of sense for new EU member states (benefits for the EU as a whole would be smaller). I wrote about it (although in a roundabout IMF style) in an IMF Working Paper written in August 2008 together with Mariusz Jarmuzek.

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