Tax Competition : How Great Is the Challenge ?

Hardly any week passes by in ‘Old Europe’ without a discussion about tax reforms as a reaction to the fl at tax challenge of new member countries of the European Union (EU). By many observers this is interpreted as an expression of the race to the bottom that supposedly results from fi erce tax competition in Europe and around the globe. Instead of looking at descriptive fi gures of corporate income taxes, an answer to the question how big the challenge of tax competition actually is requires to, fi rst, fi nd out what impact tax competition could have on the allocation of scarce resources and how it could affect income redistribution by the state. Second, empirical evidence should be provided on the existence and the actual economic impact of tax competition. Both topics are addressed in this paper by seeking to answer the following questions: How does tax competition work? What is the impact of tax competition on the effi ciency of public goods‘ provision and on the effectiveness of income redistribution? Is there any infl uence of tax competition on regional convergence and economic growth? And fi nally: Does tax competition, in analogy to competition in private markets, serve as a discovery procedure in the public sector such that better public policies are more quickly detected and diffused?