The Political Economy of Corporate Tax Harmonization – Why Do European Politicians (Dis)like Minimum Tax Rates?

Political representatives repeatedly argue that globalization might lead to a destructive competition which would result in a "race to the bottom" of corporate tax rates and an insufficient financial endowment of the public authorities. Setting minimum tax rates is a way of mitigating this pressure from tax competition. In this paper, we explore the factors which shape the support of politicians with respect to corporate tax coordination in the EU. While there exists a vast literature on the controversial issue whether corporate tax coordination is capable of improving welfare or not as compared to unrestricted competition, the positive question on the driving forces of harmonization processes has largely been ignored. This paper contributes to filling this gap. In a first step, a number of hypotheses are derived mainly from the theoretical tax competition literature and different approaches from political science. Individual factors can be derived from ideological preferences towards the role of the government and national sovereignty as well as from the personal background such as education. Country-specific factors mainly arise from different national preferences as well as from the extent to which a country can benefit from the autonomy to pursue an independent tax policy. In our empirical approach, we focus on a particularly interesting group, namely the Members of the European Parliament (MEP) and make use of a self-conducted survey among MEP, which included a question which deals directly with the desirability of EU-wide obligatory minimum corporate tax rates. Moreover, this study makes additional use of a similar survey of the Bundestag to analyse differences between the attitudes of national and European representatives. The results confirm an important role of ideology, left-wing and pro-European politicians tend to favour minimum tax rates. But we also demonstrate that both further individual characteristics as well as national interests are important determinants for the politicians' attitudes towards reducing tax competition by means of minimum tax rates. Individual characteristics, such as education and the length of membership in the EP, show the expected effect. National interests play an important role as well, which is most notably the case for the current national level of corporate taxation. Moreover, the citizens' preference for social equality transpires to have an impact on the politicians' attitude towards tax competition, while some other predictions from tax competition models seem to play a minor role. Our EP-Bundestag comparison shows that German politicians on the national level do not show different preferences towards tax rate harmonization.

Osterloh, Steffen and Friedrich Heinemann (2008), The Political Economy of Corporate Tax Harmonization – Why Do European Politicians (Dis)like Minimum Tax Rates?, ZEW Discussion Paper No. 08-108, Mannheim.