Tax Harmonization

Before we can begin the deep dive ahead of us, we must first know, at least to a general extent, what the phrase tax harmonization means. Depending on what approach is being discussed, the meaning will change in the details. I will discuss how tax harmonization affects economic welfare. However, at this point the answer to the question which pertains to the usefulness of tax harmonization can be swayed in either of the directions.

In "Fiscal harmonization in common markets" (2: 443) Shoup explains tax harmonization, It usually implies a group of tax adjustment programs somehow associated with various types of economic integration. This is so because the term tax harmonization has been developed, in response to the practical need for a general and comprehensive term which can cover a wide range of tax adjustment programs that are as yet not being identified definitely, though likely to be necessary to help in achieving a number of broad, and often competing, political and economic objectives of an economic integration. It has come to be understood that the term is often used in a special sense, with relevance only for the EEC.

Now, that we know what it means, we can move on to the evidence that explains how tax harmonization effects economic welfare. As it was previously stated, there are different approaches to take into account, three of which shall be explained with reference to Shoup in an effort to determine if tax harmonization is truly useful. The first if which will be the equalization approach. This is, in general, the most common way of thought which deals with competition and keeping all parties on an equal playing field. Shoup explains (1: 31-32) Its justification include the following: (I) It accords with the aims of the union designated simply as "enhancing competition." "Competition on equal terms" must imply all producers facing the same tax schedules. (ii) It is in the favor of those who see economic union merely as a preliminary to much more important political union. For equalized tax rates are part and parcel of the apparatus of a unitary state.

Second, is the differentials approach which changes the welfare question in its essence to "what set of differentials optimize welfare?" Shoup goes on to explain this further in (1: 33-34). It still accords with the idea of reproducing the conditions of single economy, but with a different interpretation. The new interpretation is that the tax system is used for major economic goals, and the same should be done on the union scale. But further, opportunity is taken to use differential rates of tax, a means which has only a limited counterpart in unified states. Harmonization must, consequently, be defined as a pattern of pluses and minuses which yields a net positive gain when they are politically weighted.

The differentials approach goes with a more active public-sector control of the economy, and demands a much richer use of economic analysis in harmonization studies. Harmonization is determined by that was decided by reference to a given rule in the equalization case; now it is decided by consideration of case-by-case by a political assembly.

The third and final approach to aid in the determination of whether or not tax harmonization is useful is the standards approach. This approach is mainly about how in its simplest form tax harmonization is quite basic. However, when more variables and issues are allowed to be added into the equation, it quickly becomes evident that this topic is far from simple. Shoup says that (1: 37-38) This approach could be systematized in a way similar to the differentials approach, but with a list of standards forming the criteria column of the matrix. It seems at first sight that the definition of tax harmonization is simple in this case, being a tax change moving towards the standards. But once conflicts are allowed, tax harmonization is as complicated as in the differentials case: we need a "weighted net plus" for a tax change to be harmonization.

Resources:

http://salestaxstrategies.com/sales-tax-issues.html

http://ezinearticles.com/?Tax-Harmonization&id=8990495

Thanks for reading!