Enhanced Cooperation in Corporate Taxation

In this thesis I study the harmful competition between national governments to attract multinational companies into their country, by designing a competitive corporate tax system. In particular, I study the solutions put forward by politicians to constrain this competition. Governments compete with each other for the investments of multinational companies to provide work for their citizens, or just because they want to tax the profits of these multinational companies. The thesis makes three main contributions. First, I try to measure, using a novel approach, how a change in the corporate tax system affects government finances in the country itself and in neighboring countries. Second, I develop a theory on how the government of a country changes its corporate tax system in reaction to changes in corporate tax systems abroad. Third, I analyse how solutions to constrain tax competition, affect corporate tax systems and welfare. With respect to this latter issue, the thesis studies the prospects of an interesting new policy initiative which is labeled in popular terms “Europe in two speeds.” The idea is that a (partially) unified system of corporate taxation in a subgroup of European countries can be achieved, whereas the remaining countries in the European Union (EU) are free to choose their own corporate taxation policy. In the Treaty of the European Union (TEU) this is called an Enhanced Cooperation Agreement (ECA). However, before delving deeper into the subject, let me first stress the relevance of the topic of corporate tax competition through some numbers, popular arguments, and a brief historical perspective on the initiatives by the European Commission (EC) to constrain corporate tax competition.

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