TAX COMPETITION, ECONOMIC GROWTH AND ECONOMIC PERFORMANCE

Recent data on GDP growth in the EU show sluggish periodical growth rates, far below the average growth rate in globally high-growing economies, particularly in Asia and the U.S. After years of weak growth, the EU and eurozone now face a significant barrier in letting the GDP growth soar.

In the EU, tax burden on labor increased from 35,1 percent to 35,2 percent while in the eurozone the increase in tax burden levied by workers extended from 36,2 percent to 36,8 percent. Nevertheless in the EU, tax burden penalizing work as an ingredient of productive behavior is globally one of the highest, outperforming the competitors of the EU economy.

EU governments have been steadily persuading Europeans that work is essential in remaining on competitive level together with the U.S. and high-growing economies in Asia. But how can work be promoted if tax regimes in nearly every European jurisdiction heavily penalizes saving, investment, entrepreneurship and work. Labor tax burden levied on taxpayers remained pretty much higher in the EU than in other industralized economies, accelerating GDP growth rapidly faster than European jurisdictions. In fact, not every European tax jurisdiction is showing sluggish economic performance. Ireland, for instance, eased tax burden on productive behavior by slashing corporate tax rate to "rock-bottom" 12,5 percent, eventually the lowest rate on corporate income in the entire EU. In Ireland, top marginal tax rate on individual income was slashed from 65 percent to 42 percent. The taxation of individual income still remained somehow progressive but the rate was decreased dramatically. Further, the economies in Eastern Europe are booming. Recently, flat tax revolution quickly splashed over the entire horizon of Eastern Europe. Estonia, a Baltic beacon which pioneered flat tax revolution, enjoys a rapid GDP growth, outreaching 10 percent. Seven-year compunded annual average GDP growth between 1997 and 2004 equaled 7,2 percent. In 2004, Estonian economy boomed once again after annual GDP growth rate topped 7,8 percent.

Investment is a key to economic growth. In the EU, taxes on capital (personal savings and asset income) increased dramatically from 25,3 percent to 27,3 percent. In the eurozone, where the majority of high-tax jurisdictions is situated, real tax burden on capital rose to 30,4 percent from 28,4 percent. However, tax competition between tax jurisdictions is pushing tax rates on work, saving, entrepreneurship and investment down. If two jurisdictions compete on letting in foreign investment and if the first jurisdiction slashes the corporate tax rate, the result is an increase in direct investment as investors do not prefer to operate in an environment where doing business is hampered by the outburst of tax burden. This action, however, essentially forces another jurisdictions to challenge the competition and slash the corporate tax rate down as well. As taxes on capital fall, disposable income grows.

Policymakers in older EU members seem to feel relentless about the size of public spending as a source of increasing tax burden and the EU authorities want to penalize them by harmonising tax rates on corporate income across the entire EU. This would have tragic consequences, ending the stories of economic success of Slovakia, Lithuania, Latvia and Estonia - countries that suffered for 50 years under communist regimes and, after the collapse of communism, sustained precious economic performance and emerged as global stars, whom history shall never forget.