European political leaders gathered in Malta last month to discuss the future of the European Union. During the meeting, German Chancellor Angela Merkel made sure to denounce any post-Brexit move on the part of the United Kingdom to lower corporate taxes. (Merkel condemned efforts by the US to cut corporate taxes as well.) Merkel called any such move a “race to the bottom.”
With these comments, Merkel; was echoing earlier comments by German Finance Minister Wolfgang Schuble who in January employed the same “race to the bottom” phrase and harangued the UK on the matter, claiming that any attempt to lower taxes would be in violation of international agreements. Besides, lowering taxes is retrograde and non-progressive thinking, Schuble noted, stating that “A truly global economy must think of global governance.”
This controversy helps to reveal how the European Union has been a useful tool in preventing tax competition between member states.
By threatening retaliation from EU institutions, and by resorting to claims that international agreements cancel out national policy, EU bureaucrats have long used the EU as a stick to beat potential tax-cutters into submission.
This post was published at Ludwig von Mises Institute on March 28, 2017.