Corporate taxes and inefficiency in Europe

An important source of concern about corporation tax regimes within the European Union is the extent to which differences in regimes between member states generate production inefficiency. This paper analyzes the tax regimes in the 15 EU member states. It identifies the extent to which they differ by presenting two summary measures: the cost of capital and the effective average tax rate. It also identifies how these measures would be affected by alternative forms of harmonization within the EU, such as a common corporation tax rate or tax base. Such simulations serve a dual purpose. They identify the impact of potential policies, but, more generally, they show how differences in effective levels of taxation between countries depend on specific aspects of the tax regimes.