European tax harmonisation and production efficiency

This paper analyses the impact on production efficiency of potential harmonisation of the taxation of income from capital in the European Union. It develops and applies a methodology for computing the cost of capital for transnational investments to assess the degree to which production efficiency holds in the EU. It considers the impact of potential forms of corporation tax harmonisation. The results indicate that some commonly advocated reforms (e.g. harmonising tax rates or tax bases) would not significantly move the tax system towards production efficiency, but that other reforms which affect the taxation of cross-border flows would have more impact.